Russia's military economy is doing well. This may seem counterintuitive, but overall GDP growth is not unusual in times of conflict.
Russia appears willing to continue funding its war against Ukraine for the third year in a row, despite doubts about the accuracy and completeness of the rosy economic data that Moscow has released over the past two years.
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“From a purely economic standpoint, Russia has significant room to continue the war,” said Hasan Malik, global macro strategist and Russia expert at Boston investment management firm Loomis Sayles.
After all, Russia has been protecting itself from sanctions since 2014, when it was subject to a series of trade restrictions following the illegal annexation of Crimea. In addition, the Russian Federation continues to be supported by oil revenues.
This is how Russia managed to keep its economy strong even after two years of war.
The Russian Federation is waging a war outside its own borders
One of the most important reasons why the Russian economy is still working is because it is a place of war.
“The war is being waged largely on Ukrainian territory and is destroying primarily Ukrainian homes, businesses and farms so that the direct impact on Russian production capacity and households has been relatively limited,” Malik explained.
The material examined the impact of the war on the economies of both Russia and Ukraine. Thus, in 2022, the first year of the war, the Russian economy shrank by 1.2%, according to official statistics. Analysts expect the country's GDP to grow 3.1% in 2023. Russia itself has not yet released GDP growth data for the entire year 2023.
For comparison, Ukraine's GDP fell by 29.1% in 2022. The National Bank of Ukraine forecasts GDP growth of 4.9% in 2023. The NBU has not released official growth figures.
Malik explained that in a scenario where the war is not fought on your soil, it could entail a major demand shock, especially for military supplies and manpower. This is what happened in Russia: the war boosted the economy.
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Demand for wartime goods and services was created in Russia
In addition, in the Russian Federation there is a demand for goods and services, thanks to which the war is going on. The Russian army needs material resources – guns, ammunition and bandages. Demand stimulates industries producing these goods – especially within the country, since imports to the Russian Federation are limited due to sanctions.
The authors of the article noted that the demand for military goods is so great that even a bakery in central Russia was recruited to help the war effort. A store that showed off its newly produced drones next to freshly baked bread on Russian television is now under US sanctions.
Wages have increased in the Russian Federation due to labor shortage
Russia was facing a demographic crisis due to a shrinking population and falling birth rate even before the war against Ukraine. With the outbreak of war, almost a million Russians – including men of military age – fled their homeland, further reducing the country's labor force.
The mobilization of men for war has led to a labor shortage in the Russian Federation, which has continued since 2022. The country faced a shortage of 5 million workers last year as job vacancies rose nearly 5% from the previous year. In November 2023, Russia recorded a record low unemployment rate of 2.9%.
Thanks to the labor shortage, Russians' wages have increased, which at the same time supports consumption and economic growth.
Russia is self-sufficient in the production of weapons and goods
Russia is a large global economy—the world's eighth largest in 2022—due in part to its strong position as a producer of commodities such as oil, natural gas, wheat, and metals.
However, unlike many countries, the Russian Federation is also self-sufficient in the production of vital goods such as oil, natural gas and wheat, which has helped it withstand years of sanctions.
“While Western sanctions and trade restrictions have undoubtedly had some marginal impact on the Russian economy, this impact is particularly limited in the largely autarkic Russian defense industry,” Malik said, referring to an economy based on self-sufficiency and limited foreign trade. < /p>
According to the expert, the Russian Federation, as one of the world's leading arms exporters, can also satisfy most of its defense needs even with relatively complex weapons.
This is together with measures , which the country has introduced to stimulate its economy, including parallel imports, targeting alternative export markets such as China and India, and new supply chains – further weakens the impact of Western sanctions on the Russian defense industry and wartime economy.
Russia stimulates and strengthens its economy with subsidies and policies
The Russian economy is also supported by government subsidies, spending and policies. Moscow's attempt to prop up its wartime economy was so aggressive that subsidies for preferential mortgages created a housing bubble.
The Russian government has rolled out other types of subsidized business loans, further stimulating demand in the economy.
At the same time, Russian politicians quickly intervened to stabilize the market and economy after the full-scale invasion of Ukraine began. They took measures, including closing the Moscow Exchange for several weeks, to introduce capital controls and monetary policy management.
“This was done quite quickly. Many Russian financial instruments were immobilized,” said Sergei Guryev, former chief economist of the European Bank for Reconstruction and Development.
Russia maintains low external debt and strong exports
Russia entered full-scale war with little external debt, and its current account was in surplus partly due to the war's effect on commodity prices.
“Such events largely compensated for Western steps, such as freezing the reserves of the central bank (RF – ed.),” Malik said.
Russia managed to allocate almost a third of its 2024 budget to defense spending, despite all the sanctions imposed.
Russia has the opportunity to wage war even longer
Over the past year, experts, including Russia's self-exiled former deputy finance minister and several economists, have argued that Moscow has the money to finance its war against Ukraine for several years.
Bloomberg Economics economist Alex Isakov said in a Jan. 17 report that Russia's National Wealth Fund will have enough liquid assets to last another year or two if oil export prices fall below $50 a barrel.
The average price of the flagship Russian Urals oil in 2023 was about $63 per barrel.
Despite this, Putin found himself in an economic “trilemma”
Even though Russia avoided economic disaster following the invasion of Ukraine and widespread Western sanctions, that doesn't mean all is well in Putin's homeland. Thus, the Russian dictator is trying to solve the economic “trilemma,” as a former official of the Central Bank of the Russian Federation recently stated.
“He has three challenges: he must finance his current war against Ukraine, maintain the standard of living of his population, and protect macroeconomic stability,” Alexandra Prokopenko wrote about Putin in Foreign Policy in January.
“Achieving the first and second goals will require large costs, which will contribute to inflation and thereby hinder the achievement of the third goal,” she added.
The publication recalled that Putin has already had to apologize for egg prices in Russia, which rose by 42% in the 12 months to November 2023.
There is a risk of an “outright crisis” in the Russian Federation after the end of the war
According to Guryev, rosy GDP figures alone are not a good indicator of economic activity during the war.
“You produce weapons and ammunition, you pay for them from the budget, but these weapons and ammunition do not contribute to the quality of life, do not contribute to future economic growth. They are sent to Ukraine, where they are destroyed,” the ex-explained. Chief Economist of the EBRD.
Russia's investment in the war is so stimulating its economy that it risks stagnation or even “outright crisis” after the conflict ends, according to a January report from the Vienna Institute for International Economic Research.
“The longer the war continues, the more the economy will become dependent on military spending,” say economists at an Austrian think tank.
By the way, retired Australian Armed Forces Major General and military commentator Mick Ryan said that “the Russians are not as stupid as we hoped.” He noted that the Russian Federation mobilized its defense industry and put the economy on a war footing “long before the West” and was able to adapt to sanctions.
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