Politicians across the West vowed, amidst a wave of sanctions for Russian state officials, companies and oligarchs, that Moscow’s economy would be stifled. And yet, Russia’s GDP growth has surpassed both the EU and the US for the second consecutive year. A conflict which has enormous geopolitical consequences, a burden of incalculable human, industrial, agricultural and energy losses for some, is seemingly also providing an economic boom that is injecting optimism and richness across Russia, particularly among Russia's “rustbelt”.
By PABLO VILLAR BOLAÑOS
Defying Sanctions and Redirecting Trade Post-2022 Invasion
When Russia launched its invasion of Ukraine in early 2022, an immediate consensus was reached on the topic of economic sanctions. An economy so overly dependent on its oil and gas industries would inevitably suffer when Russian materials’ import bans would come into place in the most important economies of the world. Putin’s economy, as they publicly announced, was weak, and comparable to that of Spain. To say that those 2022 assessments were not completely right would be an understatement. Russia, due to its worldwide leadership among key strategic sectors such as hydrocarbons, cereals, nuclear reactors, and space technology [1] has effectively bypassed some restrictions and continued its trade by redirecting its economy towards other markets such as China, Brazil and India.
Russian import revenue almost doubled, in some markets, between 2022 and 2023. Aluminium, copper and nickel, key components of electric vehicles or semi-conductors, are now swerving to China, in a move that has been called by some experts “a transition from primary competitor to principal client” [2]. Moreover, production plants have been moved into Chinese territory to overpass some Western sanctions against specific companies or products. Some of the most under-developed Russian oblasts, particularly reliant on industries that have plummeted since the dismemberment of the Soviet Union, now boast new-found richness thanks to once-forgotten manufacturing facilities. The overall industrial output of the Russian Federation has risen in 60% of its regions compared to 2023, and furthermore, some particular areas are now producing nearly 30% more than before [3].
Industries tied to aerospace and defence, but also to more menial tasks such as boot-making or leathercraft are experiencing some surprisingly positive results. Economic growth has been able to reach both the financial centres and the more vulnerable communities stretched across Russia. Thus, with so many sectors of the labour market becoming so lucrative, the demand for specialised workers is extremely high. Unemployment has dropped dramatically, and the combination of the industrial demands for manpower, coupled with the conscription laws and the exile of some Russian citizens have created an economic habitat where the worker is now able to demand better conditions and has seen his wages grow high.
Underlying Vulnerabilities: The Strain on Russia's War-Economy Amidst Sanctions and Inflation
Some experts, however, have adopted more sceptical stances regarding the state of the Russian economy, in this present war-like form. Labour shortage is a grim reality in some sectors, as well as overall inflation – which now stands at around 7.5% [4]. The impossibility of buying specific high-end technologies manufactured in the West could halt production lines if the demand is not met through third countries. Other fears concern the “ad hoc” nature of the measures put forward by Putin. Monetary compensation and payments coming from the frontline soldiers, as well as those special grants made to armed forces members wounded or killed in action, may provide some solace in the short term; on the longer term, new difficulties may arise, particularly if the inflation comes to override the benefits of the wartime economy in terms of wages and fiscal pressure. Productivity, in other words, continues to be poor. Pre-existing inefficiencies and mounting losses in some sectors have largely kept on, and the economy continues to be dependent on volatile indexes such as the oil and gas markets, or the international steel exchanges.
The financial system of Russia, as some experts have come to conclude, is starting to overheat. The burden imposed by the cost of the Ukraine conflict has meant that the pension funds have been cut or frozen since 2014 [5]. Even if the population has mostly taken an optimistic view of the war and the economic fallout of it, the truth is that the overall confidence in the market is still moderate. With some degree of the global dimension of its economy being currently blocked, Russian stocks plummeting, and the disappearance of certain Western products from the supermarket shelves, it is clear to everyone that the grass may not be as green as one might think.
The conflict in Ukraine, as it stands now, may be presenting an unprecedented window of opportunity, especially in economic terms, for the Russian people. It is also true, to a certain degree, that the promises and the tribulations put forward by the rulers of the Western democracies were not milestones that have been reached, even in 2024. And yet, some stress is to be noticed in the Russian economy. Cash reserves are constantly dropping, and some loopholes allowing the delivery of material to the war machine have been closed. Heavy public spending, and the re-directing of the economy towards the completion of the military goals in Ukraine, have been conducted with little concern to the wider economic consequences of the Russian public. Lack of access to technologies may prove to be a key point [6], and the mounting pressure on the Russian domestic economies, especially due to the rampant inflation, may decide the economic front of the war.
Conclusion
The present and future prosperity of Russia, anyhow, remain intrinsically tied to the Ukrainian frontlines, and only time will be the judge of the long-term success of the economic strategies around it. This interdependence is fraught with complexities and potential vulnerabilities. The war in Ukraine has undoubtedly catalysed a shift in Russia's economic orientation, fostering a war economy that has reaped some short-term gains. However, these gains are not uniform, and the sustainability of this economic model is highly questionable. The long-term prosperity of Russia remains uncertain, dependent on its ability to transition from a wartime economy to a more stable and diversified economic model.
References
[1] Teurtrie, David “Russia: why the sanctions failed to bite”, Le Monde Diplomatique [online] available from https://mondediplo.com/2024/07/11russia-sanctions
[2] Spivak, Vita “Western Sanctions Are Pushing Russian Metals Producers Into China’s Arms”, Carnegie Politika. [online] available from https://carnegieendowment.org/russia-eurasia/politika/2024/07/china-russia-metal-partners?lang=en¢er=russia-eurasia
[3] Ivanova, Polina “How the war in Ukraine is reviving Russia’s rustbelt”, Financial Times, 14th July. [online] available from https://www.ft.com/content/b9749a86-b8dc-4eaa-a1d1-ebccf179d747
[4] Sor, Jennifer “Russia's economy is so driven by the war in Ukraine that it cannot afford to either win or lose, economist says”, Business Insider, [online] available from https://www.businessinsider.com/russia-economy-ukraine-war-moscow-military-spending-inflation-worker-shortage-2024-2
[5] Kiselev, Aleksei “What Will Be the Cost of Russia’s Overheating Economy?”, Carnegie Politika. [online] available from https://carnegieendowment.org/russia-eurasia/politika/2024/07/russia-economy-boom-cost?lang=en¢er=russia-eurasia
[6] Svantesson, Elisabeth “Russia is lying about its economic strength: sanctions are working – and we need more”, Swedish Ministry of Finance, 25th July. [online] available from https://www.government.se/opinion-pieces/2024/07/russia-is-lying-about-its-economic-strength-sanctions-are-working--and-we-need-more/
