In terms of the sheer number of sanctions faced by it, Russia holds the record, having been slapped with more individual sanctions than Iran, Cuba, and North Korea combined. That ignominious record is unlikely to change anytime soon as Russian troops surged across the border last week to open a new line of attack near Kharkiv, Ukraine’s second-largest city after Kyiv.
The Russian economy, though, is chugging along, as it has done for much of the last 24 months, almost unmindful of concerted efforts by western powers to bring the country to its knees. So much so, that the Washington-based IMF, in its latest country assessment, even cautioned that “there are some signs of overheating” in the Russian economy. That prospect should make policy mandarins in many western capitals squirm.
While it might be tempting to put this economic resilience down to a massive defence build-up, there could be more factors at play. And while the jury is still out on how long this will last, things are not as bad as they should theoretically have been. The Russian job market is strong, unemployment is at a record low, and rising wages continue to propel consumer spending.
Russia’s economic resilience saga is borne out of the fact that following a relatively mild contraction of 1.2% in 2022, the economy again outperformed expectations in 2023, growing by 3.6 per cent.
The 5 factors
There are a few factors at play that could explain the doggedness of the Russian economy.
First, the gamut of sanctions on the Russian energy sector are not as tight as they were when imposed on countries such as Iran or Venezuela. There is significant elbow room, and that is almost by design.
The sanctions were formulated by the West keeping their own interests in mind, effectively to ensure that Russia continues to produce fossil fuels despite the sanctions on its energy sector, so that there is no significant surge in oil prices. Higher oil prices would have been counterproductive for the economies of the western countries, and so the sanctions, and the subsequent price caps, were loosely designed.
So, while Russia’s fossil fuel exports to most of Western Europe have fallen, the overall export volumes have been relatively steady despite all the sanctions. This is because the oil that used to go to Europe is now being absorbed elsewhere, especially China and India.
From IMF’s Regional Economic Outlook report on Europe, April 2024.
With global oil prices still elevated and the discount on Russian oil lower than at the beginning of the war despite the $60 per barrel price cap, Moscow’s oil export revenues remain high and bolster the economy, according to the IMF.
Second, corporate investment in Russia has recovered from the drop in 2022, adding an estimated 4.5percentage points to the growth in GDP in 2023. Investment is being bolstered by increased resources flowing to the country’s defence and manufacturing sectors. In addition, the sanctions imposed after the start of the invasion of Ukraine have made a retooling of the economy necessary.
The IMF, for instance, has highlighted that some imports are being substituted by domestic goods, resulting in investments in new production facilities. Also, some multinational corporations have stayed back, in the hope that the war would end and sanctions be lifted.
Third, Russia’s private consumption has recovered strongly, adding 2.9 percentage points to GDP growth. This is being driven by buoyant credit and a strong labour market, with record low unemployment of just 3 and a general rise in wages. The largely voluntary military recruitment model, using monetary incentives, has let sections of consumers carry on with their spending.
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CHART 1 | Russia’s economy: Contributions to GDP Growth |
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|
2020 |
2021 |
2022 |
2023 |
|
|
GDP |
–2.7 |
6.0 |
–1.2 |
3.6 |
|
Private Consumption |
–3.0 |
6.1 |
–0.6 |
2.9 |
|
Public Consumption |
0.4 |
0.4 |
0.5 |
0.6 |
|
Gross Capital Formation |
–1.0 |
2.8 |
0.3 |
4.5 |
|
Net Exports |
1.3 |
–3.1 |
–1.1 |
N/A |
|
Sources: Federal State Statistics Service for the Russian Federation; Haver Analytics; and IMF staff calculations; N/A = not available |
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Fourth, government spending too has added to growth but more modestly, with the fiscal impulse estimated at 1.2 percentage points of GDP in 2023. Defence spending in Russia has been ramped up to an estimated 7% of GDP. Despite the large increase in military spending, overall government spending has increased, but not as much in real terms, according to economists.
Fifth, some financial sanctions had already been imposed in 2014 after the Crimea invasion, and Russia had already factored in that cost. The economy, and Moscow’s policy mandarins, have learnt to manoeuvre around these punitive measures over time.
Central Bank role
Elvira Nabiullina, the Bank of Russia governor is seen as the top technocrat keeping Russian president Vladimir Putin’s war machine going, having been widely credited for blunting the west’s sanctions through her hawkish monetary policies.
Nabiullina, a self-confessed opera lover and, like former US secretary of state Madeleine Albright, someone who has taken to conveying her outlook through her outfit choices and the use of brooches, reacted to the surging economic output by raising its policy rate from 7.5% to 16% in the course of the second half of last year.
The tightening of monetary policy, plus the projected withdrawal of fiscal stimulus, according to the IMF, are expected to weigh on growth going forward and quarterly growth is projected to decelerate to around 2.6% annualised throughout 2024.
“The uncertainty around this baseline forecast is large, though. In particular, the recent tightening of sanctions since December could have a material impact on growth, though at this stage it is too early to tell,” the IMF noted in its country forecast. Modest growth is projected in the medium term amid “a shrinking labour force due to an ageing population, loss in human capital, isolation from global financial markets, and impaired access to advanced technology related to Western sanctions that will harm productivity growth”.
Konstantin Sonin, the John Dewey Distinguished Service Professor at the University of Chicago Harris School of Public Policy, told The Indian Express that the visage of normality in the Russian economy is something of an illusion. “Even during World War II, or when the collapse of the Soviet Union happened three decades ago, people went about their lives, buses and metros ran on time, and workers were focused on earning a livelihood. I know that because I went to University during that phase (the collapse of the Soviet Union; Sonin pursued his MSc and PhD in mathematics from Moscow State University and then an MA in economics from Moscow’s New Economic School, before moving to the US)”.
So, even with all the sanctions in place currently, he said, it would be simplistic to assume that the Russian economy will not simply grind to a halt, unless there were to be “a Star Wars kind of apocalyptic situation”. But a million people have already left Russia and, over time, there will be an impact on the economy, he said.
According to Sonin, the short- to medium-term prospects for Russia and Putin’s regime are undeniably going to be determined by the evolution of the Russia-Ukraine war. Putin’s regime had, according to him, entered a declining stage even before the beginning of the war. “I do not think there is an easy way out of the war, nor from Putin’s authoritarian rule… I think there is always an upside to this, because if and when Putin is gone, the new leadership will be able to do some things that will immediately improve Russia’s situation.”
According to Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center and someone who’s worked from 2017 until early 2022 at the Central Bank of Russia, to say that the economy’s stability is based solely on the oil bonanza would be an “understatement”.
For the last 15 years, according to Prokopenko, the economy has been managed by the same team of technocrats, who have accumulated significant experience in crisis management. Russian firms, though, are compelled to maintain higher inventories, leading to additional costs, which stifles investment and prevents optimal allocation of resources within the economy.
The IMF sees growth slowing to 1.8% next year, and cautioned that Russia’s potential growth rate has dropped to around 1.25% from 1.7% before the war. “This would mean that Russia’s income per capita may no longer converge toward Western European levels in the medium to long term.” For Putin, that is unlikely to be much of a worry at this point in time.