Why Russia’s Economy is still doing well
Has the war been a fatal decision for Russia? An analysis of the post-war Russian economic situation: Russia is expected to grow 3.2% this year, significantly more than important Western states.
The 22nd of February marked the date in which Russia launched a full-scale invasion of Ukrainian territory, sparking a war whose end is still unclear. Premature opinions debated the surmounting costs of war and the numerous sanctions imposed on the Kremlin to be the start of a deep economic crisis that would haunt Russia for the years to come. As we reach the end of 2024, this does not seem to be the case.
Immediate Post-Invasion and Sanctions
The short-term catastrophic effects of the war on the Russian economy were evident. Economic activity severely contracted as households attempted to withdraw large sums of money in light of the uncertainty that would dominate their lives consequently. Reports state the ruble lost overall more than 40% of its external value in just a few days and GDP fell by 4.4% in the second quarter of 2022.
What followed was a list of updated and new sanctions that would aggravate Russia’s situation; these were initially imposed in 2014 following the invasion of Crimea and other Ukrainian territories but were escalated and diversified significantly after the invasion in 2022. They mostly aimed at damaging the financial, technological and energy Russian industries to the point of withdrawal from the war. Financial sanctions consisted of cutting Russia off from the US and European financial systems through disconnection from the SWIFT global messaging system and freezing Russian central bank reserves, estimated to be around $300 billion. Export controls were also imposed by a coalition of countries to limit the arrival of technology to Russia and deprive its military of its necessities. When it comes to energy, the EU, which represents approximately 50% of Russia’s crude oil and gas, did not force any sanctions. Alternatively, it looked towards diversifying its energy suppliers, opening relations with the Middle East and diminishing its dependence on Russia.
Modern Day Russia
Whether the sanctions had the intended effect by the West remains debatable. On the other hand, growth has been evident. As shown by the International Monetary Fund (IMF) in their latest report, Russia is expected to grow 3.2% this year, significantly more than important Western states. Furthermore, unemployment has remained significantly low, estimated to be at 3.1% this year. This growth and prosperity can be attributed to multiple factors. Firstly, an increase in capital investment has proven to have contributed to the growth in GDP. Reuters states investment to have risen by 8.3% year-on-year to 8.44 trillion rubles ($92 billion) in the second quarter of 2024, following a 14.5% growth in the first quarter of the year. Secondly, whilst sanctions did have an effect, this was restricted due to their limited nature. The EU did not impose an oil embargo with immediate effect as they required time to find alternative suppliers. Russia was able to gain from energy prices rising sharply due to geopolitical risks whilst the volumes remained stable. The outcome was an all-time high current account surplus of $238 billion in 2022. Furthermore, to keep trade going as Europe remained dependent on Russia, important banks such as Gazprombank, one of Russia’s largest banks, were exempted from the exclusion from SWIFT. In the meantime, the Russian financial system has been able to adapt. Lastly, Russia was able to steer out of an economic crisis thanks to its “Turn to the East” policies. The invasion of Ukraine in 2014 severely damaged Russia’s relations with Europe, making any plans for common spaces between Russia and the EU unfeasible. Alternatively, Russia initiated a process of developing relations with the East, particularly with China, Japan, and India. Examples can be made with the 2014 Russia-China Gas Deal: a 30-year gas supply agreement worth $400 billion. With the escalation of sanctions by the West following the invasion of Ukraine in 2022, Russia expanded its focus from the Asia-Pacific region to the Greater East, which includes a wide range of Asian, African, and Latin American countries. In fact, over the next decade, the Russian state expects to funnel $70 billion into the construction of transport routes to connect the country to trade partners in Asia and the Middle East. Participation in regional organizations such as BRICS has also become vital for Russia.
2025 and Onwards
GDP growth is estimated to inevitably slow down from 3.2% in 2024 to 1.8% in 2025. This downgrade is caused by high investment and robust private consumption fading. Many debate Russia to be an “overheated” economy that will intensively struggle with labor and technology shortages in the years to come. Consumer prices, an indicator of inflation, also remain at a staggering 6.9% in 2024 and 4.5% in 2025. Additionally, other experts still believe that sanctions will have a scarring effect on Russia and that current growth is only given by the economy being extremely geared towards the war industry. Whilst Russia’s future is still unknown, its predicted immediate economic demise after the war has been proved wrong.
