NATO and its allies placed crushing sanctions on Russia. They then stood back and watched,
waiting for the Russian economy to collapse. But this is not what happened. Russia’s
economy is in decline, and there are shortages of certain goods, but overall,
Putin’s nation is weathering the storm. In fact, the IMF had to revise its economic forecast for
Russia from a prediction of decline to one of growth. How is it possible that the Russian
economy is still strong 1 year into the war? And what does this mean for Ukraine?
Before we get started, let’s be clear. Just because Russia’s economy might be predicted
to grow does not mean everyone in Russia is thriving. We live in a global economy,
which means that many factors will influence a nation’s economic forecast. There is no
doubt that the war in Ukraine has taken a toll on Russian businesses and people.
Even if certain industries bring in large sums of money and the government claims
profits, it does not necessarily mean that every aspect of the economy is doing well.
When Russia invaded Ukraine, the nation had a large reserve of money to ensure it could fund
the war effort. The Kremlin already knew that sanctions would be enacted on them,
but they didn’t really care as the war was supposed to be over in a matter of weeks. However,
one year later, the battle in Ukraine continues to rage on. Russia is finding itself losing the
war, and with every day it continues, Russian reserves are becoming depleted.
So, what does the Russian economy look like a year after the war began,
and what is going to happen in the year to come?
The United States and its allies firmly believed their sanctions would cause Russia a lot of
economic pain, but this doesn’t seem to be the case. At least not at the rate that the West had
hoped for. In May of 2022, most analysts predicted that Russia’s GDP would fall by around 7 to 8
percent; some even believed that the sanctions would result in a 15% reduction in Russia’s GDP.
Now that 2023 has begun, it appears the Russian GDP will only decline by around 3.3%, which is
significantly less than expected. Inflation also seems to have leveled off lower than anticipated
at around 12%, while the Russian population’s real income declined by about 2 to 2.5 percent.
It’s important to note that there was still a decline, and although the sanctions did
not have the short-term effect that the West had hoped for, the long-term effects
will likely be devastating for the Russian economy if the sanctions are not lifted.
The most shocking thing about the Russian economy was the revised prediction that the
International Monetary Fund or IMF came out with recently. They had predicted in October
of 2022 that the Russian economy would decline by around 2.3% in 2023. However,
the revised assessment has the Russian economy growing in the coming year. Though
the war has cost the Kremlin billions of dollars and the loss of hundreds of
thousands of Russian citizens, the economy is still expected to grow by around 0.3%.
This statistic seems even crazier when compared to Europe's largest economic hubs, Germany and
Britain. The German economy is forecasted to only grow by 0.1% in 2023, while the British economy
is predicted to decrease by .6%. Even with all of the sanctions placed on Russia and the fact it’s
fighting a losing war, the economy appears to be holding firm. Although, looks can be deceiving.
Part of the positive outlook for Russia has to do with an overall revision of the global
economic forecast. The IMF now believes that the global economy will grow by 2.9%,
which is slightly higher than initial predictions. An overall increase in global
growth may actually help Russia more than the sanctions will hurt it. That being said,
the IMF did warn that the war in Ukraine is a major vulnerability in the global economy,
and if things escalate, it could throw economies across the planet into turmoil.
Let’s now look at the different sectors of the Russian economy and see how they’ve
faired since the start of the war. We’ll start with the key industries that have
allowed Russia to survive the onslaught of economic sanctions imposed on it by the West.
Unsurprisingly, arms manufacturing was one of the main components that
kept the Russian economy from going into immediate recession. As the war ramped up,
so did the production of weapons and ammunition. Normally, arms manufacturing only makes up around
1 to 2 percent of the industrial output in Russia. However, since the invasion began,
this sector has increased to around 5% of total production. As Ukrainian forces
continue to destroy and capture Russian equipment, arms manufacturers need to make
sure Russia doesn’t run out of weapons, tanks, missiles, and artillery shells.
The Russian economy has shifted from one that operates in relative peace to a wartime economy,
meaning that the manufacturing sector has large
amounts of money coming in from the government and private investors.
Besides arms manufacturing, Russia’s natural resources
are also helping the nation weather the sanction storm.
Russia has a lot of natural gas and oil. What this means is that even
though a number of agreements to reduce buying resources from Russia have been implemented,
certain nations still rely on the war-mongering nation for its energy supplies. A lot of European
countries have done a good job of reducing their reliance on Russian fossil fuels,
but other parts of the world have been picking up their slack. Over the last year, Russian
fossil fuels have brought in more than 165 billion dollars in revenue. This is 30% more than in 2021.
This may surprise you since there was less conflict and fewer sanctions in
2021 before Russia invaded Ukraine. So how could revenue from oil and gas increase by
so much throughout the war? Fossil fuels make up around 45% of the overall revenue for Russia
and around 60% of its export revenues. These numbers are huge, which explains why Russia
exporting around 7.5% more oil and gas in 2022 has helped the economy remain relatively stable.
After the war got going and it was clear that Ukraine was going to put up a fight and draw
out the conflict, European countries decided to stop importing oil from Russia. Obviously,
they couldn’t just completely cut off the purchase of oil as this would cause
prices to skyrocket and could devastate European households. However, over time,
Europe decreased its dependence on Russian oil.
The world expected this would hurt the Russian economy, but that’s not what happened. India,
China, and Turkey ramped up their oil purchases and made up for almost all
of the oil that would have been bought by Europe. These countries receive Russian oil at a discount,
which means that Russia did not make as much money as they would have by selling it to Europe,
but it was enough to help keep the economy going and fuel the Russian war machine.
Natural gas has also played a role in funding the war in Ukraine and keeping the Russian economy
from entirely collapsing. Russia continued to sell natural gas to countries in Asia and along
its border, but when Putin cut off gas supplies to Europe in an attempt to “freeze” the western
countries, it didn’t go as planned. Europe was able to tap into its own gas reserves,
and since the winter was relatively mild towards the end of 2022 and into 2023, they only needed
to use around 12.5% of their own supplies. This is about 5% less than they used the year before.
The inability to sell gas to Europe caused overall sales to fall by around 45%. This was bad news for
Russia as it hurt one of their main revenue streams and didn’t really have much effect
on Europe. However, other parts of the world continued to purchase gas from Russia. This,
combined with strong oil sales, is part of the reason why the Russian economy did
not collapse in the way that many predicted it would during the first year of the war.
But an economy is more than just a country’s main exports. A number of other sectors are
suffering greatly after the first year of the war in Ukraine. It’s important to
remember that Russia had a large amount of reserves in its coffers for this vary
occasion. The Kremlin has used this money as a cushion to slow the nation's economic decline.
When we look at the overall health of the Russian economy, however, things don’t look
great. Average Russian citizens are the ones being hurt the most by the war and resulting
sanctions. This has led to some pretty important economic sectors suffering greatly as well.
Many private companies are reducing their investments in the country. They are also
firing workers to help cope with inflation and the slowing of Russia’s economy. Entire cities
are dialing back spending and investments at the expense of infrastructure improvements.
For example, the City of St. Petersburg has reduced its spending on a new subway system
by 25 billion rubles, which was supposed to help people commute to work and get around the city.
Foreign companies are also pulling investments from Russia. One of the industries that has
been hit especially hard in Russia is car manufacturers. Leaders in the industry
have shut down entire factories and let go of their Russian employees. Russian car companies
can no longer get the parts they need from Western suppliers, and the parts that are
secured tend to be scooped up by military contractors to build more war vehicles.
This means that auto sales have decreased by around 60% since the invasion. It’s sometimes hard
to remember that the people of Russia have all of the same needs as citizens of other countries.
Russian citizens and businesses in the country often get lost in the noise created by their
insane President and the war he is waging. Russians go shopping; they commute to work;
they have families. Yet, sometimes we lump the Russian population into the category of the enemy,
even though the vast majority of the people there are just trying to get by.
This is what makes examining the economy of the nation somewhat heartbreaking. Vladimir Putin
doesn’t care if his people are suffering as long as he has the money and manpower
to fuel his war in Ukraine. Just like in the United States or any other part of the world,
goods bought by the populace in Russia contribute largely to the health of the
economy. It’s increasingly clear that the internal aspects of the Russian
economy are struggling to stay afloat as the war reaches its one-year anniversary.
Real estate in the country has fallen off a cliff. In Moscow,
prices have been slashed by up to 30% just to move inventory. The resistance or inability
of the Russian people to spend money on new properties will greatly hurt the economy in
the future. Russia has spent the past several years investing in large-scale construction
projects to create new housing and office spaces around the country. Without any buyers,
these structures will remain empty, which could lead to the collapse of the real estate market.
And if this wasn’t enough to rock economic sectors across the nation, the Russian
Central Bank implemented harsh measures to ensure that inflation was kept under control.
As the war really got going and it was clear that Russia wouldn’t win in the
first few weeks or even months of the war, the Russian Central Bank sharply
increased interest rates to keep the ruble from falling in price. This had the desired effect,
as there was a 36% reduction in loans given by banks, which is one way to
slow inflation. However, the Central Bank then did something that is eerily
similar to what U.S. banks did in the housing market crash back in 2008.
Throughout the war, the Russian Central Bank increased the number of mortgage loans they
gave out to people who could only afford to place a small downpayment of 10 to 20
percent on a property. This meant that in 2022 while the war was happening,
Russian citizens were receiving mortgage loans at incredibly high-interest rates.
And the fact that they could only place a small downpayment on a property should have indicated
that these people probably didn’t have the necessary income to ensure they could make
all of their payments on time, especially in a time of war and economic uncertainty.
So now the Russian Central Bank may have a number of outstanding loan payments to
collect on that people just can’t afford. This could eventually lead to a huge number of people
completely defaulting on their loans and the collapse of the housing market. Sound familiar?
About halfway through the first year of the war,
this is exactly what happened. Around 13% of borrowers began defaulting on their
high-interest loans. Nonpayment on car loans increased by 19% in September of 2022 alone,
and unpaid mortgage loans rose by 35%. As we reach the end of the first year of the War in Ukraine,
the Russian economy is paying for the bad loans given out by banks. Overall, banks have been
giving out fewer loans since the war started to help curb inflation. However, the loans they have
been giving out are high risk, and the fact that with each month the war continues, more and more
people will be defaulting on their payments is a very bad sign for the Russian economy.
Again, we need to remember that Russia isn’t just a nation of soldiers and crazy
oligarchs who want to invade their neighbors. There are regular people
who do regular people things like go to school, eat out, and see movies.
Every sector has been hit hard by the war. But as the fighting continues,
and the Russian people look for some kind of escape to normalcy, they find activities that they
once enjoyed are in short supply. Although entertainment and leisure aren’t the largest
sectors of the Russian financial market, they do play a role in the overall health of the economy.
It’s estimated that restaurants in Russia have had their revenues cut in half since the war
began. People no longer have the money to spend on the things they once enjoyed as jobs are lost,
and prices of goods continue to climb. However, there is a bigger problem,
especially for industries that require a large number of workers to operate. As more and more
Russian citizens are conscripted into the military to fight in the war, a labor market shortage has
sprung up. On top of losing employees to the war effort, more than 700,000 people have fled Russia
to try and escape being conscripted or to get away from the oppressive rule of the Kremlin.
What this means is that workers, one of the key components of a healthy economy,
are in extremely short supply. Experienced staff is becoming harder and harder to find as the
people who make up this demographic are the same people being sent to fight in the war. Russian
teachers are reported to have fled to places like Kazakhstan, Armenia, and Georgia, where they are
now teaching classes in those countries. Russian restauranteurs are opening new locations outside
of their native country where there are more opportunities. If the war lasts much longer,
there will be no one left to work jobs outside of wartime production in Russia. And for obvious
reasons, a single industry nation that relies on war to fuel its economy is a very dangerous thing.
The Russian government claims it will never conscript more than 30% of a business's
employees. However, this seems to be an empty promise. Putin is scared. He needs more men
to throw at Ukrainian forces, and he doesn’t care where they come from. Young men who once
worked normal 9 to 5 jobs are quickly finding themselves on the front lines with minimal
training and no combat experience. Which begs the question: when the war ends, will there be
any workers left to rebuild the damage Putin and his war has done to the Russian economy? After
analyzing how badly the first year of the war is going for Russia, it does not seem likely.
It’s slightly ironic that the Kremlin is hurting the Russian economy in ways that
the West could only dream of doing. NATO and their allies enacted harsh sanctions
on Russia that had relatively little effect. However, the Russian government conscripting
hundreds of thousands of men, giving out bad loans, and spending most of their reserves
on the war is setting the foundation for the economic collapse that the West had hoped for.
One of the most important sectors for Russia is information technology. In a
world where computer programmers, hackers, and tech gurus rule,
Russia cannot afford to lose key talent in this sector. However,
it’s now finding itself in an IT crisis that could have drastic consequences for its economy.
Since the war began, it’s estimated that around 30% of Russia’s IT labor force has
left the country. Businesses around the world are looking for IT workers, and the nations along
Russia’s borders are happy to scoop up skilled workers regardless of where they came from. Some
Russian companies are even taking huge risks to retain IT talent. Stories have been coming out of
businesses being subpoenaed by the government to hand over employees to fight in the war,
but instead of complying, they transfer their workers to a location outside of the country. So,
rather than losing experienced workers, some Russian businesses are taking the risk
of lying to the Kremlin, relocating their workers, and hoping they don’t get caught.
It’s clear that companies are taking drastic measures to keep themselves
going even though the health of the Russian economy is declining. Again,
the economy is not just measured by the amount of wartime equipment that can be manufactured
or the quantity of natural resources that are sold. It also includes the prices of goods,
the income levels of citizens, and the ability of businesses to operate efficiently.
At the start of the conflict, the Russian military seemed powerful
enough to crush Ukraine, at least on paper. However, as we have seen,
sheer numbers can be deceiving. The same is true of the Russian economy. Over the last year,
the Russian economy has looked good on paper. There have been profits in key sectors and
successful measures taken to slow the economic decline of the nation while keeping inflation
under control. But the Russian economy is not healthy. The first year of the war is going
to have long-lasting consequences, and Russia’s economy is teetering on the edge of a recession.
The illusion of a healthy economy is not the same as having a healthy economy. Russia
still has nations willing to buy its natural resources, and since they have a lot of them,
this will bring in huge amounts of revenue. However, as the first year of the war ends,
Russia is finding that profits from almost every other sector besides oil and gas have
declined. The Russian government can only raise taxes so high, cut spending on non-war related
projects so low, and incur so much debt before the economy implodes on itself.
This brings us to what might be the final nail in the economic coffin for Russia. As
the war continues to drag on, it’s the Russian people who are suffering. Putin, his entourage,
and the rich are able to sustain themselves during tough times. In fact, you wouldn’t even know that
there is a war going on when looking at the lavish dinners served at the Kremlin or the
way Russian businessmen are spending their money. However, the 143 million ordinary
people living in the country are definitely feeling the war's impacts on the economy.
With each day that passes after the one-year anniversary of Putin’s invasion of Ukraine,
the Russian people are losing more and more faith in him. The citizens of Russia can only
endure so much pain and suffering, and since the people are the backbone of the economy,
when they’ve had enough, it could cause things to spiral out of control quickly.
This is why when the IMF revised its economic forecast for Russia,
it included an addendum that basically said: if everything stays the same, the Russian GDP
might increase slightly; if everything goes to hell in a handbasket because of the war, the
Russian economy will freefall into oblivion. This is paraphrasing, of course, but you get the idea.
While the Russian Central Bank seems to have curbed inflation over the last year, this is not
the full picture. Due to higher taxes, a decrease in product demand, and the unpredictability of the
future, the income of Russian citizens has not kept up with rising prices. This means
that although the ruble might have remained at somewhat stable levels, Russian citizens are not
able to afford some basic necessities, let alone purchase goods that would help fuel the economy.
One major contributing factor that kept Russia’s economy semi-solvent during the first year of the
war was the high prices of oil and gas. Russia had resources that everyone wanted, and the war,
along with several other global economic concerns, drove oil prices way up. Russia was able to profit
off of this scramble to purchase oil and gas, but as the second year of the war begins,
this no longer seems to be the case. The economies of the United States and Europe are slowing down.
Some argue that recessions have already started, meaning spending is being cut across the board.
Oil and gas prices have been in a steady decline which suggests that
Russia will not be able to make the same huge profits on fossil fuels as they did
last year. This is also true because of the sanctions and price ceilings western nations
have enacted on Russian goods. What all of this means is that oil and gas companies
in Russia will bring in less revenue in the coming year. And when this happens,
the Russian government will receive less in taxes, and Putin will have less cash to fund his war.
This is all on top of the fact that people in Russia can’t pay back their loans,
there is a mass exodus of workers trying to escape conscription,
and inflation is starting to hit the general population hard. When we look at all of the
economic data collected over the past year as Russia continues to wage war in Ukraine,
a very grim picture of Russia’s economic future is painted. Putin’s war is not sustainable. Much
of the world has turned its back on Russia, and if Putin decides to continue sending his citizens to
die in Ukraine to fuel his delusions of grandeur, it may cause a tipping point in Russia itself.
Even if the general populace doesn’t rebel, there is only so much people can take before there is
some sort of forced change. All indications suggest that Ukraine will continue to be
successful at pushing Russian forces out of their country. It’s also clear that Vladamir Putin will
not admit defeat, which suggests he will conscript even more men to fight in his war. Uncertainty
about the future is what might be keeping the Russian economy afloat at the moment. As soon as
something goes wrong for Russian forces in Ukraine or the war is completely lost, it’s highly likely
the Russian economy will collapse as the nation reorganizes itself into a post-war structure.
It’s anyone’s guess what this will actually look like, but a recession is almost inevitable
for the Russian economy at this point. The question becomes: when will it happen? As the
second year of the war in Ukraine is about to begin, Putin will continue to pour money
into his military while creating more pain for Russian businesses and the people. Eventually,
all of this wartime spending will catch up with the Russian government. And with the current weak
foundations in several sectors, the entire Russian economy could come crumbling to the ground.
Now watch “The One Change to Russia Putin Couldn't
Predict (War in Ukraine).” Or check out “Experts Reveal Why Russia is in Trouble.”