Earlier this month, the International Monetary Fund (IMF) revised its economic growth predictions for the upcoming year. One data point, in particular, will have caught the attention of Ukraine War observers: Russia is expected to grow faster than any advanced economy, with GDP growth of 3.2%. This article explores why Russia’s economy seems to be defying expectations despite facing significant sanctions.
Anyone who made such a prediction 2 years ago would have been accused of spreading Russian propaganda. How could their economy possibly grow while being battered by Western sanctions?
But it is now common knowledge that the Russian economy is doing more or less fine for the time being. Sure, eggs have become more expensive; yes, it’s harder to buy Western video games. But rarely has an economy held up so well in the face of so much pressure. Talk to Russians who regularly travel home, whether to Moscow or St Petersburg or Pyatigorsk, and they’ll all repeat the same story: everything seems OK. The article will delve into the factors that have contributed to this resilience, examining Russia’s unique economic structure and geopolitical strategies.
Russia’s Economy: Built to Survive Sanctions
Economies are a bit like musicians or boxers: they have their own distinctive styles.
Just over 30 years ago, this was a centrally planned socialist nation, largely isolated from the wider global economy. The USSR didn’t rely on American aircraft, Middle Eastern oil, or German chemicals. It wasn’t fully self-sufficient, as it relied on trade with richer Warsaw Pact members (like East Germany) and non-aligned nations (like India), but it was closer than any Western country. This history of self-reliance has shaped Russia’s ability to withstand economic pressure.
Russia opened up a lot to the world after the fall of the USSR, and its booming tech sector and cheap food deliveries impressed many Western onlookers, but 30 years of globalization wasn’t enough to erase the DNA of an economy forged by protectionism and autarky. This inherent structure allows Russia to better navigate economic sanctions compared to more globally integrated economies.
Surviving Sanctions for Over a Decade
Russia did not invade Ukraine for the first time in 2022; the war really began in 2014, when Ukraine’s pro-Europe Maidan Revolution led to Russia annexing Crimea and backing separatist militias in the Donbas.
The West threw some sanctions at Russia for these actions, but the worst kind of sanctions — soft enough to have no real impact, instead only teaching Russia how to get better at dodging new ones. These early sanctions inadvertently prepared Russia for the more severe measures imposed after the 2022 invasion.
Russia: A Gas Station with an Army
Economies vary in their complexity. Economies like Japan and Germany, for example, produce world-leading goods across a range of industries, from automobiles to premium beef.
Russia, on the other hand, is sometimes referred to as “a gas station with an army”. Beyond its ability to supply its own basic needs, Russia does very little well. It doesn’t make good cars, or watches, or anything really. It produces very little exporting, which drastically reduces the leverage that other countries have over its economy.
And when it comes to oil and gas, sanctioning Russia does seem to have hurt the West more than Putin. Easily circumvented sanctions allowed Russia to sell oil at record high prices for the first year of the war, and India and China’s insatiable appetite for oil means it is selling basically everything it can get out of the ground even now. This reliance on natural resources provides a buffer against broader economic pressures.
COVID-19 Lockdowns Diminish Appetite for Economic Warfare
Sanctioning the world’s biggest energy player would be a tough sell even at the best of times, but became an unsellable proposition after years of restrictions brought the global economy to its knees.
Economic growth requires energy. Perhaps in some utopian future most of that energy will come from nuclear fusion, or the sound of puppies barking, but for now, it mostly comes from oil and gas.
It’s no coincidence that Russia intensified their invasion of Ukraine just as the end of lockdowns appeared to be within sight; they knew that when the world would be most hesitant to put principles before profit.
Competent Economic Leadership
Putin’s insatiable urge to (disastrously) invade a new country every 5 minutes mightn’t be the greatest example of competent leadership we’ve ever seen, but Russia’s financial and economic institutions have compensated very well for his blunders.
Figures like central bank governor Elvira Nabiullina have expertly helped Russia withstand and circumvent sanctions from the rest of the world, pulling off probably the greatest piece of wartime financial engineering since (Hjalmar Schacht) resurrected the German economy for World War II. Her strategic decisions have been pivotal in stabilizing the Russian economy.
Geopolitical Allies: China and Friends
The Soviet Union had to rely on a few weak satellite states for support and resources; today’s Russia can rely on the world’s 2nd largest economy and greatest industrial power: China.
China’s willingness to buy Russian resources and sell them everything from semiconductors to cars has been crucial in sustaining Russia’s economy. Numerous smaller nations are also useful in bypassing sanctions, which is clear from the explosive rise in British and German car sales to Azerbaijan, Kazakhstan, Kyrgyzstan and Georgia. This support network has been essential in mitigating the impact of Western sanctions.
Also, Russia has benefited from the hesitance of Western countries like Hungary, Germany and Austria to engage in sanctions, which has undermined a collective approach and reduced the impact of sanctions when they do finally arrive.
Conclusion: A Resilient But Not Invincible Economy
Having said all of this, the Russian economy is not going as well as Putin would like the world to collapse. Desperate measures taken to protect the economy (like taxing foreign companies that withdraw operations or freezing cash withdrawals to protect the ruble) will have permanent consequences on the willingness of investors to engage with the regime.
China’s own domestic struggles will eventually strain its ability to help its neighbour, and Russia has been forced to deplete its reserves to boost wartime spending.
At least 500,000 Russians (mostly young and highly-educated professionals) have fled, most of them unlikely to permanently return. Also, New housing and infrastructure are being built shoddily, with builders forced to make do with bad materials and labor shortages exacerbated by conscription.
But Russia’s economy is doing well enough. The grim reality is that Ukraine is likely to run out of money far, far sooner than its invader will. While the Russian economy has shown surprising resilience, long-term challenges remain, and its sustainability is questionable.
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