Earlier this month, the International Monetary Fund (IMF) revised its economic growth predictions for the upcoming year. One data point, in particular, caught the attention of many: Russia is expected to grow faster than any advanced economy, with a GDP growth of 3.2%. This unexpected resilience prompts a deeper look into why Russia’s economy seems to be doing fine, despite the heavy sanctions imposed by the West following the Ukraine war. This article explores the various factors contributing to this surprising economic stability.
Anyone who made such a prediction two years ago might have been accused of spreading Russian propaganda. But reality paints a different picture. While everyday life for Russians has seen changes, the economy has largely held up, defying initial expectations. From its self-sufficient economic structure to strategic geopolitical alliances, numerous elements have played a role in Russia’s ability to weather the economic storm.
This analysis delves into the specifics: Russia’s historical economic design, its ability to adapt and circumvent sanctions, the vital role of oil and gas, competent economic leadership, and the support from allies like China. We will also consider the potential long-term consequences and vulnerabilities that could impact Russia’s economic future.
Russia’s Economy Was Literally Built to Survive Sanctions
Economies, like musicians or boxers, have their own distinctive styles. Russia’s style? Self-sufficient. 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.
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.
They’ve Been 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.
Russia is a Gas Station with an Army
Economies vary in their complexity. 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.
The COVID-19 Lockdowns Took Away the West’s 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.
Good 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.
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.
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
While Russia’s economy is not thriving as Putin would like, it is doing well enough to sustain its current trajectory. However, desperate measures taken to protect the economy will have permanent consequences on the willingness of investors to engage with the regime. At least 500,000 Russians (mostly young and highly-educated professionals) have fled, most of them unlikely to permanently return.
After the war, when government spending falls back to normal levels, a recession is likely. But Russia’s economy is doing well enough for now. The grim reality is that Ukraine is likely to run out of money far, far sooner than its invader will.
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