The Costly Resilience of the Russian Economy: From War to Sanctions

The war in Ukraine has reached its third year and despite the apparent increase in war costs and the growing trend of sanctions the Russian economy by leveraging its diverse capacities especially the ever-increasing sales of energy along with various metals and foreign exchange reserves continues its forward-moving life. This is while some experts and politicians predicted that the nationa

The war in Ukraine has reached its third year, and despite the apparent increase in war costs and the growing trend of sanctions, the Russian economy, by leveraging its diverse capacities, especially the ever-increasing sales of energy along with various metals and foreign exchange reserves, continues its forward-moving life. This is while some experts and politicians predicted that the national economy of this country would immediately collapse under the pressure of Western sanctions and European sanctions. It is noteworthy that since May 2022, the International Monetary Fund and the World Bank have revised their forecasts regarding Russia's GDP growth 11 times. The Kremlin has increased nominal military expenditures by 3.4 times compared to 2021 with 2024, and even considering the 50% decrease in the value of the ruble in the past three years, which is also significant, it intends to increase military expenditures by approximately 25% in 2025 and hopes that people's real income will not decrease and maintain a balanced budget. But how long will Russia's resources last?

Experts' assessments are different; some insist on a rapid collapse and call for the intensification of existing sanctions and the imposition of new sanctions. Most pro-government experts believe that sanctions are not at all effective and the economy, even if it operates at a desirable level, is generally good. Another group believes that the focus of the Russian economy on raw materials and energy indicates its weakness, but with another kind of assessment, it should be said that the richest country in the world in terms of minerals is hardly excluded from the global economy, oil and other resources still have their buyers, especially for Russia, which is adjacent to China, the world's largest consumer of energy, and this has caused the volume of trade between the two countries to grow unprecedentedly and reach more than 260 billion dollars, while countries such as Turkey and the Republic of Azerbaijan and even India also play a significant role in Russia's energy exports, the Kremlin has been able to continue exporting goods to a diverse group of customers from the global south, and another important point is that Western sanctions and economic restrictions have largely stopped the outflow of capital from Russia, and as a result, Putin has seriously strengthened his financial base.

Looking at the other side of the coin, it cannot be said that the sanctions regime has been a complete failure, as Russia is increasingly falling behind the developed world in technology and has become dependent on China for many goods that it used to produce itself until recently. The country has virtually no chance of returning to its pre-war level and integrating into the global economy in the near future, one sign of which is the sharp decline in the production of passenger planes in the past three years, and while the number of production was supposed to be 109 units in this period, this figure was only 9 units.

However, the restrictions have so far failed to achieve their main goal, which is to change Vladimir Putin's calculations regarding the continuation of the war in Ukraine; it is obvious that there is no short-term and decisive concern for most decision-makers. With all this, how can the pillars of Russia's economic stability be described at the end of 2024? On the one hand, Russia is facing runaway inflation of over 20%, which is caused by the government's fiscal policy and huge payments to military personnel. Since the beginning of 2024, the maximum payment for signing a military service contract with the Ministry of Defense has increased 20 times faster than the official inflation rate. Controlling the base interest rate of the Russian Central Bank suppresses investment activities and essentially blocks the development of several industries, including housing. Also, the limited currency profit, along with the unchanged volume of imports, leads to an increase in the dollar exchange rate, which in turn leads to further price increases. As a result, experts expect a decline in Russia's economic growth in early 2025, but this may be temporary, and despite the downward trends, it is unlikely that the Russian people will face serious economic problems in the near future.

Another important issue is that, unlike previous years, the country is facing a labor shortage, which is caused by mass conscription, the emigration of hundreds of thousands of educated and entrepreneurial Russians, and the unstoppable migration of migrant workers. This shortage, which will remain constant for years to come, makes employers willing to pay higher wages, which is reflected in the growth of nominal income of at least 17% in 2024. This growth has negative consequences for the entire economy, as it reduces resources. But as long as the budget allows for such expenses, a significant portion of the working population will not face a decline in income. At the same time, 18 million Russians live below the poverty line, and this group, which mostly consists of pensioners, will be the most negatively affected by inflation.

In total, the war in Ukraine has had tangible effects on the course of Russia's remarkable economic development, and on the one hand, many development projects have been challenged by the provision of credit, and the process of industrial production has also been directed towards military production, and on the other hand, more than 300 billion dollars of this country's foreign exchange reserves have been blocked in Western countries, and recently the interest on this deposit has also been paid to Ukraine; Despite all this, although President Putin acknowledged the existence of economic problems, especially inflation, in his year-end press conference in 2024, the Russian economy has continued its resilience by relying on significant energy exports and foreign exchange reserves, and the sanctions have not been able to make a fundamental change in the country's policies regarding the continuation of the war.

Ali Beman Eghbali Zarch - Head of Eurasia Studies Group

 (The opinions expressed are those of the authors and do not purport to reflect the opinions or views of the IPIS)