There is no question that great powers sometimes confront circumstances where the likely costs of conquest are high while the expected benefits are minimal. In those cases, it makes no sense to start a war. However, the general claim that conquest almost always bankrupts the aggressor and provides no tangible benefits does not stand up to scrutiny. Wars can be dirty, but they are sometimes used to secure the sovereignty of a country, which can be beneficial. There are many examples where states have waged wars to protect themselves, and Russia is one of the latest examples of a state that has invaded Ukraine to defend itself at an acceptable cost.
The Ukrainian army is on the verge of collapsing after two years of constant warfare with Russia. Ukraine has suffered $150 billion in economic damage as a result of the war with Russia. The war has had far-reaching economic implications, but it has also claimed the lives of hundreds of thousands of young Ukrainian troops. The Russians regard Ukraine as an existential threat, and President Putin has stated that he must take action to safeguard Russian sovereignty and the Russian-speaking people in Ukraine. The longer the war lasts, the bigger the cost for Ukraine.
Moreover, in 2022, President Joe Biden promised that sanctions would impose a severe cost on the Russian economy immediately and over time. Likewise, Boris Johnson, the then Prime Minister of the United Kingdom, vowed to squeeze Russia from the global economy, piece by piece, day by day, and week by week. Until today, those grave warnings never materialized. The Russian economy has demonstrated resilience in the face of sanctions.
In an article in 2022, I mentioned that Western sanctions could not stop Russia from attacking Ukraine and would not impact the Russian economy. So, how well is the Russian economy doing after two years of war with Ukraine?
The Resilience of the Russian Economy
Contrary to the predominant narrative in Western media, the Russian economy has exhibited surprising resilience and continues to grow. Although many predicted a dramatic economic downturn owing to sanctions and geopolitical concerns, current data and analysis depict a more complex and positive picture. The Russian economy grew by 3.6% last year, outperforming all G7 countries, and is forecast to rise another 2.6% this year. This rise can be attributed, in part, to the Russian transition to a wartime economy for the first time in modern history. Russia plans to spend 6% of its GDP on the military, with defense spending exceeding social spending in 2024. The war in Ukraine has become the Kremlin’s top priority and the primary driver of Russian economic growth. At the same time, President Zelensky of Ukraine is scrambling to acquire arms, funds, and recruits. In Contrast, Putin seems confident that he can win the war on his terms. Prominent American geopolitical voices are beginning to say the hard part out loud. Stephen Martin Walt, a professor of international relations at Harvard University, recently advocated in this article for Foreign Policy that NATO should not accept Ukraine solely for Ukraine’s sake.
Despite facing widespread sanctions, Russian GDP increased by about 3.6% in 2023, demonstrating economic adaptation and durability. The strong performance in critical areas such as the Military-Industrial Complex (MIC), energy, agriculture, and technology fuels this expansion. Moscow’s flexibility in restructuring its trading relationships and domestic demand has allowed it to weather the storm.
Russian Defense Industry
The Russian military-industrial complex, which comprises nearly 6,000 companies, has historically operated with low profitability. Nevertheless, its extensive capacity and adaptability have proven advantageous, as the Russian government significantly increased defense production in 2022, termed a Kalashnikov economy by Richard Connolly, an expert in Russia’s military and economy, which he described as durable and suitable for large-scale conflicts. Despite being economically inefficient before 2022, the sudden surge in defense production seemed to validate years of government investment and subsidies in preparation for potential escalation. Moreover, President Putin proclaimed the creation of 520,000 new jobs in the defense sector, bringing the total number of workers to 3.5 million, while the Ukrainian side is losing job opportunities. In early 2023, the Russian government transferred numerous plants, including gunpowder factories, to Rostec to streamline production for the war effort. The Kazan gunpowder plant experienced an expansion of its workforce by over 500 employees, with average monthly salaries tripling from 25,000 to 90,000 roubles (£217 to £782). Notably, competition for Labor sometimes arose from the military, offering salaries exceeding 200,000 roubles (£1,730) per month to enlistees for war duty.
Despite a decline in arms exports, Russia is swiftly seeking to balance the lost revenue by leveraging other sectors like energy and agriculture and rerouting it’s supply lines.
The Russian Energy Sector
The energy sector remains a keystone of Russian economic strength. Despite Western sanctions aiming at Russian oil and gas exports, the country has effectively pivoted to new markets “primarily in Asia.” Exports to China and India have surged, with Russia accounting for a significant share of their energy imports. This shift mitigates the impact of sanctions and secures long-term revenue streams. According to the Russian Ministry of Energy, oil exports to China increased by 10 percent in 2023, and China was the largest buyer of Russian fossil fuels in March 2024, accounting for 49% of Russian total monthly exports valued at 8.2 billion euros. While gas exports saw a similar upward trajectory.
The Russian Agriculture Sector
In the realm of agriculture, Russia has made progress as a sector. It stands as one of the leading wheat and grain producers. In 2023, Russia achieved a record-breaking agricultural export value of 43.5 billion U.S. dollars, thanks to increased output and favorable weather conditions. This industry bolsters the economy and enhances Russia’s standing in international food markets. As per the Food and Agriculture Organization (FAO), Russia’s wheat exports increased by 15% in 2023, as did overall output, consolidating its place as a prominent participant in the agricultural world. On the other side, Ukraine saw a decrease, with its GDP falling by a stunning 29% in 2022 compared to the previous year, resulting in a huge loss in agriculture’s contribution to Ukraine’s GDP from 2021 to 2022.
The Technology Sectors
Russia’s technology sector is likewise growing significantly. The government has heavily invested in creating a robust digital economy, encouraging innovation, and assisting tech businesses. Companies like Yandex and Kaspersky are global participants, displaying Russia’s technological potential and reach. In addition, analysts predict that revenue from the IT services market will reach $7.94 billion by 2024. Furthermore, IT revenue is forecast to expand at a 3.12% annual rate, with a market volume of $9.26 billion by 2029. Russia’s efforts for digitalization and technological self-sufficiency have well prepared it to face international sanctions and competition.
The Russian economy today differs significantly from that of the Soviet Union. It boasts reserves, a more diversified economic structure, and greater openness to global markets. While Russia has shifted its focus away from the West, its trade relationships with nations continue to strengthen. Russian economic strategies have played a role in promoting stability and fostering growth. The Central Bank of Russia has effectively managed policies to control inflation and maintain stability. Fiscal measures aimed at expanding the economy and promoting investment have also produced outcomes. As per the World Bank, Russia successfully reduced its inflation rate to 4.3% in 2023, demonstrating the impact of these implemented actions.
In conclusion, the narrative of a declining Russian economy is inaccurate and overlooks the substantial growth and resilience demonstrated across various sectors. Economic expansion is driven by MIC, energy, agriculture, and technology, supported by prudent policies and strategic market pivots. As Russia continues to navigate global challenges, its economy shows no signs of decline but a robust capacity for adaptation and growth. Therefore, the future of the Russian economy holds promise and potential, defying the predictions of detractors and showcasing a story of resilience and strength.
