Invulnerable Russia?
During the first weeks of Russia’s full-scale invasion of Ukraine, Western countries used sanctions mechanisms that were supposed to bring the aggressor to its knees. Financial restrictions were supposed to be the most effective: freezing of Russian reserves and disconnection from the SWIFT system of international transfers.
However, the Russian economy, despite the premature assurances of some experts, has not even come close to the promised catastrophe. In 2022, the aggressor lost only 1.2% of GDP, and according to the results 2023, it grew by 3.6%. For 2024, the International Monetary Fund predicts the growth of Russian GDP by 2.6%.
Indicators of economic activity have become a real gift for Moscow propaganda. President Putin has repeatedly stated that the ruble’s stability and GDP growth are undeniable signals of Russian invulnerability to the insidious designs of the West. Optimistic forecasts of the IMF also make us ask the question: have the sanctions really failed, and Moscow was able to make a fool of the whole world?
In fact, in both cases, we can cautiously answer “no”. The indicators of the growth of the gross domestic product in Russia today cannot be interpreted in the same way as in the case of other countries of the world. According to one of the calculation methods, GDP is the sum of all final costs of economic entities during a certain period. Starting in 2022, Moscow radically increased state spending, primarily to finance the war against Ukraine. According to data from the Institute of Developing Economies at the Bank of Finland, in 2023, the growth of industrial activity in Russia by 60% was related to military industries. In general, defense spending compared to 2021 will triple in 2024: up to $120 billion or 28% of all budget spending.
Everything for the war
At the same time, other branches of the so-called “normal” or “peaceful” economy are experiencing serious problems. For example, car production remains a third lower than the pre-war level. The sectors of education, science and high-tech industry in 2022 have fallen to the level of 2011. Currently, the Russian economy is going through a period of comprehensive structural restructuring: the so-called transition to military rails. But against the backdrop of increased defence investment, other industries remain at the same level of funding. Accordingly, reports from regions of Russia about food shortages, problems with urban infrastructure, lack of spare parts, etc. are becoming more frequent.
It is still unclear whether Russia will be able to finance the declared increase in military spending for 2024-2026. According to official documents, the funds should come thanks to the growth of revenues from the trade in energy carriers. But nowadays it is extremely difficult to predict how the sanctioned Russian oil will be sold on the world market or what the prices will be. Other challenges include a lack of skilled labour and limited access to markets for high-tech components. Sanctions have limited Russia’s access to technological markets, forcing Moscow to buy low-quality substitutes at high prices. The occupier is still able to maintain the cycle of military production, but the costs are constantly increasing.
Therefore, we cannot say that the sanctions have failed. The reorientation of resources to military needs hides the troubles of other industries. However, it should be recognized that Moscow is doing everything possible to mobilize as many resources as possible, squeezing the absolute maximum out of the economy. It was not for nothing that the Financial Times reported on the interest of Russian financiers in the experience of Hjalmar Schacht, the head of the National Bank of Germany during the Reich, who provided financial services to the German war machine.
Lessons for the world
The actions of the Russian government should become a lesson both for Ukraine and for the entire Western world. Control over the movement of capital, centralized planning, increasing debt load, and mobilization of resources are measures characteristic of dictatorial regimes, but in the case of Russia, they have become an indispensable way to fight against the much more powerful West. Without a doubt, market mechanisms have no alternative in the context of the efficiency of resource allocation, therefore, in the long term, Moscow is doomed to suffer from the consequences of an unhealthy structure of the economy. However, right now she is getting what she needs.
Ukraine will have to turn to the enemy’s experience if the West stops providing us with armed and financial assistance. Today, Kyiv is trying to maintain the normal functioning of the national economy, because it can count on compensating the budget deficit with funds coming from abroad. Stopping this flow would mean we would be forced to rely on our own resources in a way similar to what Moscow is currently using.
Oleksandr Chupak, head of economic programmes of the analytical centre “Ukrainian Studios of Strategic Studies”
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