The Russian economy is a drug addict on a war footing

Sanctions: success or failure

“The sanctions pressure on the Russian economy can be rated as three on a ten-point scale. US sanctions against Russia’s energy sector are nominally twice as strong, but there is an opportunity to expand them. Especially those related to oil production and exports,” says special envoy Keith Kellogg in a commentary for the New York Post.

Immediately after the start of the large-scale invasion, Ukraine’s allies announced the application of so-called nuclear sanctions against Russia, the purpose of which was to undermine the aggressor’s ability to wage war.

The sanctions seemed so devastating that economists in Russia and abroad immediately began predicting a sharp decline in the occupier’s economy. The International Monetary Fund (IMF) predicted a decline in Russian GDP of 8.5% in 2022 and 2.3% in 2023. The Russian Central Bank expected even worse consequences: 10% and 3% declines, respectively.

However, as we know, the forecasts turned out to be wrong. After a slight contraction of 1.2% in 2022, Russian GDP grew by 3.6% and 3.9% in 2023 and 2024, respectively. Investment and real wage growth reached their highest levels in twenty years. According to the WSJ, China even initiated the creation of an intergovernmental group to study the experience of Russian economic resilience. On 19 February 2025, the EU agreed on the 16th package of sanctions against the Russian Federation, particularly against the aluminium industry and oil tankers.

There is still controversy about the reasons for the forecast’s inaccuracy, but they can be grouped into two groups:

underestimation of the stability of the Russian economy;
inability to guarantee a high level of implementation of sanctions.

On the one hand, Russia was preparing for such a scenario, and its efforts were relatively effective. On the other hand, the effectiveness of sanctions was significantly undermined, in particular, due to the readiness of major players (China, India, Iran) to become alternative suppliers of goods and consumers of its products for Russia. In addition, our allies did not know how long the war would drag on and what consequences the sanctions would have for their economies.

Currently, stakeholders are advancing two opposing theses:

First: the sanctions have failed, they harm Western countries more than Russia. The Kremlin and pro-Russian businessmen and politicians outside the Russian Federation promote this thesis.

Second: since Russia always shows false economic data, the effect of sanctions is much stronger than is believed, so they need to be strengthened. This is what we, Ukrainians, and our supporters abroad are saying.

As is often the case in such cases, the truth lies somewhere in the middle. Even though Russia has classified some economic statistics, the available data generally coincides with what external sources show. For example, the aggressor’s trading partners, data from job search sites, eyewitness accounts, etc.

However, everything indicates that Russia will pay for today’s apparent economic stability in the future. The economy shows clear signs of overheating and imbalance. The role of sanctions has been rethought: instead of a tool that was supposed to quickly force the Kremlin authorities to abandon aggression, sanctions have become a factor that causes long-term economic damage to the occupier.

As the Carnegie Center wrote, the Russian economy functions like a marathon runner on fiscal steroids, and now the effect of these steroids is disappearing.

How Russia adapted to economic warfare

Growth factors

Realizing the prospect of a multi-year war and feeling the pressure of sanctions, Muscovites began to build a war economy according to the following principles:

rapid increase in the role of the state in the economy, expansion of state demand;
strengthening economic ties with friendly countries;
partial production autocracy, activation of the so-called import substitution.

In retrospect, we can say that economic growth in Russia should not have come as a surprise, since such a scenario was typical of war economies of the past. For example, in Germany, from 1933 to 1937, GDP grew by about 55%, primarily due to state investment in the defence sector. A tenfold increase in military spending at that time entailed a threefold increase in non-state consumption.

Something similar happened in Russia. At first, it seemed that the economy was going into free fall: the ruble depreciated rapidly, the stock market stopped working, energy exports decreased, as did imports, and foreign companies began to leave the country.

However, the ruble stabilized fairly quickly due to rising energy prices and falling imports. The government adjusted fiscal policy, increased government spending, and limited capital outflows.

After a long delay, our partners imposed sanctions on Russian oil at the end of 2022. Although energy revenues to the Russian budget fell in early 2023, the flow of funds was quickly restored due to changes in tax legislation and a reorientation to new markets. For example, exports to India increased sharply from 0.1 to 1.9 thousand barrels per day (19 times).

We can identify three main drivers of economic growth in the Russian Federation during the period of large-scale war:

rapid growth in domestic investment and consumption due to government spending;
restrictions on the withdrawal of capital abroad;
appropriation of assets of foreign companies that have exited the Russian market.

1,200 foreign companies have left Russia or limited their activities on its market, and 1,028 of them have completely withdrawn. The government has set the most unfavourable conditions for foreigners who want to sell a business: a mandatory discount of 60% of the market value plus a 35% tax.

The exodus of foreigners has created opportunities for Russian companies. Over the years 2022–2024, the finance and insurance sectors doubled profits, construction increased them 41 times, and tourism increased them 52 times. Unlike the period before 2022, corporate profits and dividends cannot be taken abroad, and therefore they are reinvested domestically.

The state stimulates consumption

The rapid increase in demand for the products of the military-industrial complex (MIC) caused an explosion in demand for labour, which also quickly became scarce due to mobilization and emigration. As a result, workers’ wages began to grow rapidly, and consumption and savings followed suit.

In 2024, real wages grew by 9.4%. For 2025, the government forecasts a 7% increase. By 2027, growth is expected to slow to 4%, but this is still twice the pre-war rate. It is worth noting that these estimates are based on an optimistic forecast of energy revenues.

Capital movement restrictions and investment boom

For decades, Russia has compensated for its surpluses from energy and other commodity sales by constantly sending capital abroad. But now, sanctions and internal restrictions have trapped that capital within Russia’s borders, forcing investors to look for ways to increase it domestically.

The number of Russians with assets of over 100 million rubles (about $1 million) increased by 50% between 2022 and 2023, and their wealth increased by 62%. This is in sharp contrast to the first months of 2022, when the wealth of wealthy Russians fell by 20% due to the stock market collapse, withdrawals abroad, etc.

Until 2022, the Russian government faced the constant challenge of getting businesses to invest domestically rather than abroad and not hold large amounts of money in reserves. At the time, companies complained about an unfavorable investment climate, government interference, and unpredictable tax policies.

But now, with overseas options disappearing, businesses have started investing at home. In the first half of 2024, capital investment reached maximum in 12 years.

Instability indicators

The final stops for Russian investments are now import substitution and the military-industrial complex. For example, in 2022–2023, the leaders in growth were the production of weapons, computers and other electronics for military needs, and military optics. At the same time, spending on healthcare, education, social security, and other peaceful budget items remains unchanged from 2022.

Military products almost completely meet the needs of the front, and are not sold abroad. The CEO of Rostec Corporation stated in October 2024 that it could not maintain export volumes, in particular, due to the high cost of loans.

Another driver of growth is consumption, which is increasing due to rising wages. Companies are forced to increase compensation for employees in conditions of record low unemployment. In May 2024, the central bank indicated a simultaneous shortage of low- and high-skilled labor. The Labor Ministry predicts that by 2030 the labour shortage in Russia will reach 2.4 million workers.

The shortage of workers is associated with both increased demand and decreased supply. Long before 2022, Russia’s economically active population was declining due to demographic reasons. In 2022, approximately 750,000 people left the country, mostly highly qualified specialists in IT, finance, and management. Currently, 10,000–30,000 people join the Russian army every month.

Depopulation in Russia has traditionally been at least partially offset by immigration. However, in 2023, the number of migrants fell to a five-year low, and after the terrorist attack in Crocus Hall, the state expanded the list of restrictions for those who want to move to Russia.

What will happen after the war?

The current structure of the Russian economy indicates that a cessation of hostilities will most likely worsen, rather than improve, Russia’s economic situation.

The main fact is that Russia has become dependent on the military-industrial complex. No matter how the war ends—with a long peace or a shaky truce—the Russians will have to invest heavily in rebuilding their armed forces.

Today, the army’s needs are mostly met by Soviet-era stocks, rather than new production; these stocks are quickly depleted and will need to be replenished. Expert Dara Massicot believes that this process will take at least eight years.

Historically, in post-war conditions, countries experience several years of economic decline and high unemployment. It does not matter whether they won or lost the war. For example, Western countries after World War II could not quickly create jobs for demobilized soldiers and laid-off military-industrial complex workers and invest in civilian production.

Of course, much will depend on post-war policy for Russia. We know that the Kremlin will most likely immediately begin preparing for a new invasion and continue spending on the war. However, it is not excluded that Moscow will reduce the production of the military-industrial complex and try to reconcile with the West. However, sanctions will probably hang over Russia for some time, and overcoming the labour shortage will be a very difficult task.

Russia could be particularly hard hit by a prolonged decline in energy prices. This, combined with other factors, will wipe out existing growth. When the impact of fiscal stimulus critically wanes (or when the government runs out of money), Russia will not be able to compensate for it with normal economic activity, such as exports.

It can be said that Russia is repeating the problems of the late USSR. As then, to keep up with the arms race, Moscow is throwing maximum efforts in the form of investments and people into the military-industrial complex, sacrificing civilian industries. Government policy, aimed at indulging the centuries-old imperial ambitions of Moscow’s nature, leads to the centralization of the economy. And that itself hinders normal development, glimpses of which we saw in Russia in the early 2000s.

Oleksandr Chupak

Тиждень