After two years of war, Russian economy proves resilient – but for how long?

Despite several rounds of sanctions levied by Western powers over the war in Ukraine, the Russian economy registered strong growth in 2023 after a recession the previous year. Fuelled by increased public spending – particularly military spending – other industrial sectors also benefited from the war in Ukraine, with the country's economic resurgence aided by continued revenue from oil and gas exports.

It's an electoral race without much suspense for the master of the Kremlin. Russia is holding a first round of presidential elections from March 15-17 that is widely expected to confirm a fifth-term victory for Vladimir Putin.

In recent weeks, the Russian president has again denounced the wide-ranging Western sanctions that have targeted his country since the start of the February 2022 full-scale invasion of Ukraine, labeling them a "failure".

"We have growth and they have decline," Putin said in a January speech in Moscow, referring to Ukraine’s allies.

Although most Western economies are not in "decline" as Putin claimed, the latest figures do rate Russian GDP growth as comparable to that of the US, which also beat expectations in 2023.

Russia has recorded robust growth since the economic contraction of 2022, surpassing many expert forecasts. Rosstat, Russia’s national statistics agency, reported a growth rate of 3.6 percent for the Russian economy in 2023 while the International Monetary Fund (IMF) estimated growth at around 3 percent. The IMF has thus revised its forecast for 2024 upward to 2.6 percent given the Russian economy’s strong performance last year.

"It's interesting to note that Russia’s growth surpassed even the most optimistic forecasts, including those of its own institutions," said Igor Delanoë, deputy director of the Franco-Russian Observatory.

The war effort and hydrocarbon revenue

The rebound of the Russian economy is occurring in tandem with a massive increase in public spending, particularly military spending. The Russian government plans to spend $119 billion on defence in 2024, a rise of nearly 90 percent from 2021.

In addition to increasing arms production, the war in Ukraine has helped lift other industrial sectors. Examples include construction – with the building of extensive defensive fortifications in eastern Ukraine and southwestern Russia – and manufacturing.

"The military-industrial complex has been operating at full capacity since February 2022,” says Julien Vercueil, an economist specialising in Russia at the Paris-based University of Languages and Civilizations (Institut national des langues et civilisations orientales or Inalco).

“To facilitate recruitment, workers have been exempted from conscription. Wages in the sector have also risen, boosting household consumption, which has been one of the driving forces behind Russian growth."

Russia also continues to benefit from revenue generated by oil and gas.

"Although down from their peaks of 2022, world hydrocarbon prices have remained high, enabling Russia, despite the sanctions, to earn strong export revenues," says Vercueil.

Despite being the world’s third-largest oil producer – after the United States and Saudi Arabia – and the second-largest natural gas producer, Russia experienced a 24 percent decrease in hydrocarbon revenues in 2023 compared with the previous year, the result of Western sanctions and reduced exports to Europe. The country hopes to see a recovery in 2024 by boosting its exports to China and India.

Russia continues to export to the European Union and even the United States through a loophole in sanctions, according to a November report by the Global Witness watchdog group.

Sanctions ineffective?

On the second anniversary of Russia's full-scale invasion of Ukraine in late February, the EU, the United States and Canada announced a new set of sanctions against Moscow, marking the 13th round of sanctions imposed by the EU since February 2022.

But the effectiveness of such measures has been brought into question following the IMF’s release of global growth figures in January.

While the US recorded 2.5 percent GDP growth in 2023, the eurozone experienced a 0.5 percent average growth rate, weighed down by a recession in Germany, the bloc’s largest economy.

"The economic situation of European countries cannot be analysed solely in terms of their relationship with Russia. But it's true that the decision to cut off Russian gas has hit Germany hard, as it was highly dependent on it, and this has affected the eurozone economy," explains Delanoë.

It might be tempting to believe Putin's assertion that sanctions have harmed the West more than Russia. But Vercueil says that would be misleading.

Western sanctions targeting Russia's banking and financial system, the embargo on electronic components and the price caps on Russian oil and petroleum products have indeed had a “significant impact” on Russia's economy, he says.

IMF chief Kristalina Georgieva said last month that the Russian economy might be headed for a shock. "I actually think the Russian economy is [in] for very tough times because of the outflow of people – and because of the reduced access to technology that comes with the sanctions," she said.

"Like all economic sanctions throughout history, Western sanctions have also led to adaptive strategies for the entities affected. But Russia has been much more affected by the immediate effects of the sanctions than Europe: it can be estimated that two years of strong growth have been lost for Russia, and the effects of the sanctions are not over," Vercueil says.

These effects include high inflation, which was at an annual rate of 7.4 percent in January, according to Rosstat, compared with 2.8 percent in the eurozone. This surge in prices, particularly for certain consumer staples like beef and chicken, has led to a run on eggs in recent months, prices of which have soared 40 percent compared to the year before, forcing the government to take action.

Uneven gains

On the industrial front, certain sectors such as the automotive industry are at a standstill, hit hard by Western bans on exports of electronic components. Russian agriculture is facing severe labour shortages; the problem is endemic in Russia, and has become much more acute given forced military conscription and the exodus overseas of several hundred thousand Russians.

"Overall the growth figures are, of course, satisfactory for the Russian authorities, but the growth is very unevenly distributed," says Delanoë. "Regions linked to the military-industrial complex are in a very privileged position. This is true of Moscow, Leningrad and the areas adjacent to Ukraine in the southwest, some of which are experiencing double-digit growth. Other industrial regions are being left behind, such as Kaluga, where the planned Chinese takeover of automobile plants has yet to take effect."

In his annual address to both houses of parliament at the end of February, Putin unveiled his vision for Russia in the run-up to the presidential election. He announced a massive six-year investment plan focused on infrastructure, with priorities including reducing imports and boosting the country's low birth rate.

He also paid tribute to the citizens involved in the war effort, describing them as the country's "true elite", and promised soldiers priority access to job training.

"In this war, the state is gaining a foothold in new areas of the national economy, and tending to play a wider role than before," says Vercueil. The Russian state's ability to support this new role depends on its financial resources, and in particular on oil price trends, but also on the long-term involvement of its citizens.

This article has been translated from the originalin French.