In brief:
- what fuels the Russian economy during the war;
- how Western sanctions affected the Russian economy;
- how experts assess the future of the Russian economy after the war.
Russia, known for its vast natural resources and many political influences, has been experiencing significant economic challenges in recent years.
According to data from the CIA World Factbook, the Russian economy has been struggling to recover from COVID-19. Economic sanctions imposed by Western countries following the annexation of Crimea in 2014, furthering its empowerment after a large-scale invasion of Ukraine. Despite efforts to diversify its economy and reduce its dependence on oil and gas exports, Russia faces numerous economic hurdles, including inflation, high levels of public debt, and a declining population.
At the same time, many Russian economic observers have different ways of evaluating the future of the Russian economy. Due to the fact that most government statistics have been hidden from public eyes since February 2022, a compilation of Russian economic experts can make us quite evident with the actual image of the current state of the Russian economy. Furthermore, this compilation provides an excellent opportunity to analyze its challenges and many important implications to create a more efficient sanction policy.
In order to correctly understand the fundamental trends in the Russian economy, it is worth starting this analysis with the most basic economic concept: budget policy.
General view
For some time, the mass media spread the idea that the Russian regime would collapse soon. In January, federal budget expenditures almost exceeded the government’s plan for the year. At the same time, Natalya Zubarevich (Professor of the Department of Economic and Social Geography of Russia at Moscow State University) and Sergey Guriev (Professor of Economics at the Paris School of Political Sciences (Sciences Po) note that it was in January that the Russian regime advanced most of the costs for the Defense-Industrial Complex.
Furthermore, since the share of defense spending in the budget is already high (5.7%). Considering additional power structures inside the country and social security for military personnel and their families, it is more than 20% of the state’s expenses. This means that the further budget deficit is stretched over the year. In this way, the Russian authorities allow themselves to continue hostilities in Ukraine throughout 2023 but try to minimize the negative economic impact.
It is also important to note that, according to Ms. Zubarevich and to RosStat reports, one of the few industries in Russia that continued its development was the defense complex. To a large extent, the regions in which the relevant productions are located will benefit from this.
Let’s talk about the state of the regional economy. It is essential to note that since the industry is diversified across the territory of Russia, the decline in economic activity due to the introduction of sanctions is not felt everywhere by the population. After all, if there was a reduction in one industry, there was an expansion in another.
Natalya Zubarevich notes that “the budget deficit is observed in 49 regions, but most of all in Murmansk, Belgorod, Magadan, and Chukotka.” At the same time, the regions where the enterprises of the military-industrial complex and oil production facilities are located have received severe monetary saturation, mainly due to the very late introduction of sanctions against oil products.
The economists mentioned above note that the economic downturn occurred primarily in those industries against which sanctions were first introduced. Such industries primarily include metallurgy and coal mining.
Sanctions impact
Since the sanctions against oil were introduced only in December 2022, in combination with the global political and economic situation, it is time for the Russian regime to reorient exports to the east and accumulate specific resources. In particular, Oleg Itshoki (Ph.D. in Economics from Harvard, awarded the John Bates Clark Medal) emphasizes this: “It was a year of completely record revenues and record exports because volumes did not decrease and prices were at historical highs, and that is exactly why the Russian economy was in that state in because there were no export sanctions, there were no sanctions, for example, on Gazprombank, through which all export transactions are conducted, practically Russians were disconnected from Swift.”
Attention is also very actively drawn to the fact that the sanctions gradually affect the state of the Russian economy. Thus, we understand that the Russian economy is very inert, and although it depends on energy prices, it still leaves behind a certain safety margin. Mr. Itskhoki also notes this: “The question for 2023 year is how much income from the export of energy carriers will decrease, if they decrease, say, by 20 percent compared to 2022, then the money will most likely be found, it will still be huge income by historical standards, by the standards of the last ten years… it can be cut there are many articles, it will not cause expenses, it will not cause significant protests, but you can ask to finance the banks or the population of the banks there under the guarantee of the Central Bank, give a loan to the Ministry of Finance, take some money from the population in the form of transfers of deposits there, military bonds all this is possible, and in this sense, if incomes fall by only 20% of the money, most likely in 2023 year will be enough.”
It is important to note that the internal political tension related to the economy is very noticeable. Vladimir Milov (Russian political and public figure, anti-corruption activist) describes it as follows: “They have different positions. The government and the Kremlin want the Central Bank to reduce the rate further to facilitate the sluggish economy. However, the Central Bank says that “no, sorry, we will not do this with such inflation.”
Government efforts
Sergey Guriev notes that the Central Bank of the Russian Federation and the security forces cooperate very closely: “He (Putin) says that you need to go out because other people will not go out anyway, you will be alone there, and Zolotov will beat you, that is it.” an important part of today’s regime.” At the same time, the Russian regime is trying with all its might to keep the state of the economy regular, primarily for the average citizen. Ms. Zubarevich also notes, “The state is trying very hard to keep the prices of basic food sets down, so that food dissatisfaction does not turn into a political one.” At the same time, we see that, from a strategic point of view, the quality of life of the population continues to fall due to the general state of the economy:
• Vladimir Milov: “That is, prices have increased by 25% only according to official statistics in 2 years. Lack of money among the population, low solvent demand, in December retail sales fell much worse than in all previous months minus ten and a half percent.”
• Oleg Itskhoki: “This (war) resulted from Putin’s inability to show economic growth in the previous 14 years. The president, in particular, responsible for the economy, could not demonstrate economic growth. This was a growth between zero and one percent.”
Conclusions
1. Sanctions are an effective tool in reducing the resource potential of the Russian Federation. Nevertheless, it is essential to introduce them comprehensively and maintain their effectiveness proactively because the economy is an inertial system.
2. The authorities of the Russian Federation do not have a clear position regarding the regulation of the situation in the economy. Therefore, the decline will continue in the future. Still, most likely, this will not lead to protest moods among the population due to intense internal repression.
3. For further destabilization among the political elites, it is enough to continue the economic pressure, leading to a split in the views on solving economic problems.
4. The most important industries that need to be pressured are technologies that can be used in the military-industrial complex. First, because its products are used to kill Ukrainians, and secondly, because this is the only sector that continues to develop in these conditions.