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Why is the Russian economy still in `rosy colors` after 2 years of war? 0
(Dan Tri) – With improving economic data, Russia seems ready to continue pouring money into the `special military campaign` in Ukraine for the third year.
Russian tanks parade at Red Square during the Victory Day parade (Photo: AFP/Getty).
`From a purely economic standpoint, Russia has significant room to continue hostilities,` said Hassan Malik, global macro strategist and Russia expert at investment management firm Loomis Sayles.
A number of factors have helped Russia maintain its economy after two years of war and despite a series of Western sanctions.
Russia launched a campaign outside its borders
One important reason why the Russian economy is still growing is because of the location of the fighting.
`The fighting is taking place mainly on Ukrainian soil and has destroyed the majority of Ukrainian homes, businesses and farms, so the direct impact on Russia’s production capacity and households is relatively small.
According to official statistics, in 2022, the first year of fighting, the Russian economy contracted by 1.2%.
In contrast, Ukraine’s GDP fell by 29.1% in 2022. Ukraine’s central bank forecasts the country will grow by 4.9% in 2023. The agency has not released official growth figures.
If it does not occur on the territory, hostilities can act as a major shock that increases a country’s needs, especially for military equipment and human resources, Mr. Malik explained.
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Russian President Vladimir Putin toasts Russian soldiers after the awarding ceremony of the Gold Star Medal at the Kremlin in Moscow on December 8, 2022 (Photo: Sputnik/AFP).
Increased demand for wartime goods and services
Another factor driving the Russian economy is the demand for goods and services that help sustain the conflict.
The Russian army needs equipment and supplies – such as weapons, ammunition and even bandages.
Demand for military goods is so high that even a bakery in central Russia was mobilized to produce UAVs.
Conducting hostilities will also require manpower.
Even before the war, Russia was facing a demographic crisis when the population and birth rate were both decreasing.
The partial mobilization order also created a labor crisis starting in 2022. In November 2023, Russia had a record low unemployment rate of 2.9%.
Thanks to the lack of manpower, wages have increased, thereby supporting consumption and economic growth.
Self-reliance on weapons and goods production
Russia is a large economy – ranked eighth in the world in 2022 – thanks in part to its status as a producer of commodities such as oil, natural gas, wheat and metals.
`Western sanctions and trade restrictions have certainly had some small impact on the Russian economy, but these impacts have been particularly limited on the largely self-sufficient Russian defense industry.
Mr. Malik added that, as one of the world’s leading arms exporters, Russia can also meet most of its defense needs, even for complex weapons.
In addition, a number of other measures such as parallel imports and redirection to alternative export markets such as China and India, further reduce the impact of Western sanctions.
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Some products in Russia have seen shortages, such as eggs.
Stabilize the economy with subsidies and policies
Government subsidies, spending and policies are also supporting the Russian economy.
Russian policymakers also quickly stepped in to stabilize the market and economy after the outbreak of war.
`This was done quite quickly. A lot of Russia’s financial instruments were disabled,` Sergei Guriev, former chief economist at the European Bank for Reconstruction and Development, said at an event in September.
Keep foreign debt low, boost exports
Russia entered the war with low foreign debt.
`These developments have greatly offset the impact of measures taken by the West such as freezing central bank reserves,` Mr. Malik said.
Russia was able to allocate almost a third of its 2024 budget to defense spending, despite all sanctions.
Mr. Malik is not the only one who thinks Russia has a chance to prolong the fighting much longer.
In the news on January 17, Alex Iskov, an economist at Bloomberg Economics, assessed that the liquid assets of Russia’s national wealth fund will still last another 1-2 years if the country’s oil export price increases.
Meanwhile, the average price of Russian Urals crude oil is about 63 USD/barrel in 2023.
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A Russian soldier controls a drone in Ukraine.
The economic trilemma
Russia avoided economic disaster after launching a `special military operation` in Ukraine, but this does not mean everything is okay.
Despite the economic boom, the Kremlin is still trying to solve the economic trilemma, a former Russian Central Bank official said recently.
`Russia has three challenges: They have to fund the war in Ukraine, maintain people’s living standards, and protect macroeconomic stability,` Alexandra Prokopenko wrote in Foreign Affairs in January.
`Achieving the first and second goals will require higher spending, but this will spur inflation and thus hinder the third goal,` she added.
Mr. Guriev assessed that the `rosy` GDP numbers are not a good measure of wartime economic performance.
`You produce weapons and ammunition and pay for it from the budget, but those weapons and ammunition do not contribute to improving the quality of life, do not contribute to future economic growth,` Mr. Guriev said.
According to a January report by the Vienna Institute for International Economic Research, the conflict is having such a knock-on effect on Russia’s economy that the country risks stagnating — or even collapsing.
`The longer the fighting lasts, the more addicted the economy will be to military spending,` wrote economists at the Austrian think tank.