Russian Titan(ic) –Analysis of a wartime economy
Russia is sinking. Financially, that is. However, it is not dead in the water yet. Russia’s economy is headed for stagnation. Inflation has been increasing gradually in the post-pandemic era. Policy makers in Russia are attempting to settle inflation and “prop-up” the ruble, but the timing of their policies is being criticized as “extremely poorly” by the Russian Center for Macroeconomic Analysis and Short-Term Forecasting. Russia has been hiking recent interest rates to help lower high prices and boost Russia’s devaluing currency. With interest rates at 13%, the goal is to restrict financial conditions, but because of this limitation, there is less disposable income in Russia’s overall economy, continuing the suffering of already-struggling businesses. The Ukraine-Russia war has proven disastrous for the Russian economy. According to an article in Business Insider, “Though the nation has reported slight growth in 2023, real wage growth has slowed to near-zero…while consumer spending dipped below zero this July”. Thus, because of such slow economic growth, the decision to hike interest rates as a ‘cooling down’ action can prove detrimental to the economy.
Russia’s economy is shrinking as a consequence of its invasion of Ukraine in early 2022. As much of the world, including the European Union, is in solidarity with Ukraine, sanctions were imposed against Russia to weaken its abilities to finance the war by targeting the military and political elites responsible for the invasion. The sanctions are noted by the Economic Observatory to mostly spare agricultural and pharmaceutical sectors. According to the European Council, Russia’s economy is in a shrinking stage. The World Bank says that Russia’s GDP dropped approximately 2.1%. This is in large part the declining trade relations between Russia and the rest of the world. According to the International Monetary Fund, Russia’s exports since 2021 has declined, and their imports have increased since last year. A necessary export that has diminished significantly and negatively impacted Russia’s GDP is the monthly revenues from oil exports. According to the International Energy Agency, Russia’s revenue from these oil exports has dropped 26.9% from $19.5 billion in January 2022 to $14.3 billion in January of 2023. Also dropping 41.7% from $19.9 billion February of 2022 to $11.6 billion in February of 2023.
The backbone of Russia’s economy are their oil and gas exports. They are the backbone of the economic titan. It is the lifeboat of their sinking economy. The revenues from these industries are used to find defense expenditures and maintain military capabilities. They provide such massive funding as they are primarily priced in the U.S. dollar, meaning Russia earns foreign currency though these exports, keeping the ruble valuable, and enabling the purchase of military weapons and technologies within the global market. Because oil and gas are exports, they are also used as a stable supply of energy domestically. They provide a consistent source for fuel and national consumption, further supporting their military endeavors. The oil and gas exports provide geopolitical leverage as Russia is one of the major suppliers on a global scale. The sanctions force Ukrainian allies to obtain their oil and gas elsewhere while much of the world continues to get their energy resources from Russia. The exports that continued through 2022 kept the economy sustained. For the rest of the world, oil prices have been rising steadily for the past few years and was dramatically increased following Russia’s attack on Ukraine. Western governments have put caps on these barrels but were unable to persuade other members of the Organization of the Petroleum Exporting Countries (OPEC) to expand oil production in 2022.
The sanctions, while seen as impactful by the Carnegie Endowment, have failed to stop Russia’s aggression against Ukraine. Part of this is attributed to President Vladimir Putin’s unwillingness to give up his delusions of a ‘Greater Russia,’ the same vision that led to the annexation of Crimea. Another part is the growing consensus that the sanctions are proving entirely too ineffective. Western powers remain steadfast in their support of Ukraine and have reduced their dependence on Russian oil exports, however, there are doubts about how sustainable this course of action is. Predictions have supported the decline in Russia’s GDP but have anticipated at least a minimal, but notable, increase in 2023. This is because of the influence of the oil and gas market’s volatility. The government also provided significant fiscal support to several Russian companies and the central bank put in place monetary policies to stabilize the value of the Russian ruble. There is evidence to suggest that this growth will not last long. The toll these expenditures to try and keep the economy afloat, while also funding a hefty defense budget, is immense. Russia’s fiscal deficit is growing while its accumulated reserves are dwindling.
Russia’s economy is stalled, with the wartime expenses breaching the hull of oil and gas revenues that keep it afloat during times of conflict. However, they are not taking on water with the same ferocity that Ukrainian allies had hoped. Russia is still able to turn the tide on its economy, but it is unforeseen whether they will sacrifice the war effort to do so. Russia has the world’s fifth largest army, 10% of its oil/gas supply, and a leader with an archaic belief that there will be another Russian Empire. The war drags on, with no winner being predicted soon, and Ukrainian allies grow restless but unwilling to give Russia an inch. Russia’s economy is great and incredibly vital to the health of the global economy. But the war has shown the resilience of the Western world and those previously reliant on imports from Russia. With fewer and fewer cards left to play, what will Russia’s next tactic be when the reserves run out? If history has taught us anything, it is that God can and will sink a ship, no matter how impenetrable its “captain,” leads the world to believe.
Image courtesy of Paulo Amorim via VWPics, ©2023. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St. Andrews Foreign Affairs Review team.
