Two years after the breakout of Ukraine war, is/how is Russia successful in sustaining its economy (now even growing?) and the war?

Question

Since 2022, Russia has received huge amount of Western economic sanctions. The war itself is money-burning.

I understand that war may stimulate military-related economy as explained in this VOA article, but it is hard to believe that Russia could continue like this forever.

Two years after the breakout of Ukraine war, is Russia really successful in sustaining its economy (now even with a growing GDP) and the war? Or is there something I'm failing to realize about Russia that is slowly deteriorating its economy and will eventually force Russia to end the war?

Answer 1

The article you linked to already gives at least three explanations:

First,

growth appears to have been driven mostly by ramped-up spending on the military

(Rightly or wrongly, GDP includes military expenditures.)*

According to SIRPI (June 2023),

total budgeted military spending in 2023 can be estimated at 6648 billion roubles. This represents 4.4 per cent of forecast Russian [GDP].

According to Bloomberg (2023-09-22),

Defense spending will comprise 6% of the country’s gross domestic product in 2024, up from 3.9% in 2023 and 2.7% in 2021

Second,

Russia is undergoing a massive fiscal stimulus, and that's a lot of what's behind the Russian growth that we see ...

the Russian government spent about $353.8 billion (32.4 trillion rubles) in 2023, up from a little more than 31 trillion rubles in 2022. But those numbers far outstrip prewar levels of spending. The federal budget in 2021 was only $270 billion (24.8 trillion rubles).

They're supporting defense industries. They're supporting employment. They're paying people bonuses to join the armed forces. ... They're paying families for service members who are killed. They're paying service members who are wounded, who are lucky enough to get sent home.

The Kremlin has funded these outlays by increasing tax revenues, drawing down the national wealth fund, and most importantly, by borrowing. The government deficit is historically high right now, at nearly 10% of the overall budget.

Note that Russia's 2022 GDP was 153.44 trillion rubles. So, the increase in the federal budget from 24.8 trillion in 2021 to 32.4 trillion in 2023 equals about 5.0% of 2022 GDP.

Third,

sanctions regimes tend to diminish in their effectiveness over time, as countries subject to them find work-arounds and establish new trading relationships. Russia has offset much of its lost trade with Europe, for example, with greatly increased trade with China.

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None of the above is to suggest that "Russia [can] continue like this forever".

The above merely explain why Russia's real GDP might have grown by 2.2% in 2023.

(By the way, note that in 2022, real GDP growth was -2.1%. So, real GDP in 2023 was about the same as in 2021 in spite of all the additional military spending.)

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*According to Rockoff (2019), Simon Kuznets (the father of national income/GDP accounting) argued that

military spending should be counted in national product during a time of total war, but it should be excluded during peacetime.

Kuznets also argued for the "concept of a Peacetime National Income".

Answer 2

Whether it's sustainable it's too much of a crystal ball, IMHO. Russia's military/war budget fraction (of the budget) has doubled compared to the prewar, according to some Western analyses, (ibid).

Russia has managed to bypass many (perhaps most) Western sanctions over time, so their income hasn't changed that much. To be slightly more precise on this, their fossil fuel income has been lower than in 2022, but that in itself was an exceptional year of high income. So, the oil price cap that was imposed early in late 2022 did affect them some, but income was pretty much the same as in 2021 (or 2018).

Most recently however, they substantially bypassed the oil price cap, by creating their own "shadow/dark fleet". You can pretty much see waning effect of the cap in this graph.

The US at least has responded with secondary sanctions on middle-men in the UAE etc., but this growing economic war is hard to predict how it will end.

According to WaPo

But Russia’s most important help comes from China. Two-way trade between the countries last year topped $240 billion, a record high, up from $147 billion before the war, according to Chinese customs data. [...] But the Russians are not getting any bargains. Compared with the first half of 2021, Russian customers last year paid 78 percent more for Chinese products such as machine tools while other customers paid 12 percent higher prices, the Bank of Finland said.

The key to Russia’s surprising economic endurance has been large sums of defense spending, what some economists call “military Keynesianism,” in a nod to British economist John Maynard Keynes’s support for using public spending to lift growth.

As the war in Ukraine rages, Russia’s defense spending this year is expected to consume 28 percent of the government budget, according to the Bank of Finland. That’s more than twice the share of government spending that the United States devotes to the military. [...]

This month, Putin said more than 520,000 weapons plant jobs were created in the past 18 months. Unemployment in Russia is at a record low.

Basic economics says that that will put some pressure on inflation, and we're some signs of that (typical of war economies)

Inflation jumped last year above 7 percent, causing the central bank to hike its main interest rate to 16 percent to cool off demand.

And long term that's expected to degrade the living standards because tanks and shells don't contribute to that. But whether that will happen anytime soon... the USSR lasted for a long time. And in North Korea almost nothing changed. (And they do spend about 1/3 of the GNP, not just of their budget, on the military.)

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As for this year (2024):

the budget remains more classified than any previous one: the share of expenditures that are classified will be just under 27 percent in 2024, compared to about 19 percent in 2022 and 15 percent in 2021 [...]

To cover the increased military expenses laid out in the bill, Russia’s Federal Treasury will have to take in 35 trillion rubles (about $395 billion) in revenue — 22 percent more than it received in 2023.

The sources for that extra income are not entirely clear. There's discussion of raising corporate taxes for instance. Putin invited a circle of businessmen (Russian Union of Industrialists and Entrepreneurs) to discuss the situation. Officially though

Anton Siluanov explained that the funding will come from the introduction of export duties, the improvement of indirect tax collection processes, and an increase in excise taxes on tobacco and wine.

VAT collection though is already at 95% efficiency, according to another source in that piece. (Can be confirmed from another source, table 2.)

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Somewhat aside, but since this has been discussed in relation to globalization in some comments... The war was apparently good (so far) for the Tajik economy too, via remittances from migrant workers.

Migrants from the former Soviet Union’s Central Asian states — Tajikistan, Uzbekistan, Kyrgyzstan, Turkmenistan and Kazakhstan — have traditionally been a valuable source of cheap labour in Russia. [...]

The European Bank for Reconstruction and Development forecast in September 2023 that economic growth in Central Asia would hit 5.9% in 2024, with remittances playing a role. Tajikistan was expected to see the biggest GDP growth in the region, reaching 7.5% in 2023 and 2024, the report said, thanks in part to “the inflow of remittances from Russia.”

Answer 3

Disclaimer #1: I'm not an economist.

Disclaimer #2: There's a lot of politically-charged coverage of the Russia-Ukraine war. A lot of news outlets try very hard to push the point of view that the Russians as incompetents who are going to lose the war in the near future. Of course, just because they're trying to push that view does not mean that view is wrong, so you need to filter the facts appropriately. To do that for economic data, it's ideal to be an economist, and see Disclaimer #1.

tl; dr: It seems the Russian economy is surprising resilient, and should not be expected to collapse in the short term, but there are many potential problems in the medium term and beyond.

Russia's defense spending is currently about $100 billion, an increase of 70% "this year"*, and more than at any point since the Soviet Union collapsed. As I understand it, government spending stimulates the economy, which is also why the Russian economy is projected by the IMF to grow at 2.6% this year. However the high amount of government spending is causing inflation, which is currently ~7% - a very high number that will likely cause problems in the future, but not right now.

Another problem for Russia in the medium-to-long term is population decline, exacerbated by deaths in Ukraine + emigration. That leads to a labour shortage (but also leads to lower unemployment).

Since all the potential problems are in the medium-to-long term, one should not expect Russia to be forced to end the war anytime soon. If either country does crumble economically, it's likely to be Ukraine, whose GDP contracted 30% last year. Of course, considering it's politically unacceptable for much of the West for Ukraine to lose the war, the country is likely to keep receiving lots of foreign aid, so it's unlikely for Ukraine to crumble economically either. If the war ends in the short term, it's not likely to be because of economic pressure.

*Considering it's currently February 2024, it's unclear what "this year" means.

Answer 4

Question:

Two years after the breakout of Ukraine war, is Russia really successful in sustaining its economy (now even with a growing GDP) and the war? Or there is something I fail to realize about Russia that is slowly deteriorating its economy and will eventually force Russia to end the war?

Short Answer:

Russia's positive economic growth numbers were to be expected. Putin stands for reelection In March of 2024, this is nothing more than fig leaf propaganda for his continued disastrous governance. Short term and long term economic figures paint a depressing picture for Russia economically. Russia's military spending has more than doubled and is now nearly 40% of their budget, their exports have contracted, and their imports have ballooned. Many of their best educated young professionals ( 1 million reportedly ) have fled the country or are otherwise dead. The largest and most lucrative trade partners closed their markets and have frozen, about to seize nearly a third of their reserves. The reported first quarter 2024 growth is driven by war production spending which is unsustainable. Even as stated it still puts them significantly behind their expected pre-war economic estimates. Their population's and national wealth is dwindling as a percentage of global wealth. There really is very little to be hopeful about economically for Russia either in the short term or long term.

Answer:

• War spending is a short term economic stimulus. But it's not sustainable especially when the international finance markets are closed to you. Russia's war chest will run dry, and when it does they won't be able to finance building and improving their infrastructure which is an economic long term significant problem.

• Most Western companies have left Russia because of the war. Most of those companies have had their assets seized. So they won't be coming back after the war. That's a big problem too.

• Russia has a resource-based economy which has lost huge global markets like Western Europe and the entire G7. So the first thing you should ask yourself is which "market" replaced western Europe's multi-billion-dollar per day purchases of Natural Gas and oil? Yes China and India are buying Russian oil but given most of the pipe capacity flowing out of Russia ends in Western Europe these markets can't replace Europe and won't be able too until someone pays to lay new pipes into China and India. Which both China and India have said they won't finance. So who is Russia claiming is buying their resources? Nobody, that's who. So having a resource based economy without the worlds largest markets long term is another economic red flag to be aware of.

• The robust growth reported by the 11th biggest economy in the world with the second largest army could be another red flag. When you invest in the army as Russia has It yields jobs and puts money into the economy, however if you invest in Roads, bridges, and infrastructure it does the same; and the economy get's to use that infrastructure to grow stronger. Military over spending in the long term is a drag on the economy.

• Russia has lost 300,000 soldiers dead or severely wounded, That coupled with an estimated 1 million Russians who have fled to other countries to avoid military service ( most young and well educated ) another significant long-term burden on the Russian economy and growing.

• Russia's inflation rate has been around 7.4% now for 3 years. The Russian national bank is maintaining high interest rates in an attempt to control this inflation. Long term this is going to impoverish Russians. Russia has already seen their share of the global economic market drop from 4% to 2% as their GDP has contracted and the rest of the world GDP has grown. That trend predates the war with Ukraine, but the war hasn't eased that trend.

• Last time I was in Russia prior to their invasion of Georgia I exchanged 1$ and received 18 rubles. Which at the time I thought was quite favorable. 1$ today buys you 93 rubles. Which is meaningful because Russia services much of their international debt in dollars.

• The inability of Russia to attract neighbors to it's social and economic model would be another thing one might realize. If Russia's economic model is so resilient why do all their former Warsaw client states want to join or are already in the EU?

Answer 5

As another answer already mentioned, the main factor contributing to this calculation is military spending. From the perspective of the civilian economy, military spending is inflationary spending. Every dollar spend on military expenses can be spent in the economy, but the consumer goods it buys are produced by people who are not getting any consumer goods in exchange for it.

But from the overall economic perspective, it adds to the GDP because it adds to the wealth of products owned by the country at large.

By August of 2023, Reuters reported that "Russia doubled 2023 defense spending plan as war costs soared." And even more significantly

Defence spending in the first six months of 2023 amounted to 5.59 trillion roubles, 37.3% of a total 14.97 trillion roubles spent in the period, the document showed. Russia's budget plan envisages 17.1% of total funds spent on "National Defence".

Which suggested runaway spending of more than double of even the increased 17% of the budget (compared to the previous year's 14%).

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What gets lost in these numbers is that the military spending not only doesn't contribute to the GDP, but prolongs the war which itself contributes to the reduction in the quality of living. The people sent to fight cannot participate in the overall economy as producers. And the very high level of corruption in Russia ensures that the people who are sent to fight are working class.

There have been massive reported safety violations and outages of infrastructure within Russia. This is not a sign of a growing economy. It's a sign of a shrinking one.

The working-age male population of Russia is around 35 million. 0.4 million have been reported as deceased casualties as the result of the war. Another 0.5 million are considered to be the size of the expeditionary military force in Ukraine. Even if one were to consider the high number of freed prison inmates who were supposedly sent to war (and that number ranges between 40,000 and 100,000), it would still mean as many as 800,000 working-age men absent from the economy.

That's 2.5% of the working-age male population which does not produce anything in the economy and which has to be supplied and paid for. The deceased are effectively paid for because their families receive large balloon payments upon their death.

This doesn't even account for the number of wounded who return home and can no longer work due to loss of limb or other health problems.

Answer 6

it is hard to believe that Russia could continue like this forever.

It's not that hard to believe, because it has happened before.

The fact that war spending stimulates the economy whilst peaceful austerity depresses it, was a 20th century realisation that led to the policy of Keynesian stimulus.

The reason the capitalist class eventually sought to desist from war was because it strengthened the working class and caused common ruin to themselves. WW1 was followed by massive worker militancy and political unrest (and helped enable the Russian Revolution), and WW2 practically destroyed the capitalist ruling class in Europe and boosted the Soviets further.

And even when one side thrashed the other, the winner couldn't usefully extract any advantage, as exemplified by the slide of Germany into radicalism during the Weimar punishment years - and was one of the reasons for the Marshall Plan after.

The aftermath of WW2 also led to 30 years of peacetime Keynesian stimulus that massively reduced the capitalist slice of the pie, since the masses had by then twigged that the economic stimulus could be had without the war, and that generation were powerfully well-organised by their years of military training and wartime experience. You couldn't practically get a police force to confront a community of decorated war heroes who demanded secure jobs and homes, in the way you can get them to confront bums and squatters.

That is exactly the process that will be underway currently in Russia. Corrupt oligarchs are overall losing economically and politically, whilst Russian workers are becoming enriched by a booming war economy, and are being psychologically and morally improved by politics which emphasise collectivity and national strength.

The only limiting factor is the political credibility of the regime, and the birth rate necessary to reinforce the numbers who must die on the battlefield, which is effectively a kind of non-financial taxation upon the masses.

The assumption that war will cause Russia to collapse is largely wishful thinking, probably driven by the experience of right-wing liberals trying to mobilise Western populations to fight cynical and morally bankrupt foreign wars in remote places (such as Vietnam or Afghanistan), rather than the serious national defence mobilisation that is happening in Russia.

Indeed, it is America that is showing more signs of political convulsion than Russia, as Trump once again returns to pole position, and whose resistance to foreign liberal wars (as Ukraine is for Americans) is quite popular. Meanwhile, the economic crisis caused by inflation and sanctions has largely hurt American workers, and is not matched by the scale of any rearmament or re-onshoring which would help them (and which would therefore hurt American capitalists).