April 24, 2024
Economy

Opinion: Why Russia’s economy is doing so well – even if the good times won’t likely last


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A man waves the Russian national flag as he arrives at the patriotic concert at the Red square in downtown Moscow ahead of Russia Day on June 11, 2023.KIRILL KUDRYAVTSEV/AFP/Getty Images

John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).

When Russia invaded Ukraine two years ago, the Western alliance rallied to both support Ukraine and isolate Russia. In addition to arming Ukraine and taking in refugees, Western countries took swift and decisive measures to cut the oxygen to the Russian economy: requiring their companies to close operations there, barring imports from Russia and preventing its ships from using their ports or insurance companies, and most importantly, blocking exports of the high tech needed in both Russia’s defence and energy sectors.

They intended to impede Russia’s ability to fund a long-term war, all while providing Ukraine the assistance it needed to repel the invasion. At first, the West looked triumphant. Not only did Ukrainian forces withstand Russia’s attempt to take Kyiv, but the Russian economy began contracting.

Two years on, though, things look very different. The Russian economy suffered a shallower recession than expected in 2022, and last year it bounced back. Whereas Western countries, in particular West European countries such as Germany that had depended on Russian energy imports, are floundering, Russia’s economic growth rate now rivals that of the U.S.

Meanwhile, far from being hobbled, its defence industry has managed to expand significantly. The country now produces three million artillery shells a year, almost three times the combined output of U.S. and European factories. Each day on the battlefield, it fires five times the number of shells as Ukraine. As Ukraine is bombed to rubble, its economy has imploded. After losing nearly a third of output in 2022, it remains far from recovery.

It goes without saying that reports of Russia’s economic demise proved premature. Several factors account for the country’s surprising resilience. First off, it put itself on a war footing. Defence spending shot up, such that over 7 per cent of the country’s economy is now committed to defence. This boost in demand, coupled with the fact that Russia is not directly affected by the war – Western allies insist Ukraine not use their weapons to target Russia directly, for fear of widening the war – has jolted the economy back to life.

Second, it found inventive ways around sanctions. After Western countries stopped exporting the computer chips used in modern weaponry, Russia started importing non-prohibited items, such as refrigerators, microwaves and dishwashers, then cannibalizing them for chips. Equally, it has maintained shipping by operating through shell companies that find ports willing to turn a blind eye, and has thereby maintained its trade. For many intermediary countries, especially in the developing world, sanctions-busting has become morally easier to justify since the outbreak of the Gaza war, given what they see as Western double-standards on who should be sanctioned.

Third, Russia found new markets for its exports. When Western countries cut their imports of Russian oil and natural gas, countries such as India and China happily stepped in to mop up supply. Admittedly, they did so at a cost to Russia, buying the products at a discount to the world price in such a way that they could observe the letter if not the spirit of the sanctions. India’s Energy Minister was thus able to recently say with a straight face that “the world is grateful to India for buying Russian oil,” since it has kept down oil prices on the world market.

Fourth, European countries softened the impact of sanctions on their own economies by trading with Russia through the backdoor. Western Europe’s trade with countries in Central Asia and the South Caucasus has taken off – German car sales to Kyrgyzstan suddenly rising some 5,500 per cent in one year, while Kazakhstan’s exports of electronic equipment to Russia increased 18-fold in the same period. It’s pretty clear what’s going on: European countries are trading with Russia through intermediaries.

Nevertheless, if Russia seems to have won its battle with the West, the future of its war still looks in doubt. Although it’s finding markets for its exports, the discounts it’s being forced to absorb mean that its revenues are less than they would otherwise be. All the while it is growing ever more dependent on trading partners, such as China and India, which aren’t doing it any favours. Beyond defence, Russia’s manufacturing and high-tech sectors, which it wanted to develop, are struggling. As a result, Russia is turning back into a Third World country.

Should the war drag on, Russia’s resource well will start to run dry, and the country will then find itself poorer and weaker than before. Vladimir Putin is gambling this won’t happen. He appears to reckon that Western electorates, softened by the easy life, will press their governments to cave on Ukraine, sue for peace and resume regular relations.

If he’s right, he’s headed for victory. But if he’s wrong, if Western countries dig in and support Ukraine over the long haul, Russia’s long-term prospects look grim.



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