One of the most enduring puzzles of the Ukraine conflict has been interpreting the state of the Russian economy and its ability to wage war. Two years after the Special Military Operation, and thousands of sanctions later, President Vladimir Putin and his team of credible finance managers led by Elvira Nabiullina, head of the Russian Central Bank, have found a way to circumvent punitive measures. For all the frozen assets and thousands of sanctions, the International Monetary Fund’s latest forecasts about Russia’s economy project a GDP growth of 2.6 per cent while Russia’s own figures report an even higher growth at 3.6 per cent.
What we see today in terms of these forecasts only tells half a story. Common ponderables that permeate scholarly debates on Russian resilience despite strident sanctions centre on the reliability of data sources and data interpretation.
The matter of Ukraine, on the other hand, is pretty straightforward. The country is totally dependent on Western macro-financial, military and humanitarian help. The cost of rebuilding the country, wherever the war ends, has been pinned at $1 trillion.
But what’s happening with Russia? It is now the most sanctioned country in the world, with 19,000 sanctions against its different entities and individuals. Despite Western penalties and the rising costs of an already expensive war, the Russian economy has managed to show resilience. This becomes even more prominent as Europe’s biggest economy, Germany, has shrunk by 0.3 per cent .
Deconstructing IMF figures
The growth figures released by the IMF for Russia look optimistic because they are now driven by the war. Russia is now spending 40 per cent of its budget (6 per cent of its GDP) on re-vitalising the military-industrial complex. With more people working in the military sector and better wages, there has been a hike in consumption. It is the first time in modern Russian history that spending on defence will outstrip social expenditures.
The obvious takeaway is the cardinal importance that Putin has attached to this war in his larger political aims.
Economic experts, however, have been cautioning that the Russian economy is in overheating mode and the current growth trajectory is not sustainable.
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The sanction maze
Before the war began, Putin had built an impressive war chest with $640 billion in foreign reserves that came from the unshakable dependence of industry-hungry markets in Europe. Hydrocarbon revenues were the magic wand that had led Russia to fill its coffers with tremendous foreign exchange.
Therefore, when the war started, the two most evident sanctions from the West were aimed at denting Russia’s energy revenues—those already earned as well as those anticipated for the future. For the former, the West announced freezing half of Russia’s foreign reserves that were held in Western banks. And for the latter, it announced harsh sanctions. Russia turned off the taps for its natural gas in retaliation. Soon, Russian crude oil and refined oil products were sanctioned by the West.
An added challenge was to ensure that this geopolitical upheaval didn’t trigger an uncontrolled price rise of Brent crude. Therefore, the oil and refined products sanctions came coupled with a G7 price cap of $60 per barrel. This price ceiling ensured Russian oil flow to the rest of the world, though under a price cap.
The price cap has been a matter of speculation and heated debate. Some argue that its initial phase was instrumental in lowering Russia’s oil revenues. But its efficacy dwindled as Moscow acquired a shadow fleet of tankers to transport discounted oil – without adhering to the G7 price cap – to new markets in China and India. Therefore, a popular conclusion drawn from the above was that energy sanctions on Russia had failed.
Such conclusions derive from armchair intellectualism, which doesn’t delve deeper into interpreting data.
A sincere probing into the data provided by Russia’s Ministry of Finance furnishes a better picture of its revenues with insightful takeaways.
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Have the energy sanctions been successful?
Yes. Data from Russia’s Ministry of Finance shows that, when compared with the oil and gas revenues earned in 2021 (before the war), the figures have dropped by 65 per cent in 2023. Russia earned 25.29 trillion rubles in 2021. Despite the rise in crude price and the successful rerouting of hydrocarbons to newer markets, its revenues have been falling. The 8.82 trillion rubles earned in 2023 is 24 per cent less than the 11.58 trillion rubles earned in 2022, and 65 per cent less than the revenue earned in 2021.
The sanctions were not only successful in lowering Russia’s energy revenues but also kept the price of oil stable throughout. It also shows that the country is likely selling its gas and oil at steeper discounts to China.
Where is Russia earning its revenues from?
When non-oil and gas revenue figures are analysed, the picture obtained is quite the opposite of the oil and gas revenues. These have risen after the war. Between 2021 (at 9.9 trillion rubles) and 2023 (at 20.3 trillion rubles), non-oil and gas revenues have risen by 124 per cent.
For a holistic picture of Russia’s revenues, all one has to do is simply add the total revenues for the three years to give a before and after picture of the Russian economy. In 2021, the total revenues stood at 34.34 trillion rubles, but two years later, the figure has fallen to 29 trillion rubles. Of course, the shortfall in the oil and gas revenues is made up by the remarkable rise in revenue in the non-gas and oil segments.
However, there is one fundamental problem with this analysis–one doesn’t know what’s driving the 124 per cent increase in the non-gas and oil revenues after 2021. Usually, these are taxes and revenues from other means. But for a hydrocarbon-based economy such as Russia, the government has not disclosed the details of this category. At best, it remains speculative.
Add to it the fact that due to payment issues and falling discounts, India is again buying more from traditional importers like Iraq. These factors do show a precarious revenue pattern for Russia’s traditional magic wand.
Going further, the price of ruble, when analysed over a three to five-year period, has been falling too. Before the war, it was trading at 75 rubles per dollar. After the war, it fell to 130 rubles per dollar. The central bank has been a saviour because it has stepped in repeatedly to stabilise the price through different capital controls but, toward the end of 2023, the price fell back to $100 and is now more or less stable at 90. A small monthly jump here and there doesn’t help much because it has been devalued after the war.
Lack of transparency in its real exchange value remains one of the reasons why India is unable to start the rupee-ruble trade with Russia despite political will.
Russia has reportedly paid Iran for Shahed-136 drones, not in rubles or yuan but in gold bullion. Considering the lack of transparency in its exchange value, it is quite convincing that Iran may have actually preferred gold.
All this shows that Russia has an import problem despite importing from China and Turkey. Russia’s imports of war-critical goods among other trade flows have been volatile as well.
Foreign direct investment in Russia, which had been declining since 2019, saw a steep rise in 2021. While in 2020 it stood at $9.4 billion only, it jumped to $40.45 billion in 2021. However, after the war, it plummeted by 206.63 per cent and came to $-43.13 billion. The interest rates are still sky-high, at 16 per cent.
Among many of his election speeches, Putin has assured that the economy is developing and will enable Russia to sufficiently transition away from the West amid the sanctions. However, a detailed analysis of data generated by Russian sources shows that this cannot reflect broad economic recovery or sustained growth unless the energy revenue, Russia’s traditional stronghold, is able to sustain. But again, it is not the same as saying that the sanctions are capable of choking Russia’s ability to finance the war. They are not.
The real challenge before Russia is to turn its current resilient GDP growth – driven by massive spending on the military-industrial complex drawn from its remaining reserves, dwindling oil and gas revenues and undefined but rising non-oil and gas revenues – into a sustainable state programme that fosters industrial development in other areas as well. However, the path ahead remains a very rocky one.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.
(Edited by Zoya Bhatti)
So much blood and treasure flowing into a futile conflict. Money that could improve living standards for ordinary Russian households. 2. President Putin was right to say that Ukraine cannot defeat Russia militarily. Perhaps the West should take him up on his suggestion for a substantive peace dialogue.