Russia’s attack on Ukraine looks increasingly like achieving lasting if partial success, as Ukraine’s hopes of reclaiming all the territory lost in 2022 (forget that lost in 2014) fade with each passing month. With continued military aid to Kyiv from the United States and the European Union blocked, the best that Ukraine can hope for is a military stalemate. At worst, Russia might encroach on yet more territory. Economic reconstruction in Ukraine will remain a mighty task, needing massive sums of foreign aid that may or may not be forthcoming to the extent required.
What about the cost of its military adventure to Russia? Moscow has been hit by waves of trade and financial sanctions, but the country’s economy has confounded Western expectations of a rapid collapse. There is damage, of course, but it has been contained. After its economy shrank by 2.1 percent in 2022, it is now expected to grow by 2.8 percent in 2023; the latest quarter has reported 5.5 percent growth. Despite the trade sanctions, the current account is in massive surplus.
The sharp increase in military expenditure, expected to more than double by 2024 to 6 percent of GDP, has meant that the budget is in deficit by about 2.8 percent, but this is eminently sustainable since public debt is low at barely 20 percent of GDP. Because of conscription, large-scale emigration, and government spending on military production, unemployment is low at just 2.9 percent. Inflation at 7.5 percent is high, as are interest rates at 12.4 percent — partly to protect the ruble, which has fallen by about 20 percent since the war began 22 months ago. But the stock market is up 7 percent on what it was a year ago.
These indicators might have been better without the war. There is also its large human cost. But the economic numbers are not what the Western powers would have predicted (nor of course wanted) in February 2022, when the sanctions began to be imposed. There was talk then of “Fortress Russia” becoming “Rubble Russia”, and of the economy imploding— not to mention reports of Vladimir Putin being seriously ill. Both Putin and Russia seem healthy enough now to continue the war.
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If there has been no drastic fallout of the sanctions, it is because Russia found customers for its oil in China and India, while in recent months managing also to break through the $60-per-barrel price ceiling imposed by the West. A commodity price boom has additionally boosted exports, while imports routed through or from neighbours (Turkey, Lithuania, Central Asia, Iran, and China), sometimes with the yuan as the currency, has helped Moscow access otherwise scarce supplies.
That has not prevented a sharp fall in automobile production, while the more sophisticated manufacturing sectors have been hit by the scarcity of silicon chips and the closure of many Western companies’ operations in the country. But ordinary Russians say they are not affected much by the sanctions — mostly because sanctions have exempted everyday goods. Support for the war remains high.
Russia will pay a long-term price, of course. Its natural gas needs alternative markets (the only real candidate is China, which therefore has negotiated hard). The lack of access to Western technology will tell over time, as will the loss of skilled manpower through emigration, while the loss of much private-sector activity will make the economy more state-oriented and therefore less efficient. Still, Iran’s experience is instructive. That country has been subjected to Western sanctions for decades, but has managed to sustain a long-term growth rate of above 3 percent. That’s not good enough at its stage of development, but it has kept the country a viable entity.
Ukraine was never going to be able to fight Russia on its own. With further Western support roadblocked, the question has to be whether the faceoff over Ukraine could have been avoided, saving that country so much death and destruction. The related questions are about the Western will to fight, even at Europe’s periphery. And the operational effectiveness of sanctions, even those as comprehensive as those slapped on Russia.
By special arrangement with Business Standard.
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