Russia’s war economy has demonstrated an extraordinary degree of resilience, since the start of Russia’s war against Ukraine in February 2022. A Plethora of sanctions have been imposed by Western nations with an aim to break Russia’s economy. However, Russia’s economy has successfully managed to withstand sanctions pressures in spite of these efforts. Let’s concentrate on the substantial long-term ramifications and how Russia’s war economy is circumventing the sanctions.

Russia’s War Economy: Defense Expenditure by the Russian Government

Russia’s invasion into Ukraine and the resulting Russia’s war economy are the mainstay behind Russia’s economy today. Russia has significantly increased its defense spending since 2021, with the country’s GDP rising as a result of the manufacture of military products like artillery, drones, and missiles.

The economy has momentarily gained from this high military demand, which has helped to circumvent some of the negative effects of the sanctions. Due to the labor-intensive nature of defense production, unemployment has gone down while wages in the military-industrial sector have climbed up.

In 2021, Russia’s defense expenditure was around $65 billion, but estimates for 2025 put it nearly $200 billion, with military manufacturing now constituting a massive component of Russia’s economy. The Russian economic situation is definitely in a dilemma between quitting the war and continuing the war, till a viable solution comes up against extensive western sanctions, which will continue to stay during post-war years.

Meanwhile, OECD Economic Outlook 2024 says, Russia’s GDP will decrease from a 1.8% in 2024 to 1% in 2025. 

There are major long-term risks inherent to this rise in defense expenditures. Most of the money is spent on consumables, like ammunition, which don’t support long-term economic productivity. There are rising constraints that funds for infrastructure, education, and technology are being reduced as military outlays continue to feed from the majority of the national budget.

Factors Helping Russia’s War Economy:

• Diversification of Trade Partners: Russia has worked to diversify its trade partners, particularly by strengthening economic ties with countries like China and India to defeat the price cap & bans imposed by western countries on Russia’s energy export. Russia has additionally created alternate trade routes via nations like Turkey, the United Arab Emirates, and those in Central Asia that are not party to the sanctions. These crucial steps have helped Russia to maintain steady revenue transactions.

• Import Substitution: The Russian government has promoted import substitution policies to reduce reliance on Western imports and boost domestic production.

• Financial Resilience: Russia has taken measures to stabilize its financial system, including bolstering foreign currency reserves. Russia imposed capital controls to prevent the outflow of currency and maintained low sovereign debt levels.

• Chinese Support: China has been a crucial commercial partner for Russia. Since Russia’s invasion of Ukraine, China and Russia have strengthened their bilateral trade significantly, with China procuring significant amounts of Russian energy and sending items that are vital to Russia’s economy. Russia has relied heavily on this alliance to get around some of the worst sanctions, especially the ones pertaining to technology. 

Long-Term Consequences:

While Russia’s war economy has shown strength in the short term, the long-term consequences of sustained sanctions and economic isolation could be more dangerous.

• Technological Lag: Sanctions targeting access to Western technology could slow down Russia’s technological development and innovation pace. Everything in technological progress is impacted, including vital parts for the military-industrial modernization and advanced consumer demands. Russia is going to face an increasing technological pause that will restrict its future industrial and military strength, despite of supports from few third countries.

 

• Human Capital Flight: The economic challenges and political climate will lead to an exodus of skilled professionals seeking better opportunities abroad. Since the start of the war, an estimated one million highly skilled workers have already left Russia.

 

• Economic Stagnation: Prolonged sanctions and economic isolation will lead to a stagnation, with limited growth prospects and reduced foreign investment. Over-dependence on energy exports despite supports from India & China, will eventually reduce overall dependence on Russian energy.

While Russia’s war economy has managed to withstand the adverse effects of sanctions by temporary strategic measures, it remains to be seen how Russia will manage the crippling long-term impacts as the geo-political situation evolves and energy market goes through a transformation. The last bad dream of Russian President Vladimir Putin will be to deal with a severely damaged Russian economy at the end of war.