In his article for The Ukrainian Week, Oleksandr Chupak, Head of the Economic Programme of the non-governmental Analytical Center “Ukrainian Strategic Research Studies, delves into Moscow’s shift towards a wartime economy and how it allows them to showcase apparent growth. Why is this approach risky, and should we consider embracing adversarial strategies?
Is Russia Truly Invulnerable?
In the initial weeks of Russia’s full-scale invasion of Ukraine, Western nations implemented sanctions intended to cripple the aggressor. Among the most anticipated measures were financial restrictions, including freezing Russian assets and cutting Russia off the SWIFT. Yet, despite the premature assurances of some experts, the Russian economy did not come close to the predicted catastrophe. In 2022, the aggressor state saw only a 1,2% GDP loss, followed by a 3,6% growth by the end of 2023.
Looking forward to 2024, the International Monetary Fund forecasts an additional 2,6% increase in Russia’s GDP. These economic indicators have become a boon for Moscow’s propaganda machine. Russia’s president Putin has consistently pointed to the stability of the ruble and the growth of GDP as irrefutable signs of Russia’s resilience against the West’s hidden agendas.
The IMF’s optimistic forecasts prompt us to question: Have the sanctions truly fallen short, enabling Moscow to deceive the world?
In truth, in both scenarios, we can cautiously say ‘no’. The growth figures for Russia’s GDP can’t be seen through the same lens as those of other nations. One method of calculating GDP is by adding up all the final expenditures of economic entities over a specific time period. Since 2022, Moscow has significantly upped its state spending, mainly to fund its war against Ukraine. According to data from the Bank of Finland’s Institute for Economic Development, the 60% surge in industrial activity in Russia in 2023 was closely tied to the expansion of its military sector. Overall, defence spending in 2024 is set to triple compared to 2021, reaching $120 billion, in other words, constituting 28% of the total budget expenditures.
All-In for War
Meanwhile, other sectors of the so-called ‘normal’ or ‘peaceful’ economy are running into serious problems. For instance, automobile production is still a third lower than pre-war levels. In 2022, the fields of education, science, and high-tech industry fell back to the levels of 2011. Right now, the Russian economy is in the midst of a full-scale structural overhaul: the so-called shift to a wartime footing. However, while defence investments are on the rise, other sectors are left with the same level of funding. Consequently, reports of food shortages, urban infrastructure issues, a scarcity of spare parts, and more are increasingly common in regions across Russia.
For now, it’s anyone’s guess whether Russia can really foot the bill for the promised increase in military spending from 2024 to 2026. Officially, they’re banking on a boost in revenues from energy exports to cover the costs. But predicting how sanctioned Russian oil will fare on the global market and what prices will do is a real head-scratcher. Then there’s the issue of a shortage of skilled labour and limited access to markets for high-tech gear. With sanctions blocking Russia from tech markets, Moscow is stuck buying lower-grade substitutes at inflated prices. Russia can still keep the war machine chugging along, but the expenses will continue piling up.
Thus, we can’t really claim that the sanctions have fallen flat.
The diversion of resources to military needs is a temporary solution to mask deficiencies in other areas. However, it’s fair to acknowledge that Moscow is pulling out all the stops to squeeze every bit of potential from the economy, pushing resources to the limit.
It’s not surprising that the Financial Times reported Russian financiers taking notes from the playbook of Yalmar Schacht, the head of Germany’s National Bank during the Reich, who played a key role in financing the German war effort.
Lessons for the World
The Russian government’s actions should serve as a wake-up call for both Ukraine and the entire Western world. Capital controls, centralised planning, mounting debt burdens, and resource mobilisation—these are tactics straight out of a dictator’s playbook. Yet for Russia, they’ve become a necessary strategy to counter a much stronger and more resourceful West. Market mechanisms undeniably excel in efficiently allocating resources. In the long term, Moscow is bound to face the consequences of its unhealthy economic structure. But for now, it seems to be getting the job done.
