How Russia's War Economy Has Withstood The Onslaught Of Sanctions
The Russian economy has proven remarkably resilient to Western sanctions, a phenomenon largely driven by Russia's expanding military-industrial complex and increased trade with India and China. One challenge remains unsolved however: a lack of young working-aged men ready for hire in the country's industrial and white collar sectors.
Updated October 12, 2023 at 3:30 p.m.
MOSCOW — As fall began and business resumed, Russian company leaders faced a headache that has nothing to do with Western sanctions — far from questions about the ruble, inflation or interest rates. The most urgent priority is recruitment.
In a market where the unemployment rate has reached its lowest level in history (barely more than 3%), companies are struggling to hire. Incomes are soaring, with more than 13% monthly increases just before the summer and around 6% over the first half of the year.
The Kremlin’s “special military operation” in Ukraine is partly to blame. The generous salaries given to the volunteers on the front attracted many young people from the most popular classes in industrial regions. On the other hand, in Moscow and other large cities, the shortage of qualified executives has worsened with the departure of men fleeing military mobilization and the absence of economic prospects.
But what Russia is paying for above all is one of its endemic afflictions: its demographic crisis. The country today suffers from the low birth rate of past generations and, consequently, from a lack of young men of working age. Companies are thus forced to increase salaries to attract insufficient recruits. Some can't afford it, but most find solutions.
By contrast, this renewed activity on the job market is also good news for the Russian economy. Once again, it is adapting and withstanding the shock, far from the paralysis promised by the West which, in nineteen months of conflict in Ukraine, has turned Russia into the most sanctioned country in the world.
For 2023, the central bank predicts an increase of 1.5 to 2.5% in GDP, beyond its initial forecast (0.5-2%). As for next year, according to the IMF, growth will be stronger in Russia than in Europe.
Manufacturing industries notably registered almost 5% production growth in the first half of the year. For the extraction industries (oil and gas), exports have stayed stable despite the sanctions on crude and refined products. Moscow has turned to new markets, with India and China in the lead.
Russia was able to find other markets to sell its energy.
European and American sanctions did not have the effects expected by Brussels and Washington because, unlike past measures targeting Iran, they were only partial, and Russia was able to find other markets to sell its energy, and other suppliers to source technical equipment.
Policies of “import substitution” (boosting national production) and “parallel imports” (circumventing Western export bans via “friendly” countries) have also made it possible to mitigate the effects of sanctions.
NOVGOROD REGION, RUSSIA - A raw wood material storage at the IKEA Industry Novgorod furniture plant. IKEA has since left Russia.
TASS / ZUMA
The economy shows signs of crisis, including growing inflation and a budget deficit but it is only the sixth time since the fall of the USSR with similar episodes in mid-1990, 1998, 2008-09, 2015, 2020. Russian companies have acquired experience with such situations and become very resourceful.
But they still have the greatest difficulties in developing. The growth announced by the central bank is mostly a fool's game. Brussels can boast: Russia is suffering. Moscow can brag: Russia is resisting. But growth mainly comes from the Urals and central Russia, regions with strong military industries which have recorded 10-15% increases these past five months.
However, in regions that are strongholds for the automobile industry, such as Kaluga and Kaliningrad, declines hit 15 to 18%. Likewise, investments are primarily directed towards military industrial sectors, without the usual multiplier effects for the entire economy. Investing in transport infrastructure or new technologies has a future influence on the country's growth. A tank doesn’t.
An adaptation phase
So, today the Russian economy survives but does not develop. This summer, the ruble fell to its lowest level in a year and a half, under the combined effect of renewed inflation and continued capital flight. Net outflows have exceeded $250 billion since the start of the conflict.
But, if sanctions succeeded in worsening the freeze on the development of the Russian economy, they did not manage to sink it.
The economy is now one of the reasons to continue the conflict.
Paradoxically, the economy is now one of the reasons to continue the conflict for those who benefit from it: not only the military industries but also the oligarchs who, such as the recent buyers of the Russian activities of Danone and Carlsberg, play on their political proximity to benefit from the distribution of Western assets among friends. It is therefore not a real economic crisis but a phase of adaptation. It's a well-known situation in Russia, long accustomed to living with economic difficulties, and without political change.
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