When Vladimir Putin launched the invasion of Ukraine two and a half years ago, few could have anticipated that the economy of a country vitally dependent on the global market would endure the disruption of established economic ties.
Early trends seemed to confirm dire predictions: the freezing of half of Russia’s foreign exchange reserves, a 50 percent drop in stock market capitalization, a surge in the exchange rate from 75 to 120 rubles per dollar, restrictions on cross-border financial transfers, and a government order requiring near-total sell-off of hard currency earnings — all of which appeared to leave little room for optimism. Yet, within three months, the situation has terned for the better, and the subsequent two years saw active economic growth despite bold sanctions, military hardships, and the largest emigration wave in a century.
Although Russia’s economy stabilized by the summer of 2022, major part of both independent and official experts predicted the crisis would be severe and prolonged. The Bank of Russia and the Ministry of Economic Development forecast GDP to decline by 10-15 percent; experts predicted a 50 percent drop in oil production during 2023, record budget deficits due to resource monopoly struggles , and an inability to redirect energy exports. Observers saw numerous price surges as the onset of hyperinflation, while the exodus of hundreds of thousands of professionals was taken for the final nail in the coffin of “Putinomics.” At the same time, bloggers passionately claimed that the Russian offensive in Donbas would soon stall due to an alarming shortage of shells or missiles. By mid-2023, these apocalyptic forecasts had subsided briefly, only to be replaced by more recent claims that the Russian economy’s “peak growth” had passed and that a genuine crisis is looming large.
This report aims to debunk the view that the Russian economy will constrain the Kremlin’s ability to wage war in Ukraine. It is far more likely that it will continue to support Moscow’s aggressive policies for at least five to six more years, if not indefinitely. Given this outlook, any efforts to end the aggression by ramping up economic pressure on Russia may prove ineffective.
Before diving into the findings, it’s essential to examine why expert forecasts have consistently missed the actual developments and why authors of these forecasts are reluctant to update their policy recommendations. We believe this disconnect is largely subjective, reflecting essential features of three main groups of analysts. The first group consists of longtime Russia specialists who view current events through a Soviet-era lens, interpreting Putin’s dictatorship as an attempt to restore the Soviet system. The second group includes analysts who work for Western governments or NGOs, and feel compelled to propose sanctions and restrictions, projecting confidence in their effectiveness. The third group is made up of experts with Russian backgrounds, including those former politicians who despise Putin and are convinced of his regime’s imminent collapse. The deep biases of these groups hinder objective assessments of the Russian economy’s current state and prospects.
Consequently, Western governments, assuming that economic sanctions can bring the Kremlin “to its knees,” have proceeded with multiple bans and restrictions moved by the idea that “the ends justify the means.” Of course, if an energy embargo could eliminate oil and gas revenues from the Russian budget, deprive the Russian military-industrial complex of most of the funds it gets from the state, trigger numerous defaults, or provoke hyperinflation, it might be worth the price. However, such an assessment of the sanctions policy’s effect is grossly exaggerated. The West’s inability to attract China and India to its side has produced huge “loopsholes” in the sanctions’ “fence”, which has sharply reduced the effectiveness of the decisions taken. Atop of this, the Russian authorities have taken well-considered countermeasures allowing to restore the macroeconomic stability and to use the potential of the market economy to solve the emerging problems. It seems that the development of the Russian economy in the last two years, as well as the real effect of sanctions, should have led to a reevaluation of the quality of the expertise used by policymakers — but this has not happened yet.
The significant mistake of Western politicians is that the decisions they make are based on inadequate judgments about the existing condition, and therefore a truthful assessment of the state of the Russian economy and an analysis of the reasons for its stability seems to be an extremely important and timely task these days.