Although the Russian economy is currently in a quite stable state, one would be mistaken if she or he says that the sanctions imposed by the West have not caused any disturbing developments in it.
The initial impact of the Western sanctions was extremely strong andpainful: within two weeks, the US dollar exchange rate rose by 40 rubles, oralmost 50 percent, which forced the authorities to pause all operations onRussian stock exchanges; the consumer prices increased by up to 10 percentin monthly terms, which provoked a sharp drop in real disposable incomesand drove the retail sales down by 10 percent; international air traffic almoststopped; the termination of many foreign companies’ business in Russia ledto a crisis in the banking payments market. In the second quarter of 2022, Russian GDP fell by 4 percent.
But the consequences of the first shock had quickly eased: the currency restrictions introduced by the Russian authorities made the ruble a limited convertible currency, but allowed to stabilize its exchange rate and propel it above the pre-war levels, thus suppressing the surge in inflation. Already in the third quarter of 2022, under the influence of a powerful budget impulse (financing of arms production), stabilization of economic activity became noticeable at the macro level, and by the end of that year economy started to grow, continuing to do so to this day. In general, starting from 2022 to 2024, the Russian economy consistently showed results that were strikingly different from the expectations of Western experts: while in April 2022 the World Bank predicted Russia’s GDP to decline by 11.2 percent by the end of the year , the final estimate came to only minus 2.1 percent, 1. In 2023, the Russian economy grew by 3.6 percent against the January IMF forecast of 0.3 percent; and in 2024, its growth could amount to 3.8-4.0 percent, while at the start of the year international experts gave just 1.3 percent. Of course, this “economic miracle” is due to the massive use of fiscal reserves and monetary financing of the budget in 2023, that ensured the rise of military spending, which boosted both consumer demand and industrial production. Meanwhile, the civilian sectors of the Russian economy also demonstrated steady growth: in 2023, the largest increase in gross value added was recorded in the activities of hotels and catering enterprises (by 10 percent), in the information and communications sector (by the same 10 percent), in financial and insurance activities (by 8.6 percent), in wholesale and retail trade (by 7.3 percent) and construction (by 7.0 percent), which reflects an increase on the share of final consumption expenditures in GDP to 68.7 percent from 64.9 percent in 2022, including the share of household expenditure to 49.8 percent from 47.4 percent.
1 — Official numbers for 2022 provided by Rosstat insist on 1.2 percent decline in Russia’s GDP, but such an optimistic assessment looks doubtful.
The fall in oil and gas revenues and the growth of the budget deficit at the end of 2022 and during 2023 were temporary and were partly related to concerns about the impact of the EU “oil sanctions” that came into force in December, but “bureaucratic” factors became more important: the excessive strengthening of the ruble exchange rate under the influence of paramount currency restrictions and the Ministry of Finance’s sluggishness in changing the methodology of determining the price of oil for tax purposes. When these factors ceased to have an effect, budget revenues stabilized and soon began to increase rapidly, outpacing economic growth — the Ministry of Finance began to collect an “inflation tax” of additional revenues from VAT, profit tax, and personal income tax, caused by a significant excess of the inflation rate over what was anticipated in the draft budget2.
2 — The prices increases transcending the forecasted level, in addition to the emergence of an inflation tax, leads to a devaluation of budget expenditures in real terms, the size of which can only be determined by the end of the year, and which are not reflected in the budget statistics.
If in 2023 the Ministry of Finance covered 17 percent of overall annual expenses through additional money supply using the National Welfare Fund (3.46 trillion rubles) and revenues from ruble devaluation (or exchange rate differences) (2 trillion rubles), in 2024 the budget is fully funded by current revenues (for the January-September period, the Ministry of Finance reported a 169 billion rubles [0.1 percent of GDP] surplus). The improvement of the federal budget in 2023-2024 was facilitated by the ongoing modernization of tax administration, and by a 30-40 percent reduction in the share of the economy’s shadow sector due to effective stimulation of self-employment, and, of course, because of the “fine-tuning” of the tax system (since 2023, the taxes collected outside the oil and gas sector have increased annually by 1 percentage point of GDP). In 2025, a progressive income tax scale will come into effect, and the profit tax rate will increase from 20 to 25 percent.
One should add that the Russian government’s debt is insignificant by modern standards — it is expected to reach 18.1 percent of GDP by the end of 2024 — which leaves a huge space for domestic borrowing.
The growth of real disposable incomes during the war looks like an even greater achievement for the Kremlin, since it started after the longest period of their fall in Russian history — from 2014 to 2021, the total decline in real incomes, according to official data, exceeded 3.3 percent. In three years since the start of the aggression against Ukraine, this figure will grow by at least 17.5 percent (4.0 percent in 2022, 6.9 percent in 2023 and, according to the government forecast, about 7 percent in 2024). It is worth noting that at least until mid-2024, the rate of income growth accelerated (the maximum figure of 8.1 percent was recorded in the first half of this year). A significant contribution to this dynamic was, of course, made by disbursements to the military personnel — since the fall of 2022, contract soldiers at the frontline were paid at least 195 thousand rubles per month, and in 2024 the amount was increased to 210 thousand rubles (or 2.5-3 times the average salary in Russia) while federal and regional one-time payments for signing a contract today vary from 800 thousand to 3.4 million rubles. According to calculations by independent experts, from mid-2023 to mid2024, the federal budget had paid out to the military personnel and their relatives at least 3 trillion rubles in salaries and compensation that equals 1.8 percent of GDP, and government economic analysts openly call the recipients of these funds “the new young rich”.
Of course, it would be wrong to insist Russia’s economic growth is organic — it’s without a doubt fueled by both direct government investment in the military-industrial complex and infrastructure projects, and various investment programs supported by federal benefits. It is worth recalling the construction and reconstruction of highways, investments in housing and communal services, which in 2022-2023 were carried out at a record pace in most Russian regions; about significant investments in the modernization of infrastructure in the capitals and large regional centers (against the backdrop of the war, the linkage of the metro network and the urban light rail into a single system was completed in Moscow, up to 200 km of new roads were laid, and since 2014 78 metro stations have been opened — more than during the previous 40 years). With the outbreak of the war, a trend in the transformation of social policy became especially noticeable: the efforts of the authorities and budget funds are directed at those Russians who either belong to less well-off social strata (for the upper stratum of the middle class, on the contrary, the goods and services they previously consumed have become noticeably more expensive, and in some cases have become practically unavailable), or do not show a tendency to emigrate (here it is worth noting the numerous preferential mortgage programs, which by 2024 ensured records for housing construction, allowing more than 4.7 trillion rubles to be involved in the economy in 2023 alone). In other words, final domestic demand continues to be a more significant growth factor than exports — in the construction sector alone in 2023, up to 30 million tons of steel were consumed (the increase from the previous year amounted to 9 percent), while before the war, in 2021, just over 15 million tons were exported.
Russian business benefited significantly from the new trends: in 2023, the “total net results” (combined profit minus total loss) of Russian companies hit a record high of 33.4 trillion rubles, or 19.2 percent of GDP. Although the data for the current year have not yet been summed up, it can be said that the corresponding figure will not differ significantly, and may even set a new record. One way or another, the increase in profit tax from 2025 will not turn into a disaster for entrepreneurs.
Of course, it’s not worth claiming that the Russian economy doesn’t experience any problems, and, moreover, it got only benefits from sanctions and isolation: in recent months, debates about the growing pressure have become more active, and business confidence indices started to dip. But it should be noted that in Russia a significant part of both individuals and businesses does not experience profound economic discomfort either from Putin’s aggression against Ukraine or from the Western nations’ reaction to it — the main effect of sanctions has so far been felt by the upper middle class, which has historically taken the most critical stance vis-à-vis Vladimir Putin and his policies. The Bank of Russia’s policy of combating inflation by raising interest rates has not yet caused fatal problems for businesses, but has provided the upper strata of the population with a new source of income, allowing them to deposit their money at an interest rate that fully compensates for the inflationary effect. From January 2022 to September 2024, household deposits in Russian banks grew by a record 53.8 percent over such a short period, which reduces the feeling of anxiety associated with the ongoing war.
The emerging picture indicates the Russian economy has no problems that could immediately destabilize it. And, of course, before talking about the future, we need to understand what has allowed it to withstand the military confrontation, powerful economic sanctions and a noticeable change in the structure and geography of foreign economic relations.