All the reasons explaining why the Russian economyresponded quite successfully to both the Westernsanctions and other shocks caused by the war, seemedobvious even before the start of the Kremlin’s aggression against Ukraine, but were continuously ignoredby liberal researchers — Russian and Western alike.
1. Free Market economy
The first and most important circumstance is the free market character of the Russian economy, which has been underestimated by analysts. As Vladimir Putin established control over Russia’s largest corporations, the idea of the “étatization” of the Russian economy and, consequently, about its growing similarity to the old Soviet one, penetrated the Western expert community. It was argued that the state controls 100 percent of the railway and pipeline infrastructure, and that by 2018 the share of state-owned companies in overall corporate revenue reached 63 percent in the oil and gas industry, 79 percent in machine-building sector, and 92 percent in the banking business. It was assumed that the competence of state managers was low, that corruption was present almost everywhere, and that all these state-managed enterprises were ineffective. The observers therefore arrived to the conclusion that Russia’s economy could collapse just as easily as the Soviet one once did. Such assumptions were based on the unwillingness to see many obvious circumstances — and above all, the fact that in modern Russia private business provides 48 percent of total employment as the economy accommodates up to 6.5 million private companies and 10.2 million individual entrepreneurs and self-employed people. . Moreover, many large state-controlled corporations (one may just look on the banks) operate in a highly competitive environment acting as if they were owned by private capital. The readiness to adapt to changing conditions for the sake of survival could be seen in the Russian economy even after the wave of sanctions that had arrived in 2014-2015, and this desire became the main reason for its current stability. The lifting of a large number of regulations in the first months of the war (primarily the legalization of “parallel imports,” the nullification of Western companies’ intellectual property rights, and the expropriation of FDI originating from “unfriendly” countries) created new opportunities for for hundreds and thousands of entrepreneurs, who did their best to adapt to the changing situation. If in the USSR the loss of suppliers or customers could lead to the halt and collapse of large industrial chains, in Putin’s Russia the restructuring of the supply and sales networks took only a few months in 2022. No less important is the fact that property (which many liberals considered the basis for ensuring and expanding political liberties) became the main reason for non-resistance to the authorities, since fears of losing it perfectly disciplined the Russian entrepreneurs. In other words, the private and market nature of the Russian economy made it much more resilient than the Western policymakers had expected.
2. Production and export of primary commodities
The second of these circumstances is the fact that Russia’s place in the global economy has been determined by the production and export of primary commodities. The latter are often reduced to hydrocarbons, but in fact the Western dependence on Russia has been much deeper. As of 2021, Russia delivered to the world market more than 7.8 million barrels of crude and processed oil per day, 240 billion cubic meters of natural and liquefied gas, 227 million tons of coal, 43.5 million tons of steel, 37.6 million tons of mineral fertilizers, 49 million tons of grain (predominantly wheat), as well as large volumes of timber, aluminum, nickel, uranium, and many other commodities1. The share of these products in Russia’s exports exceeded 78 percent, amounting to $385 billion in 2021, that made Russia the world’s largest supplier of either crude or primarily processed raw materials. Smart Western analysts interpreted this feature exclusively as a sign of the country’s weakness, contrasting it with high-tech economies: the definition of Russia as “a gas station masquerading as a country” given by the late Senator John McCain was considered extremely elegant. Of course, it was partly true — but it ignored that despite the unpretentiousness of gas station business, everyone has to visit the place a couple of times a week. After the war started, it soon turned out that Russia could not be cut out from the global commodity supply — if such an undertaking had been successful, the prices of oil, gas, metals and other goods could have grown significantly, threatening the well-being of Western countries (that happened both in Europe in 2022 and in the United States with its “Putin’s inflation”, and continues to this day — the evidence of dependence is manifested by the Czech Republic’s attempts to continue receiving Russian oil after the end of 2024, and Germany’s purchases of the Russian oil from third countries). In addition, commodities supplied from Russia easily found their way to the world market if offered at a discount price — the best example can be the competition between Russian and Arab oil on the Indian market. As a result, despite all the introduced restrictive measures, Russian exports decreased from $491.6 billion in 2021 to $425.1 billion in 2023, or by a mere 13.5 percent (comparisons with a very special 2022 should be avoided), and will probably remain close to that level in 2024-2025, providing the opportunity both to cover all necessary imports and to balance the federal budget.
3. Global economy diversification and flexibility
The third extremely important factor was the degree of the global economy’s diversification and flexibility. It turned out soon that Western countries’ role is not decisive in Russia’s foreign trade and in its financial transactions. Despite the energy embargo introduced by the West, and the sanctions imposed on all the basic sectors of the Russian economy, Russian business appeared able to redirect commodity flows to new markets and find new suppliers of many of the products it needed. In addition, officials and businessmen cooperated in inventing smart schemes for circumventing sanctions (like the famous “shadow fleet”) as well as in managing trade settlements in “non-traditional” currencies and barter deals. One may even expect that in the near future the Russian business, with the support of the Kremlin, will try to launch original settlement systems based on the use of cryptocurrencies or other instruments that will no longer be vulnerable to “traditional” banking sanctions. It can also be added that dealings with Russia had proven so profitable for Western companies that, on the one hand, few of them have left the Russian market for good, and, on the other hand, most of those that have formally left it have not offered ways and means to prevent Russian consumers from using their products (and sometimes even stimulate their presence on the market). Finally, during the war in Ukraine, Russia has demonstrated clearly that even the system of multilateral international sanctions authorized and imposed by UN Security Council resolutions does not actually work if their violator is a permanent member of the Security Council. Moscow carries out mutual deliveries of weapons and military technologies with Iran and the DPRK, which were put under broad sanctions (Pyongyang has recently even provided the Kremlin with direct military assistance, sending its soldiers to the frontline); undermines the international order through contacts with the Taliban and Palestinian terrorists; almost openly interferes into the affairs of African nations — and does so with obvious economic benefits for itself. During the war, Russia has shown that in trade and financial terms, a large commodity economy, disregarding the prospects for its own long-term development, can survive without Western goods, technologies and financial centers quite well, at least for some time.
4. Impact of autarky on Russia’s economic condition
The fourth issue that requires attention here is the impact of autarky on Russia’s economic condition. Contrary to popular belief, open capital markets for an export-oriented country have proven less favorable than the limited convertibility of its national currency, which relies on currency bans and restrictions. The rapid stabilization of the Russian economy in 2022 was largely ensured by the introduction of a ban on non-residents originating from “unfriendly” countries to purchase hard currency on the Russian market and by blocking their ruble assets in special type “C” accounts, as well as by the requirement for exporters to sell 80 percent of their foreign exchange earnings for rubles, by partial restriction on current and capital transfers abroad made both by individuals and businesses, by a ban on withdrawing cash from bank accounts, and by termination of the cross-border use of payment cards introduced by Visa, MasterCard, and AmEx. As a result, according to the Bank of Russia, capital flight to “unfriendly” countries decreased in 2023 almost sixfold compared to 2022 — or by at least $200 billion. Large Russian businesses hit by sanctions have used creative schemes enabling them to repatriate much of their assets back to Russia from the Western countries, and, through registering dozens of holding companies in Russia’s “free economic zones” specially created for this purpose, made themselves “unattainable” to sanctions. A significant reduction in imports originating from Europe stimulated the development of businesses focused on domestic demand. Although it can hardly be called “import substitution” in the sense that Russia began to produce analogues of previously imported products (when they appear, then of much lower quality and at prices several times higher than the cost of the originals), this is of no importance for assessing economic dynamics.
The ban on a significant part of international flights by Russian airlines and visa restrictions introduced by countries that announced the sanctions against Russia led to a contraction in international tourism and a rapid growth in the domestic one that has expanded by more than 45 percent compared to 2021.
5. Size of Russia’s domestic market
The fifth underestimated factor was the size of Russia’s domestic market and the government’s ability to stimulate effective demand. It is no exaggeration to say that between 2021 and 2024, the Russian authorities ensured a multiple increase in spending on the purchase of weapons and ammunition from military-industrial complex enterprises. For the first time since the end of the 17th century, a mercenary army has been created in Russia, with wages paid to the soldiers that are several times higher than the national average. The subsidized mortgage scheme launched during the COVID-19 pandemic that was supposed to end in 2021, was extended until mid-2024, chaneling up to 6 trillion rubles into the construction sector46. The 2022 “partial mobilization” and subsequent emigration created a shortage in the labor market, which led to a significant increase in the salaries of middle-income workers and to an increase in the purchasing power of millions of families. This hike in household incomes turned out to be the most unexpected phenomenon of the first war years: traditionally, in Russia, wars had led to the opposite — to a sharp fall in consumption due to a growing budget deficit; to a freeze of income through forced loans; to unpaid employment, etc. But today’s Russia turned out to be not another Soviet Union, but rather resembled Israel, where the economy grew by an average of 4.3 percent annually from 1970 to 1990 without facing a single recession, despite defense spending averaged 18.6 percent of GDP during this period (it is worth assuming, however, that up to half of this amount was covered by foreign aid). The budget proposal for 2025-2027 sent to the State Duma shows that not only does the Kremlin not consider military spending at 6 percent of GDP to be excessively high, but also that the current budgetary structure looks sustainable over a three-year horizon with massive military spending1.
1 — It should be recalled that when the government submitted the budget for 2024-2026 to the State Duma last fall, it seems possible to keep the budget deficit within 1 percent of GDP only by significantly reducing military spending in the second and third years of the forecast period.
Despite a probable slowdown in economic growth in the second half of 2024, Russia looks safe from the collapse of the existing economic model in the near future: the budget remains balanced, and the real disposable incomes are expected to grow further. Of course, the increased military spending provokes growing inflation, but for now it is kept within single-digit numbers, which suits the Kremlin, does not cause a slowdown in the real sector and is perceived “with understanding” by the majority of the Russian people.
6. Professionalism in the “economic bloc”
The sixth, and last, among the main reasons ensuring the stability of the Russian economy, is the professionalism of bureaucrats employed in the “economic bloc” of the government. Almost three years of war have shown that while Putin’s “silovikis” proved ineffective, the so-called “systemic liberals”, abstracting themselves from any moral assessments of their activities, were able to quickly overcome the state of prostration that had overwhelmed them in the first days of the war and save the collapsing economy, turning it into a solid foundation for a virtually endless war.
Summing up this part of the report, we repeat that most analysts were mistaken in assessing the capabilities of the Russian economy, primarily for two reasons.
On the one hand, they consciously (and even intentionally, partly because of their emotional rejection of Putinism) assessed it as a reincarnation of the Soviet one with all its inherent shortcomings and weaknesses — i.e., they transferred a value-driven approach to an area that required strict and unbiased analysis.
On the other hand, they took many features of the Russian economy (including its commodity dependence, relatively low availability of credit resources, an archaic model of consumption with the prevalence of goods over services, as well as the government’s focus on ensuring “self-sufficiency”) for systemic vices — but in fact all this might be seen as an obstacle to development, turning into an advantage when one tries to counter external challenges and preserve the existing state of affairs. The “military economy”, meanwhile, is a special economic system, and it is wrong to evaluate it by standard assessments.