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Snapshots of the Russian Economy from Invasion to Present

Russia Impact Series

By Aliza Weiss

Trade Impact Foundation Intern

Russia’s economic status before, during, and future, amidst the war with Ukraine, expand upon the previous case studies regarding the impact of sanctions on Russia’s general economy. Prior to the war, Russia’s economy was recovering from the Covid-19 pandemic, making strides in the realm of unemployed rates, job opportunities, and wage growth. At the start of the war, and as it proceeds Russia’s economy exceeds the predicted downfall but still suffers economic growth as a result of imposed sanctions. However, IMF predictions indicate that Russia’s economy is expected to grow in 2023, regardless of international regulations. This led to significant concern until the United States, the European Union, and the Group of Seven allies promised to intensify sanctions by focusing on loopholes and companies that have failed to comply with international law.

In the first half of 2021, Russia experienced a significant resurgence in its economy, with projections indicating a growth rate of 4.3% for the year. During the second quarter of 2021, investment in the country remained strong and the current account surplus reached new heights, largely due to elevated commodity prices and a reduction in outbound tourism, totaling $82 billion by September 2021. The Central Bank of Russia was quick to implement monetary policy tightening measures in 2021, increasing interest rates by 325 basis points to 7.5% by the end of October, thereby keeping real interest rates near zero and adopting a neutral monetary policy stance. Over the first three quarters of 2021, Russia's federal budget saw substantial revenue increases, including a 60% rise in oil and gas revenues and around 30% increases in both VAT and income tax revenues. The labor market has also rebounded, with a 24% year-over-year increase in job postings during Q2 and a reduction in the ratio of unemployed individuals to job opportunities. Real wage growth, which remained above 2% in 2020, has continued to average 2.5% through to the end of August 2021.

Despite the conflict with Ukraine that began nine months prior, the Russian economy has surpassed expectations. Instead of the anticipated decline, the country has sidestepped a significant drop in GDP, which was originally projected to fall by 8-10%, but has now been revised to a more modest decrease of 3-4%. Non-oil and gas revenues fell by 20 percent in October in annual terms. And over the initial ten months of the year, the drop in industrial production was kept to a minimum, only decreasing by a mere 0.1%. This small decrease was a result of an increase in military expenditure, leading to an upswing in the production of clothing and metal goods, including tanks and missiles. However, there was still a decrease in civilian sectors, such as the automobile industry, which experienced nearly a 50% reduction, as well as timber processing and machine-building industries.

The International Monetary Fund (IMF) later revised its earlier predictions and instead indicated it anticipates a growth of 0.3% in Russia's GDP for the current year, which is a marked improvement from its initial projection of a 2.3% decline. Furthermore, the IMF predicts a 2.1% rise in Russia's GDP for the year 2024. Despite the difficulties Russia encountered in 2022, its economy has rebounded more rapidly than expected, with the Central Bank identifying five primary factors driving this recovery. Following the report being published IMF director Kristalina Georgieva tampered with those predictions telling CNN’s Poppy Harlow that the economic outlook for Russia beyond 2023 is “quite devastating.

However, the latest forecasts from the World Bank and the Organization for Economic Cooperation and Development contradict the IMF's predictions, with both groups anticipating contractions of 3.3% and 5.6% in 2023, respectively. Despite the contradictions, the IMF remains optimistic about Russia's economic prospects based on the country's banking system stability, rising prices, export shift towards Asian markets, import-based businesses' logistics chain restructuring, and government support.

Despite differing opinions on the economic outlook for Russia, it is clear that the country's oligarchs have been affected by sanctions, with frozen assets and individual sanctions impacting their operations. The United States, its allies, and partners have imposed sanctions that have frozen approximately $300 billion in assets belonging to the Russian Central Bank, making it more challenging for the bank to support the country's war efforts and mitigate the effects of the sanctions. Sanctioned Russian oligarchs and financial institutions have also had to divest from long-held assets outside of Russia. This caused a significant impact on Russia's financial sector, with Sberbank, the country's dominant lender, reporting a nearly 80% drop in net profit in 2022, leading to reduced connections between the Russian financial sector and banks in various countries. While these effects alone may not have a significant impact on Russia's overall economy, they will limit the country's growth prospects in the coming years. As a result, several nations have committed to increasing sanctions further.

After President Joe Biden's visit to Ukraine, which marked one year since the start of the war, harsher sanction proposals were being proposed and implemented around the world. The United States and its allies in Europe are seeking innovative ways to limit Moscow's access to essential materials that improve its military and technology industries. The Deputy Secretary of the Treasury, Wally Adeyemo, has stated that the US, EU, and Group of Seven allies are willing to use a range of tools, including export controls and sanctions, to give companies doing business with Russia a clear-cut decision, either abide by sanctions or suffer the consequences. In an effort to close loopholes and prevent the circumvention of sanctions, specific technologies and components that Russia can only acquire from Western suppliers are being targeted. Simultaneously, officials are preparing to notify foreign banks and companies, particularly Chinese companies and banks, that they will lose access to financial services and markets if they assist Moscow in evading sanctions.

As we move forward, it is crucial to acknowledge that the international community must maintain the enforcement of sanctions to encourage nations to adhere to international laws and norms. While the economic consequences thus far may not have been as significant as desired, they remain significant and establish a global standard. The forthcoming measures taken by the international community will hopefully lead to a genuine impact on Russia's economy, ultimately bringing an end to this devastating conflict.


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