As of: February 9, 2024, 12:05 p.m
By: Andreas Höß
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Vladimir Putin inspecting a sniper rifle © Mikhail Metzel
Despite the war in Ukraine and sanctions, the Russian economy is recording considerable growth.
An economic expert explains.
Oxford – On February 24, 2022, Russia started the Ukraine war.
In response, the EU has imposed massive sanctions against around 2,000 institutions, but also individuals such as President Vladimir Putin, prominent businessmen and oligarchs.
21.5 billion euros in assets have been frozen, 300 billion euros in central bank funds blocked, Russia is no longer allowed to import oil into Europe and is no longer allowed to import many technological goods.
Now the news: Russia's economy grew by 3.6 percent.
Have the sanctions failed?
The economist and Russia expert Michael Rochlitz from the University of Oxford provides the answer.
Despite sanctions, Russia has not collapsed economically.
Is that a surprise?
Most experts initially believed that the economy would collapse massively.
In 2022, the minus was only two percent (now Rosstat speaks of only 1.2 percent. See article below).
In 2023, Russia's economy even grew by 3.6 percent.
This came as a surprise - and there are reasons: In the first weeks of the war, Russia benefited from the fact that some EU states such as Germany were dependent on Russian raw materials.
The sanctions drove up the prices of oil and gas, but many countries initially continued to buy Putin's raw materials because they first had to look for alternatives.
This brought a lot of money into Moscow's treasury.
Since the end of 2022, the country has been trying to deliver its oil to China and India with its own tanker fleet and thus circumvent the sanctions.
This also works quite well.
But three other things were crucial.
Which?
Russia was better prepared for the sanctions than expected.
Since the financial crisis of 2008, the sanctions of 2014 and Corona, Russian companies have constantly lived in anticipation of major crises and have accumulated reserves accordingly.
Secondly, the Russian central bank reacted very quickly and competently to the shock of the sanctions.
Thirdly, the Kremlin has now switched completely to a war economy.
For the Ukraine war: Putin optimizes the economy
War economy is called?
Russia's economy is now almost entirely subordinated to the goal of winning the war.
In the EU or the USA, however, life continues as normal.
Ukraine is supported with money and weapons.
But only as long as it doesn't hurt too much economically and financially.
This means for war?
Russia is currently outdoing Ukraine when it comes to weapons and ammunition.
It's a war of attrition, a battle of materials.
And the Kremlin is throwing everything into the balance: this year, 40 percent of the budget and six to eight percent of economic output will go to the military, while the Bundeswehr in Germany doesn't even get 1.5 percent.
This show of strength is also the reason why the Russian economy grew by 3.6 percent in 2023.
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Putin's war economy too short-sighted?
The sanctions were supposed to shrink Putin's economy, but now it's actually growing?
It only looks that way on paper.
The arms industry is currently the engine of the Russian economy and huge investments are needed for structural change.
All reserves are pumped in here - this inflates growth.
Every tank and every shell produced has a positive impact on economic growth.
In addition, many tanks are immediately destroyed in Ukraine and have to be produced again.
It's like breaking all the windows in a city every day and repairing them the next day.
This also initially creates growth.
But it is not a model for the future.
It makes a difference whether you put your money into tanks or into new industries that create wealth.
Despite the sanctions, Russia can continue to produce weapons.
Because of sanctions: High losses in the most important source of income for Russia's economy
Currently, Russia primarily uses older weapons, missiles and tanks.
This old technology can be built despite sanctions.
How long can Putin keep up this show of strength?
Not forever, but certainly a few more years, maybe two or three.
This is very difficult to predict.
But the war economy has its price.
And that increases the longer the war lasts.
While Putin is fully concentrating on warfare, Russia is losing out on future technologies such as artificial intelligence and quantum computers.
Before the war, people had one foot in the door in both fields.
The science sector is suffering massively, as is the manufacturing industry outside the defense sector and tourism.
All of these were once potential future industries for the post-oil and gas era.
Tourism has collapsed and Russia's science is no longer connected to the rest of the world.
Many young and well-educated people have fled, including many computer scientists.
Once they get good jobs abroad, they don't come back.
This is the economic sacrifice that the Kremlin is making for the war.
High wages and low unemployment: Ukraine war is fueling the economy
Many companies have withdrawn from Russia.
It was hoped that this would ferment in society.
Rightly so?
Apart from the deaths and military service, society has so far only had to live with small restrictions.
In some cities, electricity and heating are now failing due to a lack of maintenance.
The shelves in the supermarket are also empty from time to time.
But there is no mass unemployment – on the contrary.
Because hundreds of thousands have fled or are at war, there is a shortage of skilled workers everywhere.
This causes wages to rise.
Only when the war is over will the Russians feel its consequences, because at some point the bloated military apparatus will no longer be able to be financed.
The Soviet Union failed at this and Putin is about to repeat this mistake.
Many companies have withdrawn from Russia.
It was hoped that this would ferment in society.
Rightly so?
Apart from the deaths and military service, society has so far only had to live with small restrictions.
In some cities, electricity and heating are now failing due to a lack of maintenance.
The shelves in the supermarket are also empty from time to time.
But there is no mass unemployment – on the contrary.
Because hundreds of thousands have fled or are at war, there is a shortage of skilled workers everywhere.
This causes wages to rise.
Only when the war is over will the Russians feel its consequences, because at some point the bloated military apparatus will no longer be able to be financed.
The Soviet Union failed at this and Putin is about to repeat this mistake.
Putin's preparations were already underway before the Ukraine war
Does this make it more attractive for Putin to prolong the war?
That's the problem.
From Putin's point of view, peace makes no sense.
Among other things, because then the costs of the war would become visible and there was no plan for what would happen afterwards.
Even in the years before the attack on Ukraine, Russia had consistently prepared its economy for war.
Vladimir Putin during an interview with Carlson Tucker © Gavriil Grigorov/Pool Sputnik Kremlin/AP/dpa
In what way?
Russia has accumulated high reserves since the financial crisis and especially after the sanctions following the annexation of Crimea in 2014.
At the same time, Putin has made the state apparatus crisis-proof.
That cost a lot of growth, but it prepared the economy well for what was to come.
The regional administrations have routinely cooperated with local companies since 2022 to mitigate the worst consequences.
The central bank also reacted well and put the economy into a kind of coma with a short-term interest rate hike to 20 percent and capital controls.
This got Russia stable through the first months of the war.
So far, the elites have supported Putin
Can Putin rely on the country's elite?
So far, yes.
An example: The head of the central bank submitted her resignation at the start of the war.
Putin rejected it - and they decide to move on.
Since then, all economists in the country have been faced with the question: should they emigrate or join in?
This has led to many rifts between economists who left the country and those who stayed.
And the oligarchs?
The oligarchs are all individually dependent on Putin.
Anyone who rebels against him loses their power, goes to prison or dies.
Now everyone is afraid.
This is typical of authoritarian states.
The sanctions will not fail: Putin will have to export elsewhere
In your opinion, have the sanctions failed?
We had hoped for more, you have to admit that.
Especially when Russia was excluded from the international payment system, it was thought that the country's financial system would collapse.
The central bank cleverly averted this.
But I wouldn't say that the sanctions have failed.
For what reason?
The sanctions have made everything more complicated for Russia.
It can no longer sell raw materials or buy technology on the world market.
Everything takes a winding path via China, Kazakhstan and Turkey.
It's similar with financing.
None of this prevents Russia from waging this war, but it does make it more difficult.
We also have to fundamentally ask ourselves how we react if an aggressor attacks a European country.
There are definitely parallels to Germany's attack on Poland in World War II.
At that time, France and England were allied with Poland, but did not intervene militarily - with the well-known consequences.
If we don't want to provide Ukraine with more military support, sanctions are the least we can do.
Putin's determination to win the Ukraine war is surprising
Have people underestimated what Russia is prepared to endure for the war?
In any case.
The invasion of Ukraine was always a disaster from an economic perspective.
Continuing the war also makes no economic sense.
But these don't seem to be the categories in which Putin thinks.
Some say that Germany has only hurt itself with the sanctions.
What's that about it?
We have made ourselves dependent on Putin for many years - a mistake that is now taking its toll.
But the sanctions hit Russia much harder than they hit us. They are necessary to show the Kremlin that we will not tolerate attacks on countries in Europe.
If we didn't stand by Ukraine, it would have been overrun.
Who knows who would have been next?
(Interview: Andreas Höß)