Putin’s war economy is struggling. Getty Images / SERGEI GUNEYEV, JacobH ; Collage: Dominik Schmitt
Almost two years ago, Russia invaded Ukraine. Germany and many other countries responded with extensive sanctions.
In a study led by the Ifo Institute, economists examined how these sanctions work, how Russia’s economy is doing today and what its prospects are.
The most important results: Putin’s war economy is running at full capacity. Many sanctions are circumvented. Nevertheless, war and sanctions leave deep scars. And trade between the EU and Russia has shrunk by two thirds.
Two years after the attack on Ukraine, Russia’s war economy is running at full capacity. Nevertheless, the war, the extensive sanctions and Russia’s own gas boycott against countries like Germany have left deep scars. Economists in the area have the consequences of war and sanctions examined in a study by the Ifo Institute. Here are the key findings.
Russia’s economy after two years of war and sanctions
The capacity utilization of the Russian economy has never been higher. According to various studies, factories and machines are at 81 to 90 percent capacity. This also applies to the workforce. Unemployment in Russia is at almost three percent, the lowest it has ever been. On the one hand, this is due to the increase in employment in the defense industry and construction. At the same time, the working population is shrinking. The population is also aging in Russia. In addition, up to 500,000 men were withdrawn from companies due to the mobilization of the army. Since the start of the war, up to 900,000 people have left Russia to avoid military service or increasing pressure. Russia therefore needs investments to replace work with technology. In fact, investments rose by 7.6 percent in the first half of 2023. However, it is questionable whether these investments also lead to higher productivity. Russia’s growth is driven by war spending. The arms industry, construction and tourism will benefit, as Russians are increasingly relying on vacationing at home. There was a dramatic change in foreign trade. In 2022, Russia’s export revenue increased as a result of higher energy prices. On the other hand, imports fell due to the sanctions. In 2023 the balance tipped: export revenue fell by 32 percent and import spending rose by 17 percent. As a result, the ruble also came under pressure and lost around 30 percent of its value in 2023. European Union exports to Russia have fallen to a third of pre-war levels. China in particular has filled the gap. 77 percent of Russian companies said they buy equipment in China, India or Turkey. India’s share of Russia’s imports is growing, but is still small. While China supplies its own products to Russia, there are indications that many sanctioned products from Western countries are being delivered to Russia via Turkey via Turkey. That doesn’t mean that the sanctions didn’t work. They have made imports for Russia significantly more expensive. Many Russian companies complained that they could not find domestic replacements for sanctioned products. Russia’s auto industry has collapsed following the withdrawal of Western car companies. It has since recovered because China’s automakers are filling the gap. When it comes to medicines, the EU is still the most important supplier to Russia. Russia’s economy will grow by less than two percent in 2024. The longer the war lasts, the more dependent Russia’s economy becomes on war spending – and the greater the risk of stagnation or a slump in the post-war period, the economists write.
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Let’s take a closer look at the EU’s trade with Russia. According to the study, EU exports to Russia in autumn 2023 were around 37 percent of the pre-war level. So they’re down 63 percent. “One reason for the still high export volume to Russia is that only 32 percent of all products from the EU are sanctioned,” says Feodora Teti from the Ifo Center for Foreign Trade. “For luxury goods, for example, the export of champagne to Russia is sanctioned, but not Prosecco.” Important export goods are also medicines and medical supplies that are not affected by sanctions.
Due to the sanctions of the EU and other countries, around a third of the products in Russia were missing from the sanctioned goods compared to the pre-war period. The most important alternative supplier country for Russia is China: 61 percent of products that the West has sanctioned currently come to Russia from China. Before the war, China’s share of these products was 35 percent. In the case of China, economists assume that China can also supply these products from its own production.
The situation is different in other countries. Because of the goods that are sanctioned, 13 percent come to Russia from Turkey. In 2021, Turkey’s delivery share of such products was less than three percent. Russia now also sources around one percent of the sanctioned goods from Armenia. During the same period, exports from the EU to Armenia have doubled. “In the case of China, increasing exports to Russia can be at least partially explained by stronger domestic production. However, in the case of Turkey and Armenia, the sudden and sharp increase in exports to Russia raises suspicions of sanctions evasion,” says Teti.
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This article appeared on January 9, 2024 and was updated on January 10, 2024.
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