After Three Years, How is Russia’s Wartime Economy Doing?

The sanctions have targetted almost every aspect. In the financial sector, in 2022, the European Union (EU) expelled 7 major Russian banks including Syberbank (the Russian Federal Reserve Bank) from the SWIFT system, aiming to restrain its cross-border transaction ability. They further froze 196 billion euros of Russian central bank securities assets through Euroclear, banning trading and dividend withdrawals. On the energy sector, the West managed to reduce Russia’s energy export revenue through embargoes, price caps and technology controls. The US had banned importing oils from Russia, as well as new investment in Russia’s energy sector. G7 had set up price cap of 60 dollars per barrel, banning enterprises within G7 to purchase crude oil from Russia higher than this price. Besides suppressing Russia’s revenue sources, the West also sought to limit Russia’s access to high-tech products in order to strike its war industry. Many industrial machinery and equipment, electrical equipment, optical instruments, household appliances, etc. are included in the export control list to Russia.

The sanctions to some extent had brought pressure to Russia’s economy. On the very day that Russian troops crossfire with the Ukrainians, the first round of sanctions took effect immediately, leading to a 39% sharp decrease of RTS (Russia’s stock index).  In 2022, the total GDP decreased by 1.9%. With limited access to international products, the price level continued to rise, achieving a 17.8% inflation rate in April 2022, which was a record high since the collapse of Soviet Union. Though the CPI declined later on, the inflation maintained around 9%, which is far higher than the targeted 4%.

However, the impact was milder than expected and the initial shocks did not persist. At the beginning, the International Monetary Fund projected an 8.5 percent drop of GDP in 2022 followed by a 2.3 percent decline in the following year, while the actual statistics had proven the prediction to be severely out of mark. The unemployment rate reached 2.3% in October 2024, which is a post-Soviet record low. The nominal average wages of Russian workers increased by 14% in 2023, and the data for the first three quarters in 2024 even reached 17.8% (8.1% after getting rid of the inflation). Though defense expense rose tremendously, the fiscal revenue and expenditure expanded in the same proportion, and the deficit was considered stable. The actual budget deficit for 2022 was 3.3 trillion rubles, below the target of 2.3%.

From the statistical perspective, many would argue that the Western sanctions have failed. Not only did they fail to cripple Russia’s economy, but also coincided with Russia’s economic boom. Some economists even warned that Russia’s economy is experiencing “overheating” as its demand for consumption and investment is growing too fast, while many Western countries are facing stagnation.  

There are several factors contributed to such economic resilience. In the energy sector, Russia is the world’s second largest oil exporter and a major supplier of natural gas. Though the US and the Europe had implemented sanctions to Russia’s fuel, Russia quickly shifted its energy exports to Asian countries such as China and India through low prices and long-term agreements. In 2024, Russia’s crude oil exports to China reached 108.5 million tons, an increase of 1% year-on-year. At the same time, Saudi Arabia’s crude oil exports to China fell 9 percent, showing Russia’s increasing share of the Chinese market. Despite the impact of sanctions, Russia’s gas production increased by 7.6% to 685 billion cubic meters in 2024. Liquefied natural gas (LNG) exports also rose 4 percent to 47.2 billion cubic meters. Without doubt, Russia’s strong resource endowment is an important pillar to support its fiscal expenditure.

Russia has also taken active measures to reform its financial system. To minimize the reliance to the US dollar, Russia has gradually reduced the proportion of dollars in its foreign exchange reserves and trade settlements, and increased its reserves of euros, yuan and gold. In parallel, strict capital controls were imposed during the war to curb capital outflows. The government mandated that energy exporters convert 80% of their foreign exchange earnings into rubles, a move that further stabilized the currency.

Meanwhile, the Western export control had impacted Russia’s access to daily necessities for civilians, which had forced Russian government to promote the import substitution strategy and encourage local enterprises to produce goods and services that replace imports, which significantly boost the development of domestic companies. The substitute goods from China also increasingly filled the market gap left by western brands, helping to stabilize consumer prices.

Most importantly, the military-industrial complex has become the engine that boost Russia’s economic growth. Government spending is a key ingredient in calculating a country’s GDP, and Russia’s rising defense expenditure contributed to the growth of GDP. Defense spending in 2023 was 6.4 trillion rubles, surging to 10.8 trillion rubles in 2024, and the defense spending budget in 2025 was 13.5 trillion rubles. The ratio of nominal defense spending to GDP in the three years was 3.7%, 6% and 6.31%, respectively. Defense expenditure contributed to the largest share of Russia’s budget, and reached record high. The government procurement contracts also significantly boosted the development of related industries. For the whole of 2023, Russia’s production of computer, electronic and optical products increased by 32.8 percent, metalworking products by 27.8 percent, and other vehicles and equipment by 25.5 percent. These rapidly growing sectors may be closely related to the military industry, but not all are ordnance factories, many are civilian industries, but the products produced may be used in the production of military enterprises. In fact, it is a diffusion of investment downstream from the military sector. The expansion of arms and ammunition capacity stimulated the development of the entire manufacturing industry. Much of the labor force was absorbed into the production, and some of the others were absorbed to the army, leading to a historically low unemployment rate.

But what is the downside? Excessive reliance on military industry could lead to a distorted economic structure. Similar story happened during the Cold War, when the Soviet economy highly concentrated on military, leading to the lagging behind of people’s well-being. The cost of war, coupled with the rising cost of capital caused by high inflation and high interest rates, restricted investment in long-term capacity, and Russian business owners tended to invest in short-term capacity, making “quick money”. Once the military operation is ended, whether Russia’s economy could continue to sustain such momentum is uncertain. Meanwhile, behind the rising average income is the ruthless “death economics”. Russian economist Vladislav Inozemtsev has calculated that the family of a 35-year-old man who fought on the battlefield for a year and then died would receive about 14.5 million rubles, or $150,000, from his soldier’s salary and death benefits. That’s more than he would have earned by the time he worked as a civilian in some areas until he was 60. This money increased the average income in the most remote regions in Russia, at the cost of young lives.

The hope that economic vulnerability could force peace was unreliable. However, while Russia’s economy has defied expectations and remains functional, its growth is unbalanced and likely unsustainable in the long run. 

By Xingchen Liu