The war against Ukraine - the main engine of the growth of the Russian economy

Two years after the full-scale invasion of Ukraine, Russia still faces an unprecedented number of economic sanctions, has been shut out of major global financial services and has had around 260 billion euros of central bank assets frozen.

At the same time, Russian airspace is closed to most Western planes, and Russian ships do not have access to Western ports. Under the sanctions, the West has imposed an official ceiling on the purchase or processing of Russian oil sold for more than $60/barrel (world prices currently fluctuate between $80 and $100/barrel) and, at least in theory, it is illegal to sell to Russia any product that can be used by the military.

According to theconversation.com, the sanctions imposed on Moscow had some effects. Russia's GDP is currently about 7% lower than pre-war projections. But despite all this, the Russian economy has not collapsed, but it looks very different, and now it is entirely focused on a long war in Ukraine, which, in fact, stimulates economic growth.

According to the cited source, the most worrying aspect related to the resistance of the Russian economy is the war itself. For a long time, the Russian economy was not diversified, relying to a large extent on the export of natural resources, such as oil and gas, and the relatively high revenues of the Russian government today are based precisely on the fact that the war brought prices big on the energy market.

Russia's public spending is at unprecedented levels, and about 40% of the government's budget is spent on war. According to estimates, Russia's total military spending was over 10% of GDP in 2023. Military salaries, ammunition, tanks, aircraft, and compensation for dead and wounded soldiers all contribute to GDP. In the given situation, the cited source shows that the war against Ukraine is now the main engine of Russia's economic growth. And it is a war Russia cannot afford to win because the cost of rebuilding and maintaining security in a conquered Ukraine would be too great, and an isolated Russia could at best hope to become a partner entirely dependent on China.

In a context of crumbling infrastructure and growing social unrest inside Russia, the estimated cost of rebuilding the occupied zone is already massive. A prolonged conflict could be the only solution for Russia to avoid total economic collapse, writes theconversation.com.

After the industrial transformations brought about by the war and with a labor shortage aggravated by hundreds of thousands of war victims and a massive exodus of talent, the country must struggle to find a new direction. Thirty-five years after the fall of the Berlin Wall, it is clear that resource-rich Russia has become much poorer than its former Soviet neighbors Estonia, Latvia, Poland and Hungary, which followed the path of European integration. The Russian regime has no incentive to end the war and face this kind of economic reality. So, he cannot afford to win the war, but neither can he afford to lose it. Its economy is now entirely geared towards the continuation of a long conflict, the quoted source concludes.

• How did Russia avoid bankruptcy after two years of war in Ukraine?

Russia's wartime economy is booming. Although there are doubts about the accuracy and completeness of the "pink" economic data that Russia has released over the past two years, Moscow seems ready to continue financing its war for a third year - and wars are expensive, writes Business Insider .

"From a purely economic point of view, Russia has considerable room to continue the war," Hassan Malik, global macro strategist and Russia expert at Boston-based investment management firm Loomis Sayles, told Business Insider.

After all, Russia has protected itself from sanctions since 2014, when it was hit with a series of trade restrictions after illegally annexing Crimea. In addition, it is still supported by revenues from its oil sales.

Russia has managed to keep its economy strong even after two years of war primarily because this conflict is taking place outside its own borders. "The war is mostly being fought on Ukrainian soil and is destroying Ukrainian homes, businesses and farms, so the direct impact on production capacity and Russian households has been relatively limited," Malik pointed out.

The impact of the war on the economies of Russia and Ukraine looks like this: in 2022, the first year of the war, the Russian economy contracted by 1.2%, according to official statistics. Analysts polled by Reuters expect Russia's GDP to have grown by 3.1% in 2023. Russia has not yet released its data for the full year 2023. By comparison, Ukraine's GDP fell by 29.1% in 2022, and the country's central bank estimated that the country's economy grew by 4.9% in 2023. Ukraine has not yet published its official figures for last year either.

On the other hand, Russia is supported by the demand for war-sustaining goods and services. The Russian army needs physical supplies - weapons, ammunition, bandages -, the industries that produce these goods being stimulated, especially domestically, because imports into Russia are restricted due to sanctions. In addition, there is a need for labor in Russia. With the start of the war, nearly a million Russians - including men of conscription age - fled the country, further reducing the labor pool. Russian President Vladimir Putin's mobilization of men for war has created a labor crisis that has persisted since 2022. Last year, Russia faced a 5 million worker crisis as job vacancies rose nearly 5% from 2022 In November, Russia recorded a record low unemployment rate of 2.9%. Due to the labor shortage, wages have increased, supporting, in turn, consumption and economic growth.

Another element supporting Russia - a major global economy, the world's eighth largest in 2022 - is its strong position as a producer of commodities such as oil, natural gas, wheat and metals, which has helped it weather sanctions.

"While Western sanctions and trade restrictions have undoubtedly had some impact on the Russian economy, this is particularly limited in a largely autarkic defense industry," Malik said, noting that as one of the As one of the world's leading arms exporters, Russia can cover most of its defense needs, even those involving sophisticated weapons.

This, along with the measures Russia has imposed to stimulate its economy - including parallel imports, turning to alternative export markets such as China and India and new supply chains - further dilutes the impact of Western sanctions on the industry. defense and the war economy, says Malik.

Russia's economy is also supported by government subsidies, spending and policies. Subsidies for low mortgages even created a real estate bubble. The Russian government also launched other types of subsidized loans for businesses, further stimulating demand in the economy.

On the other hand, Russia entered the war with little external debt, and its current account was in surplus due in part to the war's impact on commodity prices. "Such developments strongly compensated for Western sanctions, such as the freezing of the central bank's reserves," Malik also said.

Malik is not the only one who believes that Russia has the means to carry on the war for much longer. And other experts said that Russia has the money to finance its war in Ukraine for several years.

Alex Isakov, an economist at Bloomberg Economics, said in January that Russia's sovereign wealth fund's liquid assets will last another year or two if oil export prices fall below $50 a barrel. The average price of Russia's benchmark crude oil (Urals) was around $63 per barrel in 2023.

• Rebuilding housing in Ukraine requires the highest costs

Reconstruction of Ukraine's economy after the Russian invasion would cost 486 billion dollars, 2.8 times more than the estimated GDP in 2023, according to a study recently published by the World Bank, the UN, the European Commission and the Ukrainian government. The estimate covers the period from the invasion of Ukraine, on February 24, 2022, until December 31, 2023, and takes into account the damage to buildings, infrastructure, and the impact on livelihoods, according to Reuters.

The previous estimate, released last March, showed a cost of $411 billion.

The need for housing tops the list of expenses, with $80 billion, followed by transportation needs, with $74 billion, and trade and industry, with $67.5 billion.

"The amount of 486 billion dollars is of an unimaginable size and, of course, it reflects the real needs", said Arup Banerji, the regional director of the World Bank for Eastern Europe.

• KSE: Losses of 80 billion dollars for the agricultural sector of Ukraine

The agricultural sector in Ukraine recorded direct and indirect losses of more than 80 billion dollars following the Russian invasion, according to a report recently published by analysts from the Kiev School of Economics (KSE), taken over by Reuters.

At the beginning of January 2023, analysts estimated these losses at 38 billion dollars.

Using data from the Kyiv government and other sources, KSE analysts estimate that direct losses of the Ukrainian agricultural sector reached $10.3 billion as of December 31, 2023, up from $7.8 billion a year ago. The figure includes losses of 5.8 billion dollars from the destruction of equipment, 1.8 billion dollars from the damage of silos and almost 2 billion dollars from the destruction of agricultural products.

Analysts estimate that the indirect losses - decreased production, reduced exports, higher production costs and remediation of damaged soils - amount to about 69.8 billion dollars.