The West’s punishment of Russia for invading Ukraine has not had the intended consequences. Why not? Simon Wilson reports
What’s happened?
Russia’s economy is continuing to stabilise and display striking resilience in the face of the Ukraine war and Western sanctions. Last month the IMF increased its GDP growth forecast for Russia to 2.6% this year, a big jump from the 1.1% it had been predicting last October, and a rate that outpaces the G7. Meanwhile, the big worry – rampant inflation fuelled by massive military spending and labour shortages – appears to be stabilising at around 7.5%, and some forecasters expect it to fall to 4% before long. That hasn’t led to a cut in interest rates: the central bank has kept its headline rate steady at 16%. But policy makers are “clearly hoping that underlying price pressures continue to soften in the coming months, which we think could open up the door for easing” in the third quarter, says Liam Peach of Capital Economics.
Why is Russia proving so resilient?
Mostly because energy revenues have held, because the Kremlin has ramped up defence spending, and because sanctions have had less effect than expected. Last year, Russia’s energy revenues reached RUB8.8trn – a decline of about a quarter from the all-time high in 2022, but above the average of the past ten years. Meanwhile, a third of the state budget (RUB9.6trn in 2023 and RUB14.3trn in 2024) is being spent on the war effort and social payments to soldiers and bereaved families. That’s a threefold increase in defence spending compared with 2021 – and amounts to “military Keynesianism”, says Vasily Astrov of the Vienna Institute for International Economic Studies. “The regime is resilient because it sits on an oil rig,” says Elina Ribakova of the Peterson Institute. “The Russian economy now is like a gas station that has started producing tanks.”
Will this last?
In the long run, it’s not sustainable, says Martin Sandbu in the Financial Times. Redeploying resources towards war just “camouflages the underperformance of the ordinary economy”. The rest of industry has stagnated: car production, for example, is down a third. In other words, Russia’s rising GDP looks “real” enough, but the aggregate figure reflects a radically “changed composition of economic activity” – and even then, on Russia’s own numbers, it has still barely ca
