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Russia's economy going strong

Miltiades Schmidt
February 21, 2024

Two years of sanctions have failed to weaken the Russian economy enough to stop it waging war against Ukraine. If anything, the opposite has happened: Russia's economy grew by 3.6% in 2023. 


[Video transcript]

The defense industry is currently the most important pillar of the Russian economy. Thanks to significantly increased government spending, the defense industry accounts for 10% of GDP. Other sectors such as the steel industry are also benefiting.

After the slump in 2022, the Russian economy is now growing, according to data from Moscow. Growth is also forecast for 2024.

(Sebastian Hoppe, Russia expert, Free University of Berlin) 
"What's happening right now is that Russia is actually, in a way, almost ironically becoming more like the Soviet Union in that it has high spending on the military and in some cases heavy industry, and at the same time the level of consumption is falling for the population.

But industrial production is also doing surprisingly well, for example in the automotive sector.

Components are increasingly coming from China after the Europeans withdrew from Russia. Thanks to Chinese imports, the Russian economy is being kept afloat.

(Sebastian Hoppe, Russia expert, Free University of Berlin) 
"China is of course not officially participating in the sanctions, so it is not a partner, so to speak, of Western states when it comes to sanctions."

To finance imports, Russia needs export income from gas sales. These have fallen dramatically at times. The EU's extensive import ban seems to have had an effect. Tapping into new customers with new pipelines is only a partial substitute.

(Giovanni Sgaravatti, Energy research analyst, Bruegel Institute)
"The volumes involved with the pipelines are very, very different when you compare them for what the pipelines can transport to the EU or can transport to China. And even the new infrastructural projects like Power of Siberia 2 are still in the infant state."

However, oil sales, Russia's second most important source of export revenue, are almost as good as before the war in Ukraine. This is despite EU sanctions aimed at enforcing a price cap of 60 US dollars a barrel.

(Giovanni Sgaravatti, Energy research analyst, Bruegel Institute) 
"Transportation of oil probably [is] violating the cap. So there is weak enforcement on the side of authorities. There is also shadow trading where, you know oil is discharged and charged on another vessel overseas."

More and more oil is ending up in India. Its most important oil supplier is now Russia. 

Nevertheless, Russia's growth is partly financed on credit, including military spending. How long can Putin actually afford to do this?

(Sebastian Hoppe, Russia expert, Free University of Berlin) 
"You can ride that for quite a while. Russia had a very low debt level at the beginning of the war, it still has a low debt level even now."

Russia does not look set to run out of money to finance the war in Ukraine anytime soon.