Russia's economy under the fog of war

Russia’s war against Ukraine has placed its economy under unprecedented pressure, and this pressure has grown as sanctions continue to take effect. Before the war, the Russian economy was heavily dependent on oil exports, and fluctuations in international oil prices were the main driver of its economic health. Since the full-scale invasion in February 2022, Russia has faced severe sanctions that have disrupted its trade patterns, limited its access to foreign exchange reserves, and restricted the functioning of its financial system.

How the war is reshaping Russia's economic future

The purpose of this report is to assess the current state of the Russian economy in light of the ongoing war and sanctions. It aims to provide a clearer picture of how economic indicators like inflation and GDP growth are affected by Russia’s military actions and how the economy is changing under the weight of sanctions and financial pressure. It also seeks to explore how these changes may affect Russia’s long-term economic outlook, especially in terms of investment, productivity, and growth.

"One of the biggest challenges is obtaining reliable data, as much of Russia's economic reporting has become entangled with wartime propaganda. The Russian government has stopped publishing large swaths of data, and the numbers that are available are often skewed to present a more favorable picture," the researchers note in the report.

Key issues:

• Russian economic statistics should be treated with caution: Official statistics, such as GDP growth and inflation rates, have been manipulated to support the narrative that the Russian economy is stable, but alternative measures suggest a different reality.
• Mounting economic imbalances: An increasingly inconsistent mix of fiscal stimulus and monetary tightening in Russia's economic policies may lead to an economic crisis.
• Dependence on oil prices: The price of oil remains a critical factor for Russia's economic health, with any drop in oil prices directly impacting the country’s foreign exchange revenues, inflation, and overall economic stability.

A shrinking financial cushion

The report warns that the Russian government’s financial reserves, which have been used to finance war expenditures, are depleting rapidly and could run out within a year. Once these reserves are exhausted, the central bank will face pressure to loosen its key interest rate, or even resort to printing more money, leading to potentially high inflation and a weakened ruble.

Contact

This report was written by a team of researchers at SITE, affiliated with the Stockholm School of Economics (SSE).

• Anders Olofsgård, Deputy Director at SITE and Associate Professor at SSE.
  Email: Anders.Olofsgard@hhs.se

About SITE

SITE was set up as a research institute at the Stockholm School of Economics (SSE) in 1989 with the mandate of studying developments in the Soviet Union and Eastern Europe. Today, SITE is a leading research-based policy institute on these issues. SITE has also built a network of research institutes in the region (FREE Network) that includes the Kyiv School of Economics (KSE). KSE not only provides a premier economics education to future leaders in Ukraine but is also involved in the analysis of the Ukrainian, as well as the Russian, economy, including analysis of the role of sanctions in limiting Russia’s destructive capacity. KSE has been an important contributor of data and analysis that underlies this report.

Photo: UladzimirZuyeu, Shutterstock