As the United States contemplates providing further aid to Ukraine and also considers further sanctions against Russia, it should consider the surprisingly robust state of the Russian economy – and what effect it has on Russia’s ability to maintain its war against its neighbor to the west.
When Russia invaded Ukraine, many observers believed that the cost of the war and the impact of western sanctions would quickly bring Russia to its knees. That has not happened. Indeed, over the last two years – roughly, the period since the war began – Russia’s economy has expanded by 1.8%, less than the U.S. and Italy but more than the largest other developed countries. In contrast, Ukraine’s economy has shrunk by 24%. For 2024, that picture looks even gloomier for Russia’s adversaries; the International Monetary Fund predicts that Russia’s economy will expand by 3% this year, higher than any G-7 country, including the U.S.
That change in both sentiment and results has been reflected in the Russian stock exchange. In the week following the invasion, the market fell by 25% and by October of 2022, was down 40% from its pre-war level. But then it began to recover and by August of last year, following strong economic data, the market jumped and is now 47% above pre-war levels.
Why has Russia’s economy done so well? Some of it is because the country has been spending heavily on the war, doubling its annual military expenditures since 2021, to one-third of the country’s total government outlays. But most of the uplift can be attributed to oil. The invasion spooked world oil markets and paradoxically, as the world’s third-largest oil producer, (behind the United States and Saudi Arabia), Russia was an immediate beneficiary. While oil prices have eased since the immediate aftermath of the war’s beginning, they remain above pre-war levels and so do Russia’s revenues.
That, in turn, is due in large part to the ineffectiveness of western sanctions. Indeed, Russia’s oil exports last year were almost exactly the same as they were in 2021. But inside that overall figure, the mix has shifted considerably. Europe, the U.K., and the U.S., which collectively accounted for more than half of Russia’s oil exports in 2021, virtually eliminated their purchases of Russian oil. But many developing countries, led by China and India, stepped up their purchases and filled the gap.
Russia’s strong economic performance provides further justification for the need to provide more military assistance to Ukraine. Relative to the size of its economy, the U.S. has so far provided less aid than any major European country. Even the package now being contemplated would still leave U.S. spending on a relative basis below that of most European countries. Moreover, it’s important to note that roughly 65% of every dollar that we provide to Ukraine comes back to the U.S. in the form of purchases of military equipment.
Another idea that has gained traction in some policy circles would be to take some $380 billion of frozen Russian assets and use the money to pay for reconstruction of Ukraine. Much of that money is in a European clearinghouse in Belgium so such a move would require cooperation from the European Union, which has been unenthusiastic about the idea. But the Biden administration has backed legislation to seize the $6 billion of Russian assets under U.S. control.
