The government continues to refer to its invasion of Ukraine as a “special military operation,” but the latest budget numbers clearly indicate that the economy is undergoing significant changes due to the conflict.
Despite facing harsh sanctions, the country’s financial situation remains strong, allowing it to invest more funds into its military.
Russia’s finance minister recently declared, echoing a slogan from World War II, that everything required for the front is being prioritized in the government’s latest spending plans. Although the government still refers to its actions in Ukraine as a “special military operation,” the new budget figures clearly indicate a growing emphasis on restructuring the economy for wartime.
A significant portion of the country’s spending for the next year, roughly $109 billion, will be allocated to “national defense,” redirecting funds that might otherwise have gone to sectors like healthcare, education, and infrastructure. More notably, 6 percent of the nation’s total output is now being channeled into Russia’s war effort, more than double the pre-invasion level.
Since Russia’s incursion into Ukraine in February 2022, its economy has had to adapt rapidly to significant changes. The European Union, its largest trading partner, severed economic ties, disrupting established supply chains and reliable sources of foreign income. The United States leveraged its financial power to freeze hundreds of billions of dollars in Russian assets and disconnect the country from the global financial system.
Nineteen months later, the economic situation is mixed. The Russian economy has proven to be more resilient than Western governments initially assumed, despite a series of punishing sanctions. Moscow has secured alternative buyers for its oil and has injected money into the economy to support its military efforts, ensuring almost full employment and higher weekly wages. Total output, estimated to increase by up to 2.5 percent this year by the Russian Central Bank, could potentially surpass that of the European Union and even the United States.
However, that’s only part of the picture. Laura Solanko, a senior adviser at the Bank of Finland Institute for Economies in Transition, pointed out that during times of war, gross domestic product (GDP) is not a reliable indicator of well-being. The production of bullets, for instance, can boost a country’s GDP without necessarily enhancing the overall quality of life.
The constant demand for foreign currency, needed to pay for imported goods or as a secure investment, has also led to a rapid depreciation of the ruble’s value. Last week, it reached a symbolic threshold of 100 rubles to the dollar, exacerbating inflation and causing increased concerns among consumers.
The surge in government spending and borrowing has put additional strain on an already overheated economy. The central bank swiftly raised interest rates to 13 percent during the summer as annual inflation continued to rise. These higher rates, which increase the cost of business expansion and consumer credit, are likely to dampen economic growth.
Consumers are also feeling the pinch in their everyday purchases. Lidia Adreevna, while shopping at an Auchan supermarket in Moscow, noticed that dairy products, especially butter, meat, and even bread, have become more expensive. She attributed this to the central bank’s policies.
“People are adjusting to these changes,” she remarked, “but nothing lasts forever, not love or happiness.”
Other retirees at the store also mentioned the rising prices of meat and poultry, something almost half of Russians have observed in the past month, according to a survey by the Moscow-based Public Opinion Foundation published on Friday. Respondents also noted increases in the prices of medicine and construction materials.
To alleviate shortages and slow the rise in energy prices, Moscow imposed a temporary ban on diesel and gasoline exports last month. However, these restrictions further reduced the inflow of foreign currency into the country.
The outflow of funds is so concerning that the government has warned it may reintroduce controls on money leaving the country.
With a presidential election scheduled for March, President Vladimir V. Putin acknowledged last month that accelerating inflation, driven by a weakened ruble, is a major concern. Managing price increases may dissuade the government from its usual pre-election social spending.
“Even for an authoritarian government, a lower standard of living can be uncomfortable,” noted Charles Lichfield, deputy director of the Atlantic Council’s Geoeconomics Center.
As Russia imports a wide range of goods, from telephones and washing machines to cars, medicine, and coffee, a devalued ruble makes it harder for consumers to afford the things they are accustomed to buying.
The United States, the European Union, and countries aligned with Ukraine have persistently attempted to weaken Russia through extensive sanctions.
The consequences were swift and severe in the spring of 2022. The Russian ruble depreciated, prompting the central bank to raise interest rates to 20 percent to attract investors. Additionally, the government imposed strict controls on capital to prevent money from leaving the country.
However, the ruble has since recovered, and interest rates have declined. Russia has successfully found eager buyers for its oil, which was being sold at significantly reduced prices, as well as for liquefied natural gas and other raw materials. More recently, Russia has managed to circumvent the $60 per barrel price cap on oil imposed by the Group of 7 nations as global oil prices have risen once again.
China is among the countries that have increased their energy purchases from Russia and expanded their trade relations, a trade that was previously conducted with European nations. Trade with China grew by an annual rate of 32 percent in the first eight months of this year. Trade with India tripled in the first half of the year, and exports from Turkey rose by nearly 89 percent during the same period.
Simultaneously, the ongoing war is consuming additional portions of Russia’s budget, apart from direct military expenditures. An extra 9.2 percent of the budget is allocated to “national security,” which encompasses law enforcement. Funds are set aside for injured soldiers, families of those killed in battle, and for “integrating new regions,” a reference to occupied territory in Ukraine.
Sergei Guriev, a Russian economist who fled the country in 2013 and is currently the provost at Sciences Po in Paris, noted that accurately assessing the Russian economy is challenging. Existing economic models were devised before the war and were based on different assumptions, and the published budget figures are incomplete.
The implications of these developments for the daily lives of Russian households are more difficult to gauge.
“In general, it is challenging to compare the quality of life before and after the war,” Mr. Guriev stated. “It’s difficult to ascertain what Russians believe. People are apprehensive.”