Russia’s economy was boosted by a sharp increase in defense spending and war-related production. However, the country is struggling with high interest rates. In addition, high inflation and the labor shortage are hampering the economy. The Russian government never tires of boasting about the resilience of its economy. It seems that the sanctions cannot affect Russia. In an interview with ntv.de, Russia expert Michael Rochlitz classifies the alleged stability and explains the price Putin is paying for it.
ntv.de: Since February 23, 2022 The EU has now decided on a total of twelve sanctions packages. How is the Russian economy doing today, almost two years later?
Michael Rochlitz: Surprisingly good. It is much more resilient to crises than initially assumed. At the end of February 2022, experts still assumed that the Russian economy would collapse by up to 15 percent by the end of the year. That was not the case. In the end, Putin only had to record a loss of 5 percent.
How can that be?
The Russian economy is crisis-tested. This has now benefited her greatly. The financial crisis in 2008, sanctions as part of the annexation of Crimea in 2014 and the corona pandemic in 2020 certainly put the country under pressure. Throughout these crises, Russia has managed to build competent regional administrations that know what to do in such exceptional situations.
It seems as if the sanctions have had almost no effect on Russia’s economy.
Michael Rochlitz is Professor of the Economies of Russia, Eastern Europe and Eurasia at St. Antony’s College, University of Oxford.
(Photo: Professor of Economics at the University of Bremen and expert on Russian economics)
An economy that constantly only reacts to crises cannot grow healthily in the long term. Russia’s growth of one percent between 2012 and 2022 was far too low for an economy with such potential. Although the country has become increasingly resilient to crises, the Kremlin has sacrificed higher, healthier growth to achieve this.
What else helped the Russian economy avert a shock?
On the one hand, the Russian central bank reacted very competently. At the beginning of March 2022, it not only radically raised the key interest rate to 20 percent, but also briefly imposed export controls on capital, thus putting the country into an artificial coma. This made it possible to cushion the initial shock of the sanctions. On the other hand, Russia managed to mitigate export controls on gas and oil by building an entire fleet of shadow ships that exported oil anyway.
Has the sanctions policy against Russia failed?
From an economic perspective, the sanctions make sense. They harm the Russian economy and make it more difficult for Russia to wage this war. The fact that Russia is waging war despite foreseeable long-term economic damage is a political decision by the Kremlin. Since the end of 2022, we have seen that Russia’s government is massively converting the entire economy to a war economy. Putin doesn’t want to move away from this anytime soon. Russia plans to invest 40 percent of its budget in the defense industry alone next year. This is madness.
What exactly does a switch to a war economy mean?
Putin has massively increased investment in the defense sector. This initially led to a large deficit, but at the same time also to a demand for workers. At the beginning of 2023, people thought: the Russian economy cannot sustain this. It is now clear that the increase in investment in the defense sector caused the Russian economy to grow by 3.5 percent last year.
What dangers does this strategy pose?
A look at the past shows this quite well. In competition with the United States, the Soviet Union built a war economy that was far too large for the country’s economic capabilities. The USSR ultimately failed because of this. And this is exactly the problem we are currently seeing again. Russia is also currently sacrificing the diversification of its economy. With the arms industry, Putin is currently building a sector that has no future. As soon as the war is over, the arms industry will have to shrink again. This will be a major domestic political problem because many lobby groups are interested in keeping these sinecures. Possible future industries such as the IT sector, artificial intelligence, but also health and science are suffering as a result. However, these sectors are essential to make Russia fit for the future, especially in the post-oil and gas era.
Russia is self-sufficient in food, essential minerals, metals and energy. To what extent are the Russians actually suffering from the sanctions?
Ordinary citizens in Russia aren’t really noticing the sanctions at the moment. Because so much money is being pumped into the economy, they are actually doing better for the time being. While the government boasts about the resilience of the Russian economy, the massive investments are also leading to high inflation. The purchasing power of Russians is decreasing accordingly. Shortly before Christmas, many consumers complained about the high egg prices.
Many men have to fight in the war or have fled abroad with their families for fear of being deployed to the front. What consequences does this have?
The mobilization of reservists and the flight of many Russians abroad is already a huge problem for the labor market. The IT sector in particular is suffering from a shortage of skilled workers. Many of those who have turned their backs on Russia are highly skilled workers and will not come back. Companies are therefore now forced to offer higher wages.
Numerous companies from Western countries have also withdrawn from Russia since the start of the Ukraine conflict. How well can the Russian economy compensate for this?
As a result, the country is losing major competitive opportunities in the high-tech sector. The pharmaceutical industry and the automotive sector in particular are suffering from the decline. No cars are now being built in Russia using Western technology. Instead, people buy cheaply in China. A similar development can also be observed in other sectors. The war has condemned the high-tech sector to remain at a very low technological level.
The sanctions were actually intended to deprive Putin of the economic basis for his invasion of Ukraine. But the raw materials power keeps its war economy going primarily with the income from the oil and gas business with China and India. Why has it not been possible to isolate Russia economically?
Russia has cleverly fueled the resentment that exists against the US, preventing countries like China and India from supporting the sanctions. The war of aggression against Ukraine is not seen as a major problem there. Russia has managed to mobilize countries that have their own problems and would like to continue buying cheap oil from Russia. The increasing potential for conflict between the West on the one hand and the global south and countries such as India, China and Brazil on the other hand has ensured that it has not been possible to build a common front against Russia in order to efficiently enforce the sanctions.
According to Russian economist Vladislav Inozemtsev, John McCain’s simplistic assumption that Russia is “a gas station masquerading as a country” is the reason for the sanctions’ failure. “The main mistake of Western experts and politicians was to spread the fairy tale that the entire Russian economy was state-run,” Inozemtsev recently said. What’s in this explanation?
I wouldn’t say that Russia operates in a market economy more than perhaps many experts assumed. We are currently seeing a return to more government influence on the economy. On many levels, the Russian economy may still function according to market principles. But the sanctions were designed to make things more difficult for Russia’s high-tech defense industry. And the sanctions have already worked. The country is now no longer able to build large quantities of top-equipped tanks. In Ukraine we only see tanks from the 70s and 80s that can be built without Western technology.
How long can the Kremlin continue to finance the war?
Russia can continue the war with its war economy in this way for another two or three years. Putin is currently pushing Ukraine to the wall. Ukraine has the will to fight for its survival, but it lacks the resources. That is why the West should support Ukraine more than it has done so far.
Juliane Kipper spoke to Michael Rochlitz