Russia’s war economy

18 August by Michael Roberts

“russian colors” by frankieleon is licensed under CC BY 2.0.

The currency has been steadily losing value since the beginning of the year and has now slid past RUB100/$. That’s down 26%. The main cause of this decline is the fall in oil export revenues and the rising cost of military spending to prosecute the war against Ukraine.

When the Russian invasion began in February 2022, the ruble dropped to a record low of RUB150/$. Rich Russians took their money out to the tune of $170bn, most of which ended up in Europe’s property and banks.

Russia: net foreign capital flows $bn quarterly

Weeks after Russia invaded Ukraine, a US official predicted that sanctions would cut Russia’s GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
in half. But that proved nonsense. It fell just 2.5%. That’s because the central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

introduced capital controls that stopped the flow of money from rich Russians out of the country. And as the price of energy rocketed over the next year, the ruble gained strength and reached a seven year high. Export revenues rose, while the sanctions and falling domestic demand led to a drop in imports, so Russia’s trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. and current account rose sharply, bolstering the ruble. Two-thirds of the trade surplus was due to rising export revenues and one-third due to falling imports.

It seemed that sanctions on Russian banks and companies and a ban on using Russian energy had failed to bring the Russian economy to its knees. Russia was able to reroute its energy exports into Asia (if at a lower price) and find ’shadow’ shipping to deliver it.

But energy prices have slipped back in the last six months and the price cap on Russian oil imposed and enforced by the NATO NATO
North Atlantic Treaty Organization
NATO ensures US military protection for the Europeans in case of aggression, but above all it gives the USA supremacy over the Western Bloc. Western European countries agreed to place their armed forces within a defence system under US command, and thus recognize the preponderance of the USA. NATO was founded in 1949 in Washington, but became less prominent after the end of the Cold War. In 2002, it had 19 members: Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the UK, the USA, to which were added Greece and Turkey in 1952, the Federal Republic of Germany in 1955 (replaced by Unified Germany in 1990), Spain in 1982, Hungary, Poland and the Czech Republic in 1999.
allies has had some effect in reducing export revenues, while the costs of the war have increased. The 2023 defence budget is planned at $100bn, or one-third of all public spending.

Government spending on the war, RUB bn

Russia’s national output rose 4.9% in Q2 2023 compared to the same period in 2022. That sounds good, but much of the rise in output has been in the production of military equipment and services. The output of “finished metal goods” ie weapons and ammunition, rose by 30% in the first half of the year compared with last. Production of computers, electronic and optical products also rose by 30%, while the output of special clothing has jumped by 76%. By contrast, auto output is down over 10% year-over-year. Russia is now a war economy. Russia has been able to import many of the goods that the West has banned—from iPhones to cars to computer chips—but it does so via third countries, a roundabout way that increases prices.

Immediately after the start of the invasion real wages for the average Russian fell sharply as the domestic economy dived. But energy revenues came through and low domestic demand kept price inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. low. As Russia workers were more and more employed in arms production or in the army, wages rose. In May 2023, real wages were up 13.3% year-on-year. Such an improvement no doubt helps keep support for the Putin regime.

But in recent months the energy revenue bonanza has fallen back. Russia’s energy export revenues are expected to decline from $340 billion in 2022 to $200 billion this year and next. Russia’s current-account surplus shrank to $25.2 billion in the first seven months of the year, an 85% fall compared with the same period last year.

At the start of the war, Russia had a large stock of financial assets ‘for a rainy day’. But it is now raining, if only as a drizzle. Russia’s National Wealth Fund (NWF) had savings and assets worth 10.2% of GDP at the beginning of the invasion. But that is now down to 7.2% as rubles lose value and war spending rises.

And the domestic civil economy and production is suffering. Sanctions are blocking technology imports and other key manufacturing parts. Some 65% of industrial enterprises in Russia are dependent on imported equipment.

But the impact of sanctions is slow burn. It may weaken Russian productivity and domestic production over the long term, but it is not going to stop the Russian war machine now and energy revenues to finance it. That could only happen if fast-growing Asia led by China and India refused to buy Russian oil and gas, but the opposite is the case – they are buying more at cheap prices.

Russia’s war machine will continue but as emigration of skilled workers and capital owned by richer Russians accelerates, it is weakening the currency and reducing available skilled labour in production.

Inflation had fallen in the last year due to the collapse in domestic demand and imported goods. But if the currency continues to dive, then it will start to rise, increasing the pressure on the central bank to raise interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to support the currency and try to curb inflation. A stronger ruble and higher interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates would mean lower foreign currency revenues and a weaker domestic economy. That will hit Russian households hard.

As it is, potential average growth is probably no more than 1.5% per year as Russian growth is restricted by an ageing and shrinking population, with low investment and productivity rates. The profitability of Russian productive capital even before the war was very low.

The economics suggest that Putin can continue the war against Ukraine for several years to come, even taking into account the collapse in the currency and rising inflation and interest rates. Of course, that does not take into account political developments (like the Wagner revolt or gains by Ukraine’s NATO backed army). They could threaten Putin’s rule. And there are presidential elections in Russia next March – as supposedly there are in Ukraine. Both Putin and Zelensky must face the voters – at least theoretically.

But the underlying message is that the weakness of investment, productivity and profitability of Russian capital, even excluding sanctions, means that Russia will remain feeble economically for the rest of this decade.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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