All is not how it seems with Russia’s economy. The war in Ukraine has had profound consequences for Russia’s economy, bringing the country to the brink of bankruptcy. Despite recorded economic growth, Russia faces a combination of financial challenges that are likely to result in over a decade of economic regression. In other words, Putin is setting Russia up for a potentially devastating economic crisis that will last long after he is gone. In this analysis, I will examine the key factors contributing to Russia’s financial distress and how the Ukraine war has exacerbated these issues.
Immediately following the invasion of Ukraine in February 2022, Russia’s economy contracted significantly, with a 4.4% drop in just a few weeks. Panic ensued as citizens rushed to withdraw money from banks, and the ruble’s external value fell by 40%. The government responded by hiking interest rates to 20% and implementing capital controls, temporarily stabilizing the economy. However, these measures set Russia on the path toward a wartime economy, which has deeply influenced the country’s financial situation.
One of the most significant impacts of the Ukraine war has been its staggering cost. Estimates suggest that Russia has spent between $500 million and $1 billion per day on the war, with the initial invasion costing the country $1.4 billion daily. These costs include direct military expenses such as equipment and personnel losses, but the broader economic consequences are equally devastating. For instance, the war has led to significant losses in human capital, which could cost Russia an additional $2.7 billion in GDP over the coming years.
Sanctions imposed by Western countries, including the U.S., U.K., and the European Union, have further crippled Russia’s economy. These sanctions have frozen approximately $350 billion of Russian assets and imposed limits on Russia’s ability to sell oil, one of its key revenue sources. While Russia has managed to circumvent some sanctions by increasing oil exports to countries like India and China, the long-term effects are evident. The U.S. Treasury estimates that these sanctions have already reduced Russia’s potential economic growth by 5%. Furthermore, sanctions have prevented Russia from diversifying its economy, forcing it to rely heavily on energy exports and military spending.
Russia’s economy has become increasingly dependent on its National Wealth Fund to sustain the war effort. By the end of 2023, this fund had dwindled to just $56 billion, and Russia has been burning through $4.4 billion of it each month. This spending is not just on military operations but also on efforts to improve the standard of living for the average Russian, a costly endeavor estimated to require at least $130 billion. With its cash reserves running low and no clear end to the war in sight, Russia faces a dire financial future.
Russia has also defaulted on its foreign debts for the first time since 1918, further isolating the country from global investors. This default means that Russia will face higher interest rates and stricter loan conditions in the future, making it even harder to recover economically once the war ends. Compounding these issues is Russia’s rising inflation rate, which hit 9.2% in mid-2024. To combat inflation, Russia’s central bank raised interest rates to 16%, with plans to increase them further, making borrowing more difficult for citizens and businesses alike.
The wartime economy has led to a massive increase in public spending, with military expenses reaching 10% of Russia’s GDP by the end of 2023. This has strained other sectors of the economy, particularly those not related to the war. Non-war-related industries have stagnated or declined, and the country’s technological development has been severely hampered. Additionally, Russia’s reliance on a limited number of foreign partners, such as China, Iran, and North Korea, has left it vulnerable to future economic shocks.
Labor shortages are another significant issue. Between 600,000 and 1 million Russians left the country in 2022, either in protest of the war or to avoid conscription. Combined with the high casualty rates among Russian soldiers, this exodus has created a severe labor crisis, with the country lacking 4.8 million workers by 2023. This shortage will further stifle economic growth and make it difficult for Russia to recover after the war.
Looking to the future, Russia’s economy appears set for a significant decline. The over-reliance on energy exports, the depletion of its National Wealth Fund, and the crippling effects of sanctions all suggest that Russia will struggle to sustain its current level of economic activity. Even if the war ends, Russia will face a prolonged period of economic hardship, with limited access to global markets and a diminished workforce. The combination of debt, deficit, and a lack of diversification makes Russia’s financial collapse seem almost inevitable.
In conclusion, while Russia may still show signs of economic growth on paper, the reality is much grimmer. The war in Ukraine has drained the country’s resources, and the measures taken to mitigate the effects of sanctions and military spending are only temporary solutions. Once the war ends, Russia will be left with a weakened economy, massive debt, and a shrinking workforce. The long-term consequences of the war will likely push Russia toward bankruptcy, a situation that could have been avoided had the country not embarked on this costly conflict.
