Within days of Russia launching its invasion of Ukraine on February 24, 2022, its economy went into a tailspin.
The rouble plummeted to an all-time low against the dollar and would have fallen further if not for the central bank spending billions to support the currency. The country’s main stock exchange lost a third of its value, and the MSCI index of Russian company shares traded in London and New York dropped by 45 percent.
As months passed, Western companies exited Russia, resulting in a capital flight totaling £239 billion by the end of the year. In December 2022, the G7 nations and the EU imposed a $60-per-barrel price cap on Russian oil to weaken its war finances.
Remarkably, Russia’s economy now appears robust at first glance. The rouble, which had fallen to 133 to the dollar, is now at 92, close to its pre-war rate of 77. Thanks to sanctions-evading exports, Russia continues to earn hundreds of billions from oil and gas sales. The unemployment rate has hit a record low of 2.8 percent, and in January, GDP rose by 4.6 percent year on year.
This turnaround is largely due to Russia’s shift to a war economy, with a military budget tripled to $100 billion, or 6 percent of GDP. Reports indicate Russia is massing over half a million troops on the front line with Ukraine. The troubling implication for the West is that Russia’s continued prosperity relies on more conflict, not less.
The Russian economy of 2021 has been replaced by a war-driven economy, producing conscripts, artillery shells, and drones instead of graduates, cars, and refrigerators. As the real economy contracts, state war spending fills the gap.
Without ongoing conflict, this economic revival cannot be maintained. To retain legitimacy and avoid unrest, Putin needs continuous war, leading to increased militarization and potentially the invasion of a NATO state.
Further evidence of this shift came earlier this week with the replacement of defense minister Sergei Shoigu by deputy prime minister Andrei Belousov, an economist. This move suggests Putin aims to better align the Russian economy with the war effort, professionalize its management, and reduce corruption.
