In the days following Russia’s full-scale invasion of Ukraine in February of 2022, the US and other allies tried to isolate Russia’s economy by imposing major sanctions and restrictions.
Hundreds of companies from McDonald’s to Mercedes halted operations in Russia. The country was kicked out of the SWIFT international payment network. Within the first week, it looked like these measures had an impact and sent the Russian economy into a tailspin.
But after an initial tumble, Russia’s economy has stabilized.
Elvira Nabiullina, a longtime leader with Russia’s Central Bank, is credited with stabilizing the country’s economy and keeping Russian President Vladimir Putin’s war machine humming.
“Russia’s economy shifted to war-economy mode,” said Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security. “Nabiullina, her credentials, her experience, her understanding of conventional monetary and macro policy, have been very important to stabilizing Russia’s economy. Her policies align with Putin’s interests.”
Today, Russia’s key interest rate is high at 16%, but the country’s inflation rate remains manageable.
“The war and the war effort has really amplified the role of the state within Russia’s economy, the role of the military, and military procurement within that economy,” Ziemba said.
In a meeting last year, Alexander Lukashenko, Belarusian strongman leader and Putin’s closest ally, praised Nabiullina.
“Even our enemies say that Elvira Nabiullina was able to manage the Russian economy, overcome the currency problems, despite the sanctions,” he said.
Sanctions are only as powerful as the set of coalitions that impose them, Ziemba pointed out.
“There’s a whole bunch of countries that are quite willing to take Russia’s money and buy goods. I mean, the global economy is not united against Russia to say that invading the neighbor is not OK.”
Russia has pivoted away from Europe, significantly increasing trade with countries like India and China.
And, Ziemba said, Russia is still making billions selling oil and gas.
“Global leaders, including the United States, recognized that the global economy wasn’t ready to do without Russia’s commodity exports, and so they made a choice to try to keep Russian oil, Russian metals, Russian grain, Russian fertilizer on the market, but pay them less for it,” she said.
All of these factors demonstrate the limits of what sanctions can do to inflict damage on a large economy, Ziemba said.
In fact, the International Monetary Fund recently reported that it expects Russia’s economy will grow more than 3% this year, surpassing all of the world’s advanced economies, including the US.
But that doesn’t mean that Russia’s economy will remain on good footing.
Russia’s war effort could create new economic problems, according to Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center who used to work at Russia’s Central Bank.
“The amount of state expenses depends on how much money Russia is going to spend on the military, and this also creates some risks for the budget,” Prokopenko said, adding that depending on the situation on the front lines, the Kremlin may feel pressure to spend more on the military.
It’s already spending a lot of cash to recruit more men to join the army, which is causing problems in the labor market.
Russia desperately needs workers and three major powers — the army, the civil sector, and military manufacturers — are all competing now for workers on the Russian market, Prokopenko said. As a result, wages are growing, but this dynamic may not be sustainable.
“All of this is pushing up wages, all of this is creating huge consumer demand, all of this is a cause of inflation. Big inflation is a problem for Putin,” Prokopenko said.
As of right now, the Kremlin has been able to balance its budget. But Prokopenko said that during a time of war, there are many unknowns that could create a shock to the system — like a tightening of sanction enforcement, a drop in oil prices, or an unforeseen development on the battlefield.
Such conditions pose major risks to Russia’s wartime economy, and can quickly make it look much more vulnerable than it does now.
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