With more than 16000 sanctions having been imposed by the United Kingdom, the United States, Australia, Japan, the European Union, and Canada, why does the economy of Russia continue to grow? Half of Russia’s total reserves of $350 billion are frozen. Technology, minerals, and all other kinds of exports are banned from Russia including flights. Furthermore, some banks were blocked from using SWIFT, a worldwide financial conduit that facilitates the easy and quick flow of funds across countries.
Russia faced various sanctions after the annexation of Crimea in 2014 which is considered an illegal occupation by the United States and its allies. The sanctions were further expanded after Russia announced a special military operation in Ukraine’s Donbas region in February 2022. The main purpose of the sanctions was to compel Russia to withdraw its forces from Ukraine by crumbling its economy and isolating it from the world.
To make things worse, the G7 fixed the price of Russian oil to decrease its earnings, and foreign companies were forced to leave Russia. Despite all this, the country’s macroeconomic indicators are excellent according to the International Monetary Fund (IMF), with the economy of Russia expected to grow 3.2% in 2024. IMF projects over 3.0% GDP growth while inflation is still 7.7%, compared to 7.4% in 2021. Recently it became the fourth largest economy in terms of Purchasing Power Parity (PPP) overtaking Japan. One of the reasons behind Russian economic growth is its huge oil and gas resources. Before the Russia-Ukraine war, the US was the top importer of Russian petroleum products, valued at over 1.4 billion USD in February 2022.
Energy Exports
Russia’s major revenue come from energy exports i.e. oil and natural gas. Despite facing US sanctions, no major blow occurred to Russia’s government in terms of its exports. These exports have rather increased and are even projected to further increase in 2024 by 14% and 7% for LNG and pipeline exports respectively. This growth is largely due to the fact that India and China are now the major importers of Russian oil and gas. In 2022, China and India’s imports were 1.9 million barrels per day (mb/d) and 0.9 mb/d respectively. By 2023, China’s exports increased to 2.3 mb/d and India’s to 1.9 mb/d.
China is also not adhering to the prices of Russian oil set by the Western bloc. Instead, China is buying oil at prices above the imposed cap. Russia has also partnered with North Korea which in February 2024 sent 6700 containers carrying ammunition in exchange for Russian oil, raw materials, and food. From 5th December 2022 till 20th April 2024, China bought 48% of Russia’s petroleum and 45% of Russia’s coal exports. China-Russian trade increased by more than 64% from 2021 to a record $240 billion in 2023.
Investment Projects
Another big reason for the country’s growth lies in Russia’s large-scale investment projects. In a recent visit to China, President Putin extended a warm welcome to Chinese car manufacturers in Russia following the escalation of tariffs, quadrupled by 100%, on Chinese electric vehicles. Putin is also focused on finalizing the Power of Siberia 2 project with China to expand its natural energy exports.
Moscow has also engaged in discussions with Deputy Prime Ministers of Tajikistan and Kazakhstan to discuss economic and investment projects. Currently, Russia is Tajikistan’s largest foreign trade partner and shares industrial projects worth $26 billion with Kazakhstan.
Foreign Companies in Russia
Many foreign companies left Russia due to international pressure after the war broke out with Ukraine. According to Leave Russia Project, more than 300 companies have closed down their operations in the country including major players like British Petroleum, Nestle, and BMW. However, 1500-2000 foreign companies still operate in Russia. If these companies had also ceased their functions then it would have been a major financial hit to Russia’s GDP.
However, larger corporations such as AstraZeneca, Emirates, and Pepsi’s dairy business still continue their operations due to Russia’s policies. Russia imposed an exit tax on companies which was about 15% of the sale amount. Another policy was to impose a 50% discount policy on the sale of the assets of companies. This made it extremely costly for Western companies to leave. Some companies like AstraZeneca have also cited moral reasons for continuing their operations i.e. providing medications to Russia, especially during the war.
Wartime Spending
The revenue generated from oil exports in return fuels the defense industry. Russia spent 109 billion US dollars on the military and defense sector in 2023 which was nearly a 7% increase from 2022 and is further expected to rise in 2024. Moreover, production in industries related to war has increased to 60% in 2024. This wartime spending is contributing to an increase in Russia’s GDP.
The Russian government is using the money from energy exports in the military sector to increase the production of weapons, vehicles, missiles, armored clothing, and food packets. To fulfill these large orders, the factories have increased their industrial output and in doing so has hired more laborers. Hence, unemployment decreased to a record low of 2.6% and industrial output increased.
The hired workers use their earnings on other goods and services and hence further stimulate other sectors of the economy, but these effects are only short-term; according to some economists, long-term challenges will soon kick in due to sanctions. Some economists hold the view that the government is allocating a major portion of the budget to the military sector only and this is leading towards the misallocation of resources further contributing to less investment in other industries and infrastructure.
Once the war ends, Russia will have a challenging time balancing its economy. Workers from war-related industries would again need to find employment opportunities and more investment in other economic sectors would be needed as well.
Diplomacy
Russia and China have been making good diplomatic efforts towards Arab countries especially African states and Afghanistan. Russia exports 52% of its goods to BRICS nations and imports 57% from them. Recently, St Petersburg Economic Forum hosted the delegations of more than 130 nations which shows that Russia is not isolated. President Vladimir Putin said, “Sanctions on Russia have failed to isolate it and instead led to an ‘expansion’ in its trade with “the markets of the future.”
Alongside other exports, the overall trade volume between Russia and China reached $240 billion, and trade with India amounted to $65 million. More importantly, 90% of the mutual trade between China and Russia is done in their own currencies instead of US dollars. Additionally, Presidents Xi and Putin noted during their most recent meeting in Beijing that 90% of trade between the two countries now takes place in their respective currencies rather than US dollars.
In addition, President Putin stated that he is happy to see Chinese automakers operating in Russia, following the US announcement that taxes on Chinese electric vehicles would be increased fourfold to 100%. Moreover, China exports dual-use goods to Russia for both military and commercial use. According to the Carnegie Endowment Think Tank report China exports more than $300 million worth of dual-use goods each month that the US and its allies have designated as “high-priority” goods required for Russia to produce weapons.
Recently, Sergey Lavrov, Russian Foreign Minister, visited African countries including Chad, Congo, Burkina Faso, and Guinea. Russia is eager to expand its investment and trade with various global markets, pursue diplomatic missions with countries, and curtail Western support.
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Mr Aamir Hayat is a student of Defence and Strategic Studies at Quaid-e-Azam University Islamabad.
Inshaal Sarfraz is currently pursuing her BA/LLB from LUMS, with a minor in history. She is a writer at heart, a pianist by hobby, and a tennis enthusiast in between deadlines.
Mr Muhammad Mudassir is a student of Bachelors of Science in Defence and Strategic Studies at Quaid-e-Azam University Islamabad.