Uncertainties about the situation in Russia have increased as the war in Ukraine enters a stalemate. The reduced size of the military parade in Red Square, in addition to internal security threats, exacerbated the crisis the country is going through. The Russian economy also faces major challenges as interest rates remain high, which indicates that the economy is suffering from inflationary pressures amid continuing discussions about the possibility of raising interest rates further.
In this report, published by the Modern Diplomacy website, writer Haoyu Henry Huang spoke in detail about the negative effects of the war on the Russian economy, with many indicators warning of the possibility of an imminent economic collapse.
The structural defects that the Russian economy suffers from, along with the sanctions, have made Moscow unable to bear the costs of the war since its beginning. The repercussions of the war, such as irresponsible government spending and workforce shortages, also pose a major threat to the future of the economy.
Despite the apparent economic growth, the Russian economy suffers from deep structural problems that make it unable to withstand long-term wars. Before the war, the Russian economy relied heavily on energy and raw materials exports as its main source of income.
Despite achieving a trade surplus over the years, fluctuations in global energy prices have greatly affected annual income. For example, the decline in oil prices in 2014 and the subsequent economic recession demonstrated the fragility of Russia’s sources of income. Russia’s heavy reliance on importing manufactured goods since the Soviet era also reflects an imbalance in the distribution of industries, which makes the economic structure unsuitable for a long-term war.
In addition, the cost of modern wars has been a burden that Moscow cannot bear, an example of which is the Russian military operations in Syria in 2015, which quickly depleted Russia’s stock of munitions, and its cost reached $4 million per day for air operations alone. As for the current war in Ukraine, its costs are much higher due to the scale of operations and the number of forces required.
The repercussions of the war on expenses
The fragility of the Russian economy reflects its direct impact on military expenditures. Military expenditures have remained low through 2022, preventing the implementation of many essential upgrades. For example, the deployment of advanced tanks such as the T-14 was not seriously considered until after the start of the Russian-Ukrainian war.
The Russian Navy and Air Force were also late in updating their equipment. Looking at Victory Day parades in recent years, it is clear that Russia lacks the capacity to store and mass-produce military equipment, which reflects decades-old structural flaws.
The sanctions imposed on Russia have also proven to have a long-term impact. Although economic indicators were initially stable, the negative effects of the sanctions gradually appeared. Russia’s exports have decreased significantly and it has been forced to sell oil and natural resources at below market prices.
This situation weakened Russia’s ability to generate revenue. Furthermore, Russia’s access to foreign currencies has been restricted with sanctions imposed, forcing the Moscow Stock Exchange to suspend trading in euros and dollars. These measures limited Russia’s ability to mobilize the necessary financial resources to support the war.
Secondary penalties
Threats of secondary sanctions have reduced Russia’s trade relations. For example, Chinese banks have stopped issuing letters of credit in dollars to the Russians since the beginning of the war. Small Chinese banks have also stopped accepting Chinese yuan-based transactions with Russia due to fear of US sanctions.
In Central Asia, Kazakh and Uzbek companies have been hit with Russia-linked sanctions, making it more difficult for Russians to use regional banks to conduct their transactions. As more international parties cooperate with the sanctions, Russia’s international trade channels are shrinking significantly.
The war is also draining Russia’s limited economic resources, due to manpower shortages and uncontrolled government spending. Reports indicate that 73% of Russian companies suffer from a labor shortage, which raises questions about the future of production capacity and growth. Since the beginning of the war, nearly a million Russians have left the country, most of them with advanced degrees and the skills necessary to support the economy, which exacerbates the crisis.
