Since the Russian invasion of Ukraine nearly a year ago, attempts have been made to clobber its economy.

Russian businesses have been cut off from vast tracts of the Western world. Its oligarchs have been sanctioned and had their yachts seized. And yet, by almost every measure the Russian economy has weathered the last year much better than almost anyone expected.

“There are clearly signs of a slowdown in the Russian economy,” said Desjardins principal economist Marc Desormeaux. “But things are not quite as bad as feared when this conflict erupted.”

Beyond the staggering human cost of the war, the economic toll is also adding up. Russia is spending trillions of dollars to fund its military, kept afloat by the oil and gas sector, but without the huge surplus it was used to.

While President Vladimir Putin is crowing about Russia’s resilience, some economists are forecasting a shrinking economy to come, squeezing its ability to keep the war machine running.

More resilient than expected

Before the Ukraine invasion of Feb. 24, 2022, Russia provided 40 per cent of Europe’s natural gas. It sold about 25 per cent of Europe’s oil as well.

As the European market closed off, Russia scrambled to find new markets.

“This was a major [question] at the start of this conflict, would Russia be cut off from the global economy?” Desormeaux told CBC News.

“So rather than sending a lot of oil to the E.U. much of it is being sent to India, to China, to Turkey and to other trading partners.”

Those new trading partners demanded some heavy discounts from Russia.

But combined with a sharp increase in energy prices, the new markets allowed Russia’s economy to keep a solid footing.

“Thus, even though Moscow needs to heavily discount the price of its crude oil on the global market, its energy sector is still providing windfall revenues for the government to deploy in its war efforts given the break-even price of oil production is relatively low,” wrote BMO’s senior economist Art Woo after Russia posted its third quarter GDP results last fall.

“The truth of the matter is that [the Russian economy] is holding up much better than many originally thought after it was hit with an array of sanctions,” Woo wrote.

But it’s shrinking, slowly

Still, economic activity slowed sharply. The Russian economy officially fell into a recession last fall. In the third quarter alone, GDP shrank four per cent year over year.

The International Monetary Fund says after one bad year, with GDP shrinking 2.2 per cent over 2022, the Russian economy is now poised to stage something of a rebound.

In its annual global economic outlook, the IMF says Russia will avoid a recession this year and expand by 0.3 per cent.

The news was seized on by none other than the Russian president.

“Not only Russia withstood these shocks that had been expected, I mean decline in production, labour market levels — by all indications, a little growth is expected, not only by us,” said Putin.

But not everyone is as convinced as the IMF that Russia has rosier days ahead.

Just consider the official numbers. Russia’s finance ministry says oil and gas revenues may fall by another 24 per cent. And its forecast assumes the price of oil will somehow reach $70 US a barrel (Russian oil is currently trading below $60 US/barrel).

“The Russian economy hasn’t collapsed, but it’s shrinking,” said Mark Manger, professor at the Munk School of Global Affairs and Public Policy at the University of Toronto.

“It’s shrinking slowly. And part of that is that until very recently, the money was still rolling in.”

Manger notes, at current prices and with the steep discounts demanded by India and China, Russia isn’t running a surplus anymore.

 

 

Less rosy forecasts

So, contrary to the IMF forecast, many others say the pain in the Russian economy is only starting. The World Bank is forecasting another three per cent drop in GDP this year. The Organisation for Economic Co-operation and Development (OECD) is predicting a six per cent fall in 2023.

And Manger says the combined impact of dwindling surpluses and an economy slowly creaking to catastrophe changes things considerably.

“So now the Russian state is spending a lot of money on a very expensive war,” said Manger, all while less and less money is coming in.

“Putin’s energy windfall is over,” tweeted Robin Brooks, chief economist at the Institute of International Finance.

He says Russia posted huge account surpluses in 2022. But by the end of January of this year, that surplus had been severely depleted.

“The West has huge power to undermine Russia’s war machine. We can cut the flow of money to Russia and end this war,” posted Brooks.

Desormeaux says Russia still has some national wealth funds it can draw on. What he’s watching for is how sanctions will continue to unfold through this year.

“We probably haven’t seen the full impacts of the various rounds of sanctions in the data, yet, some of these things will take time to materialize,” said the Desjardins economist.

 

Behind the front line in the battle for Bakhmut

 

During a break in fighting in Bakhmut, Ukrainian soldiers give first-hand accounts of how they’ve managed to hold on to the strategically key town even as Russian fighters change tactics and sometimes become more deadly.

Manger says some people somehow expected sanctions would crush the Russian economy and force the government to rethink the war in Ukraine. But he says that’s not how sanctions work.

“Sanctions are ineffective in toppling regimes,” said Manger. “And sanctions are probably ineffective in stopping something like a war in the short term. But in the long run, they can completely devastate an economy.”

Manger says maybe the calculation has shifted and time is now on Ukraine’s side as it can afford to wait and see how bad Russia’s economy will get.

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