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Russia’s economy after two years of war UPSC NOTE

 Surprising resilience of the Russian economy despite facing extensive sanctions following its invasion of Ukraine

  • Two years after its full-scale invasion of Ukraine, Russia is still facing an unprecedented number of economic sanctions.

  • It has been excluded from major global financial services, and around €260 billion (£222 billion) of its central bank assets have been frozen. 

  • Russian airspace is closed to most western planes, and western ports are closed to Russian vessels. 

  • A formal cap has been imposed on buying or processing Russian oil sold for more than $60 per barrel (world prices currently fluctuate between $80 and $100). 

And in theory, it is illegal to sell Russia anything that could be used by the military.

  • Sanctions have had some effects. 

  • According to the IMF, Russia’s GDP is around 7% lower than the pre-war forecast.

  • Despite all of this, Russia’s economy has not collapsed. 

  • But it does look very different, and is now entirely focused on a long war in Ukraine — which is actually driving economic growth. 

  • In fact, the IMF expects Russia to experience GDP growth of 2.6% this year

  • That’s significantly more than the U.K. (0.6%) and the EU (0.9%). 

  • Similarly, Russia’s budget deficit (the amount the government needs to borrow) is on track to remain below 1% of GDP, compared to 5.1% in the U.K. and 2.8% in the EU

  • One reason for this relative resilience is Russia’s strong, independent central bank

  • Since 2022, it has imposed massive interest rate hikes (currently at 16%) to control inflation (still above 7%).

  • This has been combined with government-imposed controls which make it almost impossible for Russian exporters and the many foreign companies still operating in Russia to take money out of the country

  • Together, these policies have helped to avoid a total collapse of the ruble, by keeping the currency flowing inside Russia.

  • Russian firms have also learned to sidestep sanctions, with the oil cap being a prime example

  • In theory, no Russian oil should be traded with the west above the cap, which would have a massive impact on Russia’s public finances

  • In practice, it has been circumvented by a large “dark” fleet of uninsured vessels and the use of accounting loopholes

  • And while sanctioning countries are trying to tighten the rules, Russia’s public coffers have actually been flooded with oil money

  • Many countries have also made money playing the role of intermediaries.

  • Turkey, China, Serbia, Bulgaria and India are among those which have reportedly circumvented sanctions, and carried on selling goods to Russia.

  • Those products are understood to often include dual-use goods such as microchips or communication equipment that are subsequently used by the Russian military. 

  • And despite recent efforts, a full regime of extra-territorial trade sanctions — which ban any foreign company from trading with Russia — is still far away.

  • Thirty-five years after the fall of the Berlin Wall, it has become clear that resource-rich Russia has become much poorer than its former Soviet neighbours such as Estonia, Latvia, Poland and Hungary, who pursued the route of European integration.

  • The Russian regime has no incentive to end the war and deal with that kind of economic reality.

  • So it cannot afford to win the war, nor can it afford to lose it

  • Its economy is now entirely geared towards continuing a long and ever deadlier conflict.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Russia’s economy after two years of war UPSC NOTE
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