top of page

Russia sees strong growth, but unorthodox policies come at a cost

Updated: Feb 7

Russia’s Remarkable Recovery

The IMF year’s world economic outlook forecasted the Russian economy grew 2.6% in 2024, double expectations and faster than all G7 economies for the second year in a row. The figures show how the Western-led sanctions regime has successfully severed the link between Russia and the West but failed to substantially degrade the economy or change Moscow’s behavior in the wake of the 2022 invasion of Ukraine. Such unexpected growth comes despite capital outflows, lack of capital markets access, loss of millions of workers from war damages and emigration, and a dozen rounds of US-EU sanctions on Russia’s oil industry. 

At the onset of the war, the combination of capital controls, drastic government spending, and flexible monetary policy enabled Russia’s economic policymakers to strike a balance of large-scale fiscal stimulus without provoking a dramatic rise in inflation. While the central bank especially has won over begrudging plaudits from observers for this feat, decades of conservative fiscal policy and elevated oil prices covered the newly expansionary fiscal policy which ran over 3 percent of GDP on average over the last three years.

The combination of post-covid demand increases and geopolitical risk pushed oil prices higher, Meanwhile, holes in Western sanctions combined with opportunistic buyers like China and India kept hard currency flowing into the Kremlin’s coffers.  

Funding the Fighting

Despite the appearance of a miraculous turnaround, headline performance hides widening structural cracks in the increasingly closed economy. Even with record oil revenues, the Russian finance ministry has been forced to burn through trillions of roubles in savings accrued as part of its sanctions proofing strategy after the 2014 post-Crimean invasion response. Such spending has kept Russian figures relatively strong, with the economy only contracting -2.1% in 2022 compared to some projections as high as -20%. Rather than collapsing, a stabilized Russian government began large-scale spending to fuel its war effort and placate its people, boosting growth in the process.

Rather than representing some remarkable feat of financial engineering, the Russian recovery and growth is funded by oil revenue with the shortfall taken out of sovereign savings. In the three years since its invasion of Ukraine, Russia has raised military spending to around 40% of expenditures, increasing defense industry output by 35% in the process according to the Bank of Finland Institute for Emerging Economies. The sudden surge in spending has not taxed state finances yet despite being cut off from international capital markets. A combination of high savings, low public debt, and economic insularity allows the current economic system to continue on with elevated domestic spending for years. 

Counting the Costs

While such policies give the appearance of dodging a bullet, Moscow's policies are as subsidized as they are costly, mortgaging the country’s future as increasingly unorthodox economic policy comes with costs. Import costs have risen dramatically and labor scarcity is rising as more working age Russians get pulled into the war or war-related sectors. Inflation hit 7.5% in 2023 and is likely to rise further as the combination of supply shortages and demand stimulation take their toll. 

Small businesses have also suffered due to high interest rates, little foreign investment, and a reduced confidence as a result of companies leaving Russia. This all makes the Russian economy less diverse and increases the government’s centrality to the $4 trillion economy.

Russian capital is also being diverted towards less efficient defense investments and away from the struggling private sector. Businesses have borne the brunt on both sides of the conflict, as high interest rates, reduced foreign investment, and slumping consumer confidence have forced businesses closures and an emigration uptick. High war spending is also crowding out much needed investment in infrastructure, innovation, and the civilian economy. This combination of reduced market efficiency, input shortages, and degraded infrastructure looks likely to keep the Russian private sector weakened for years. Such weakness could even last decades - reminiscent of the inefficient kleptocratic mono-economies of central Asia - without a much needed, dramatic influx of capital which could only come from a reintroduction to the international market.

Innovation Breeds Unorthodoxy

Government spending continues to provide a Potemkin village of Russian economic strength, however such economic rigidity hides deep macroeconomic imbalances and de-developmental trends. The current situation of trillions in fiscal stimulus amid worsening supply shortages is also reminiscent of the market response to 2020’s COVID-19 shutdown and stimulus policies in the West. As Russia’s war looks likely to exacerbate supply shortages for years to come, increased inflation is likely working its way through the system, albeit delayed and distorted by the government’s growing role as both a financier and consumer of end products. 

However, with the political risks of hyperinflation impossible to accept, byzantine interest rates and austere, archaic tools like price controls look likely. Increased unorthodoxy risks a positive feedback loop whereby market-driven pockets of the economy betray the underlying distortion, prompting progressively deeper state involvement in the economy and higher dependency of Russian households on the state.

The Opposite of Resilient

Unlike Iranian sanctions evasion efforts which saw oil’s role as a share of output decline, Russia’s approach is making the country more dependent on the twin pillars of oil revenue and government spending. Rising non-OPEC oil supply, poor market discipline, and an uncertain global demand picture make lower oil prices and Russia’s budgetary weakness look likely. Structural lower oil prices combined with any end to the war and commensurate war spending for budgetary or reasons thus carries systemic risks to the fragile closed economy.

In such a situation, inflation is the only answer as Russia is forced to spend its way to growth. Yet as is the case in any spending-addicted economy without the buttressing protection of international capital, eventually economic reality will force deep, devastating government spending cuts and difficult political realities that could haunt the Kremlin long after their war’s conclusion.

Russia offers fascinating natural policy experiments of a state-led return to autarky, the limits of countercyclical monetary policy, and potentially an attempt of practical print-and-tax modern monetary theory. However, any short term success which may appear in GDP figures is sowing the seeds of a longer-term regression as seen in other geopolitical aggressive, closed, and patron-dependent economies like Venezuela, Cuba, and China circa 1970s.


 All views expressed belong to the authors and do not reflect formal positions or advise from the Center for Emerging Economies.


bottom of page