Putin's War Is Wrecking The Russian Economy

The Russian invasion of Ukraine has entered its third month. With no clear victor or ceasefire in sight, the war will likely continue to wreak havoc in Ukraine and, to a lesser extent, in Russia.

While the destruction and desolation of the Ukrainian cities are starkly apparent, and there are mounting concerns about the welfare of its people and economy, the aggressor, Russia, is not getting away unscathed.

The cost of the war will take a heavy toll on the Russian economy. Besides the financial drain of conducting the war, Moscow also has to offset the damage caused by the western sanctions. Multinational corporations have rolled out their own measures, further jeopardizing the Russian economy. This means that all Russians, who support and oppose the war, will suffer.

Though President Putin had demanded payment for oil in roubles, no country has agreed to it. Moscow has no option but to stop selling oil and gas, which makes up half of its national budget. Russian oil exports are estimated to be around $200 billion a year. Though friendly nations such as China will step in to augment their share, doubling the existing infrastructure to increase oil and gas supply will take years and billions of dollars in initial investment.

The cost of war, for now, is estimated to be around $1.4 trillion for Moscow. Since the beginning of the invasion, the Russian stock market has tanked, and foreign assets of the central bank have been frozen.

Economic Contraction

Many corporations have announced plans to exit Russia completely or to curtail their businesses in the country massively. Some paused sales until further notice, others stopped imports and exports, and some permanently pulled out. The companies taking such drastic measures range from fast-food chains and luxury brands to financial services and tech giants.

The Russian economy is expected to shrink, with the country’s GDP falling by about 15%. With a shortage of raw materials at manufacturing units and an embargo on Russian goods, production will fall. This could add to the high unemployment rates with the departure of MNCs.

Shut out from most of the financial world, investment is likely to remain low in the foreseeable future, leading to less growth and a drop in living standards. Russia, mostly ostracized by world democracies, will experience a vast trust deficit and it will take years to rebuild its reputation. The negative image will likely drive the young and wealthy to seek domiciles in other nations.

The National Wealth Fund

Moscow has announced economic relief packages to the tune of tens of billions of dollars to offset these dire circumstances. The focus of the relief measure is primarily on struggling individuals and businesses, especially pensioners and state employees. The “anticrisis” steps mainly aid in keeping President Putin’s supporters in the fold. Much of the President’s popularity and support rests on the economic and political stability he ushered in after the utter chaos of the post-Soviet years.

The country's National Wealth Fund (NWF) is funding a large portion of Moscow's recently announced relief packages. In early April, it was said to hold $155 billion. The fund was created using windfall gains from oil and gas sales.

NWF will be used to revitalize the Russian railways and Aeroflot, the national carrier, both of which are reeling under Western sanctions. First Deputy Prime Minister Andrei Belousov stated that up to $112 billion in credit could be extended to Russians in subsidized mortgages and business loans.

March 2022 saw Russian government spending jump by a whopping 37% from the previous year. The World Bank foresees Russian economic output shrinking by 11.2%.

While Moscow can leverage the National Wealth Fund to keep Russians content and cushioned from the fallout of the war in the short- term, it is not conducive in the long term. Aggressive fiscal stimulus without a corresponding increase in production can only lead to inflation, another economic malady.

By the end of this week, the European Union is anticipated to announce an embargo on Russian oil imports. This will result in a considerable decrease in Russian export revenue. Only time will tell whether the Russian economy can withstand the impact of the EU oil embargo.