1776Reporting
Russia’s ongoing war in Ukraine is not just a geopolitical conflict; it is a vital lifeline for its economy. Economists argue that the heavy military expenditure linked to the war is what’s preventing Russia from plunging into an immediate recession. While this may delay economic collapse, it’s a temporary solution, and the nation faces serious challenges ahead.
According to Jay Zagorsky, an economist and professor at Boston University, the military invasion of Ukraine is the sole reason Russia has avoided an economic downturn. “The Russian economy right now is being propped up by large amounts of government spending,” he noted. Without the war, he adds, Russia would likely already be in a recession.
War Spending Keeps the Wheels Turning
Russia has redirected massive amounts of funds to support its war efforts, which have acted as a crutch for its weakened economy. The government has spent heavily on military essentials like uniforms, ammunition, and food for soldiers. This spending has boosted sectors that might otherwise have suffered.
The country’s defense budget for next year is set to hit a record 13.2 trillion rubles, which further highlights the reliance on military expenditure to prop up the economy. However, this level of spending can’t be sustained indefinitely, warned Yuriy Gorodnichenko, an economist at the University of California-Berkeley. “At some point, the government is going to run out of money, and they’ll have to stop, and they’ll have a recession,” he cautioned.
Mounting Economic Challenges
While war spending may temporarily prevent economic collapse, Russia is far from stable. Inflation is one of the most significant challenges facing the country. In August, consumer prices rose by 9% year-over-year. Yet Zagorsky believes the real figure might be even higher, drawing parallels to the Soviet Union’s tendency to underreport inflation during the Cold War. The Bank of Russia responded by hiking interest rates to 19% in September—the highest since the start of the Ukraine conflict.
On top of soaring inflation, Russia is grappling with a currency crisis. Western sanctions have limited the country’s access to the U.S. dollar, making it difficult for Moscow to engage in international trade, particularly for oil and crude products—key components of its revenue.
To counter this, Russia has increasingly turned to alternative currencies like the Chinese yuan. However, even this is becoming a challenge, as Chinese companies are now reluctant to do business with Russia, fearing secondary sanctions from the West. “Russia is making fewer sales to China, or receiving less for whatever volumes, physical volumes they send to China,” Gorodnichenko said, highlighting the economic pressure on Moscow.
Oil Revenues Decline as Military Costs Rise
Russia’s oil revenues have been shrinking at the same time that military spending is climbing. This is partly due to falling global crude oil prices, which has hit the country hard. As Zagorsky put it, “Russia is not only facing a reduction in demand for its product but a rather dramatic fall in the price. This is kind of a double-whammy.”
The critical question, then, is how long can Russia sustain this balance? Zagorsky believes it’s a “pretty simple story.” The nation is managing to stay afloat for now, but the long-term outlook remains bleak.
Uncertain Future
Neither Zagorsky nor Gorodnichenko can predict with certainty when a recession might hit. It depends largely on how long the war—and the associated government spending—will last. However, the pressure is mounting. If Russia continues to increase signing bonuses for soldiers, as Gorodnichenko suggested, it would be a clear sign that the nation is running out of workers and its economy is becoming dangerously overheated.
Sooner or later, Russia may have to make “very unpopular decisions” to avoid a full-blown economic collapse. But for now, war spending is all that’s keeping the economy from crashing. How long that can last remains the big, unanswered question.
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