This study delves into the pivotal factors, trends, and outlook of socio-economic development in Russia against the backdrop of the conflict in Ukraine, aiming to analyse the repercussions of sanctions and other external influences on the Russian economy, society, and policymaking. 

Executive Summary:

Since the eruption of the war in Ukraine in February 2022, the Russian economy has confronted formidable challenges, including severe sanctions imposed by the EU and individual countries, and the erosion of traditional energy markets, foreign investment, and financial reserves. These pressures have ignited fundamental shifts within the country’s economy and society, leading to both immediate and enduring consequences. 

Some of the short-term effects include a threefold surge in military expenditure in 2023 compared with 2021 levels and a significant redistribution of wealth from foreign investors and Russian proprietors to the state and individuals close to Vladimir Putin. There has been extensive money issuance, ranging from direct “cash printing” to large-scale state borrowing at considerable costs. Profits from companies are being withdrawn through new taxation schemes, while there is a mounting risk of tapping into the population’s savings, estimated at around 400 billion USD, to meet state interests in military expenses. Moreover, there has been an unprecedented outflow of capital, totalling approximately 250 billion USD in 2022, coupled with substantial losses of Russian assets by foreign entities, ranging from 200-240 billion USD. These factors have led to short-sighted business decisions, prioritising cheap, near-term actions over strategic, long-lasting development initiatives. The high costs of capital due to inflation and the Central Bank’s policy of maintaining a high basic rate, along with the frozen Russian assets in the West and a loss of access to foreign capital markets, have further compounded these challenges. 

In the longer term, significant repercussions are expected, including the loss of the European market for Russia’s energy and other exports for decades, if not permanently. Other challenges include a halt in technological cooperation between Russia and the West, and the related heightened risk of technological accidents, particularly in communal infrastructure, where over 70% of capital assets is considered depreciated in many provinces. There is also an exaggerated dependency on imported equipment, materials, and even food, further complicating matters. The demographic situation is expected to worsen, with the population expected to decline to below 140 million by 2046 and even further in subsequent years, exacerbating the challenges associated with an aging society. Another threat arises from a notable decline in social capital and trust within Russian society. 

The impacts on the energy sector are particularly important due to its role in the national economy. The loss of European gas and oil markets, coupled with the costly redirection of export flows from the West to the East, has profound, long-lasting effects on the fossil fuel sector. Russia faces a strong dependency on China and India, accounting for a lion’s share of total crude oil exports (the main source of foreign trade revenues).  

The future economic performance of Russia hinges on several factors, including physical, human, and social capital, governance, macroeconomic stability, technological prowess, entrepreneurship, and international relationships. Most, if not all, of these factors have deteriorated over the past two years and are anticipated to continue worsening in the long term. 

To avert socio-economic collapse, the regime relies heavily on a concept, which this article defines as, the 3P factor – Power, Passiveness of population, and Propaganda – which has wielded considerable influence in recent years and is projected to intensify further. The regime’s strategy involves bolstering authoritarian control, disseminating and intensifying propaganda through various channels, and fostering a sense of hopelessness regarding prospects for change, thereby cultivating passivity and loyalty to the current regime among the populace. As economic challenges persist, the escalation of repression appears inevitable, heightening the risk of national destabilisation and social unrest in the long term. 

Photo by Vardan Papikyan on Unsplash