The Russian economy has always been of great interest to the international community because of the abundant natural resources, the geopolitical position, and a shift in political economy. From communism to astrophysics and post-communism through the transition in the period of the 1990s and today’s Russia’s strategies, Russia was thriving, stagnating, and collapsing. In recent years, economic sanctions, diminishing oil prices, and geopolitical issues provoked debates regarding economic collapse in Russia.
Sanctions and declining oil prices have significantly impacted Russia’s economy, leading to inflation, reduced foreign investments, and budget deficits.
The Russian economy has been at one time or the other in the last century passed through the mill. The country has an economic system that was unique to the Soviet Union in existence between 1922 and 1991 when it followed a system of central planning with government-regulated production, prices, and distribution. The Soviet structure at first proved effective for industrialization, however from the beginning of the 1980’s the growth slowed down due to inadequacies and corruption, it got to a very bad state in the mid-1990s after the dissolution of the Soviet Union resulting in more than 38% loss in the GDP between 1991 and 1998.
During Boris Yeltsin’s presidency, state-controlled assets were sold and a class of oligarchs was produced while citizens experienced hyperinflation, unemployment, and high levels of economic risk. During the early years of the 2000s, specifically, with Putin as the President of Russia, the economy recorded significant improvement courtesy of an increase in oil and gas prices. The government undertook economic liberalization measures, consolidated the government-encouraged monopolies on key sectors, and accumulated a massive amount of foreign exchange reserves. Between 2000 and 2014 Russia improved its GDP rate, decreased poverty rate, and enhanced the quality of its people’s lives. However, the country being a prominent oil-exporting country remained very much dependent on fluctuations of the global market.
Another of the causes of the deterioration of the economy in Russia is the sanctions by the West. After the Russia’s annexation of Ukraine, the United States and the European Union first applied restrictive measures towards Russia. In this sanctioning strategy, industries such as energy, finance, and defense had been specifically offended by reducing Russia’s access to global financial systems and technologies. Russian enterprises experienced some problems in attracting foreign investment; the ruble shrank sharply causing jokes and declining purchasing power.
The negative effects of these sanctions were again aggravated by declining oil prices. Since the export of oil and natural gas makes up nearly half of the Russian Federation’s revenues, the plunge resulted in a recession in the country. In retaliation, the Russian government reduced its expenditures, raised taxes, and searched for new markets to sell its products, especially in China and India.
Russia’s energy exports to China, India, and Turkey attempt to offset losses from the European market but remain insufficient for recovery.
The military invasion of Russia into Ukraine in February 2022 catalyzed highly unprecedented impacts on the economic front. The West froze more than $300 billion in Russia’s foreign exchange reserves and prohibited Russian banks from accessing the SWIFT international money-transfer system; it also banned the export of various high technologies to Russia. Large global actors started pulling out of Russia thereby resulting in the loss of employment opportunities among the population and a reduced consumers’ confidence.
Thus, the Russian economy proceeded to receive a number of shocks. The value of the ruble declined at the start of the change but is currently fixed at sustainable levels with the protectionism of capital movements. About inflation, supply line dysfunction, and FDI, the results show that Indonesia’s osmosis negatively impacted them. The Russian stock market collapsed and those sectors that relied heavily on Western technology and goods including aviation, automobile, and Information technology lapsed into a production crisis.
However, with its energy richness, Russia has been in a position to exercise certain measures of economic balance despite economic crises. The country recently switched its oil and gas export destinations to other parts of the world such as China, India, and Turkey. But this was not enough to make Russia gain back what it lost in the European markets since the revenues from energy sharply reduced.
EU, especially through Germany, which used to be Russia’s key customer, has abruptly switched on diversifying energy supplies from Russia. The overall fiscal stability of the country deteriorated when the G7 imposed a price cap on Russian oil and when Europe banned the import of seaborne Russian crude. This forced the Russian government to raise expenditures on the military when revenue drop triggered budget deficits and cut welfare.
The important weaknesses that have been discovered have to do with some structural factors within the Russian economy, specifically within the home economy. That is why corruption has not been eradicated, and elite and oligarchs control a large share of the economy. Downstream, lack of diversification and over-dependence on the production of natural resources are a problem in aiming for sustainable long-term economic growth. Also, the demographic problem of the non-replenishing population due to an aging population and unfavorable rates of birth increases concern over future economic development.
Structural issues like corruption, overdependence on natural resources, and brain drain hinder sustainable growth.
These issues were intensified during the war in Ukraine. Mr. Putin used vast funds for the defense sector while fiscal capital in the sectors of education, healthcare, etc., and infrastructure were cut off. Many of the skilled workforce in the society emigrated from the country either due to forcible drafting into the armed forces or as a result of the nonexistence of business opportunities. The “brain drain” also harmed Russia’s technological and industrial complexes still more.
Though the current Russian economy can be characterized as rather unfavorable, moreover, it is evidencing severe economic problems, now Russia will not experience total collapse like it was in the 90th, unlike the first two years of the transition process. There are policies which have been undertaken by the government to stabilize the economy among them being strict monetary policies, import substitution as well as having laid down other trade routes.
Nonetheless, they are insufficient for long-run growth with many questions about the economic sustainability of such policies. To some extent, the further growth of the Russian economy is predicated on several factors: geopolitical shifts, energy demand, and supply, and internal policy measures. But if Western sanctions remain in force and Russia stays out of the global economy and from global markets, the stagnation may go on for a long. However, when diplomatic relations between countries are strengthened and sanctions are lifted, Russia may gradually return.
Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.
