Russia’s Economy Holds for Now-But That Could Change

By Esther Fultz

Economies are volatile, especially when international conflict is involved. A country’s economic condition depends heavily on its political environment, which is influenced by various factors and can change overnight. One country of particular economic interest recently is Russia, which invaded Ukraine last February and has faced economic sanctions from countries in the west since.

Economically, Russia is heavily reliant on the energy sector, as a leader in both oil and natural gas exports.

“Russia’s economy is almost a test case of putting too many eggs in one basket and not diversifying well enough,” said Dr. Duerr. “It gets hit hard when the price of energy increases and benefits greatly when the price of energy decreases.”

Russia’s economy has experienced downfall since the sanctions were established, but not to the extent one might expect. While many countries in the west have put sanctions in place, India, China and other countries in Southeast Asia have not. However, countries from the east are not able to pay the same amount for resources as countries in the west, and Russia’s economy is expected to contract from anywhere around 5% to 15% this year.

Russia’s recent draft will also negatively impact its economic condition.

“The recent call-ups will have demonstrable economic effects because people who should be working will not be,” said Dr. Wheeler, Professor of Economics at Cedarville University. “There are some particular industries in Russia that no doubt benefit, such as arms and ammunition manufacturers, but the net effect will be negative.  War never helps.”

One factor that may improve Russia’s economic condition is some areas of Ukraine switching their currency to rubles. However, this comes at a great cost to Ukraine as well as countries across the world that benefit from Ukraine’s grain production. The ruble has been introduced in four regions of Ukraine, and Russia has also taken control of the major sources of industry in Ukraine.  This has resulted in increasing grain prices, which hits areas that are already food scarce, such as Africa and parts of Asia, especially hard.

“The Ukrainian economy will probably collapse by about 50%,” said Wheeler. “When you have a war being fought on your soil, your main driving goal becomes winning the war and getting the people you’re fighting against away from you, not economic activity. The basic rule of thumb for recession is real GDP growth declining for two subsequent quarters. Usually a 4-5% drop would be considered a very bad recession, but if you look at the 50% drop in gross domestic product, it’s just catastrophic and really hurts everyone.”

Long-term, neither country is expected to fare well, particularly not Ukraine. However, there may be some positive outcomes for Ukraine in the reconstruction phase, such as more open trading with the United States and other western countries. As for Russia, the exact outcome depends on the outcome of the war with Ukraine. If Russia wins or negotiates peace with Ukraine, the economy will rebound but it will struggle to grow due to the continued sanctions from western countries who are able to buy products at higher rates than India and China.  However if Russia loses the war, the economic outcome would be different.

“If their government structure collapses and their economy collapses, it’s going to take years to rebound,” said Duerr. “There will probably be a sharp contraction in the economy, by over 40%.”

Esther Fultz is a junior Social Work major and an Off-Campus and On-Campus writer for Cedars. She enjoys writing songs, spending time outdoors, drinking coffee and hanging with friends.

Photo Credit: Gennady Grachev, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0/deed.en>, via WikimediaCommons