Economy grows

How Russia is defying EU sanctions

Moscow continues to have high revenues and a welfare fund to finance the war.

(Bild: thinkstockphotos.de, krone.at-Grafik)

Russia's economy should really be on its knees: since the annexation of Crimea in 2014 and now because of the war in Ukraine, the EU alone has imposed 14 sanctions packages. However, economic researchers have found that these have so far been surprisingly toothless. Moscow is doing better than hoped. Experts know why.

The bare facts: Because of the "punitive measures", 90 percent of former oil imports to the EU have been blocked, for example. Overall, Europe is buying 91 billion euros less from Moscow and has canceled its own deliveries worth 48 billion euros, mainly machinery and other high-tech products.

Russia is doing surprisingly well
Nevertheless, Putin's country is doing surprisingly well, according to economic researchers. The sanctions have so far had little impact on the country's ability to wage war, according to Russia expert Vasily Astrov from the Vienna Institute for International Economic Studies (wiiw), which specializes in Eastern Europe: "The economy is currently growing strongly due to the arms boom, but the sanctions will have the effect of a creeping poison in the long term." The wiiw has compiled a current database on behalf of the German Ministry of Economic Affairs in order to present the effects of the EU measures and the situation as accurately as possible for the first time.

Russia expert Vasily Astrov: "The economy is currently growing strongly due to the arms boom."

(Bild: Hans Schubert)

The analysis is sobering in parts: GDP, for example, has risen to 117.3 points compared to the starting year 2021 (index value 100 points, in the 1st quarter of 2021 even only 86.6 points). Government revenue climbed from 17 to 30 billion dollars compared to February, industrial production grew by a whopping 2.7% this January, inflation more than halved, etc. How this "miracle" is possible is mainly due to two factors:

Massive government spending: This year alone, it amounted to 40 billion dollars in February, compared to 27 billion before the war. The arms industry in particular is therefore booming, labor is scarce and wages have doubled. Because employment is also good in other sectors and soldiers' pay has also been increased, consumption is flourishing. Moscow can afford this because, according to Astrov, the national debt is only 15 percent and the budget deficits are not too high. The state can therefore easily borrow from domestic banks. The state welfare fund, which was filled with oil and gas revenues, is also being tapped into. It should last until the end of 2025, estimates expert Astrov. It is therefore bearable that the EU has currently frozen 210 billion euros in funds from the Russian National Bank.

Bypass transactions: Russia has massively restructured its trade. Western goods continue to enter the country via friendly countries such as Kazakhstan, Armenia etc., including those that are actually subject to sanctions. At the same time, China, India, Turkey and others are now happy to buy the oil and gas that Europe no longer buys on preferential terms.

As a result, Moscow's foreign trade with India, for example, has more than doubled within a short period of time and increased by 40 percent with China, Wifo head Gabriel Felbermayr calculates in the magazine "Spiegel". This has more than compensated for the loss of business with the West. Felbermayr therefore suggests that instead of adopting further sanctions packages, the EU should rather seek cooperation with Turkey and the like in order to bring them into the anti-Putin coalition.

Russia has therefore adapted cleverly and is also too big economically for punitive measures to work quickly. However, they are not pointless, says Astrov: "Difficult access to high technology, such as electronic chips, aircraft engines, turbines or gas production technology, is likely to slow down Moscow's growth opportunities over the next ten to 15 years. The quality of consumer goods (e.g. cars) is already deteriorating. In addition, the country has lost tens of thousands of IT specialists and other skilled workers since the start of the war, many of whom will be permanently absent.