The War and Russia’s Economy

Stability or Approaching Crisis?

Ivan Sichen

In early February 2024, during the plenary meeting of the Forum “All for Victory!” in Tula, Russian President V. Putin made another statement about “the sustainability of the Russian economy, which, despite external sanctions, retains its positive dynamics of development”. In similar words he described the work of his country’s defense industry.

As everybody has known for a long time (at least, those who have common sense), everything that V. Putin and his associates declare is a frank misinformation that is diametrically different from the real state of affairs. Especially before elections, when such practice in Russia becomes total in nature. The same traditionally applies to the Kremlin’s estimates of the economic situation in Russia. Even when they obviously contradict the obvious facts. For example, as the failure of the Russian economy in the active period of the COVID-19 pandemic in 2020.

An even greater economic failure, which is carefully hidden by the Kremlin, took place in the Russian Federation after its attack on Ukraine in 2022. We have repeatedly discussed this topic, but the situation is not standing still but gets qualitative changes. Therefore, we propose to look again at economic problems in Russia, taking into considerations what happened recently. Moreover, this directly affects Moscow’s waging the war against Ukraine.

To begin with, let us pay attention to the key thing. Thus, despite the Kremlin’s statements about the growth of the Russian economy, in 2023 the country’s GDP fell by about 20 %. Such data have been provided by a number of Russian experts and indirectly confirmed by some indicative facts. In particular, last year the revenues of trade companies in Russia fell by 20–30 %. As the most of the country’s products are traded by them, so the amount of the country’s production volume was really smaller. The reasons for this were as follows:

• further negative impact of Western sanctions imposed against Russia in 2014–2022, and the impact of sanctions imposed later, as well as new sanctions restrictions;
• reducing consumer demand in Russia due to rising prices, which forces enterprises to reduce production;
• significant increase in military expenditures, which limited the capability of state investments in the economy, and its support;
• lack of labor due to the mobilization into the army of a large number of men or their massive escape from the country after declaring partial mobilization in the autumn of 2022.

All these problems are relevant this year, and some have deteriorated even more. In addition, a number of other factors that undermine Russia’s economy have emerged. Here are some of them, the most indicative.

For example, since the beginning of this year, Ukraine’s Defense Forces have begun to strike more actively on Russian oil and gas facilities, which play a leading role in the Russian economy. According to Ukrainian media, since the beginning of 2024 we have attacked:

• Nevsky Fuel Oil plant in St. Petersburg. Several oil tanks were damaged and a fire started. Unfortunately, there is no significant damage to the plant, but it is not the end of Ukrainian attacks;
• Petersburg Oil Terminal in Leningrad region near St. Petersburg. There was a fire. It is the largest Russian terminal for transshipment of liquid products in the Baltic Sea;
• Novatek’s main oil terminal in Ust-Luga in Leningrad region. Damaged equipment, there was a fire. After the strike, some operations were suspended. By its capacity, the terminal is almost equal to the mentioned one near St. Petersburg;
• Tuapse Refinery. There was a fire, resulting in the suspension of the plant’s work. It produces fuel oil, vacuum gas oil, diesel, and supplies petroleum products to the Russian army and to abroad;
• Slavneft oil refinery in Yaroslavl. UAVs have fallen near the hydrocracking unit, which processes oil into petrol, diesel and other fuel. The plant is one of the largest for the production of petroleum products in the Russian Federation;
• Kaluganefteproduct oil depot in Kaluga region, another oil depot in the Kursk region and oil depot near Klintsy in Bryansk region. The latter burned to the ground;
• LUKOIL-Volgogradneftepererabotka oil refinery. The primary oil refining unit ELOU-AVT-5 was damaged (according to other data — destroyed). In 2022, 12 billion rubles (about $132 million) were spent on its reconstruction;
• in the Krasnodar Territory of the Russian Federation, two oil refineries (Ilsky and Afipsky) were attacked. Both were supplying Russian troops. At the plant in the village of Ilsky a large fire occurred, the crude oil distillation unit with an annual capacity of 3.6 million tons was damaged.

As a result, in January 2024 alone, Russia lost 37 % of petrol exports and 23 % of diesel fuel exports. Such data is provided by the Ministry of Energy of the Russian Federation, admitting that the reduction of exports of petroleum products is the result of unscheduled repairs at oil refineries. And that’s true. And such repairs are quite complex because of sanctions from the USA and EU countries, which have stopped supplying Russia with the needed equipment.

As you know, the basis of the Russian economy is the oil and gas industry. Therefore, the reduction of oil exports leads to a decrease in the revenues to the state budget of the Russian Federation. This is especially noticeable for Moscow, since budget funds are already not enough to finance the war against Ukraine and other needs. Therefore, the Russian government is forced to spend funds from the National Wealth Fund of the Russian Federation on military needs, since the money of other funds is frozen in Western banks.

Last year, Russian authorities spent about half of the amount of the National Wealth Fund. By the end of 2024, the money will end and there are no sources to replenish it with. There are also no other reserves in Russia. Therefore, at the beginning of next year, the Russian Federation may face a significant deterioration of the country’s economy and even the country’s sinking deep into crisis.

The Russian leadership is aware of the reality of such a prospect, and therefore tries to save budget funds, including expenditures on the military industry. On the one hand, this really makes it possible to slow down the development of crisis processes in the country, but on the other — disrupts the fulfillment of military orders.

Thus, according to the Ukrainian organization Cyber Resistance with reference to the representatives of the “League of Defense Enterprises of Vladimir Region” of the Russian Federation, the enterprises of the Russian defense industry have to sell their products at prices fixed in 2019. And to buy materials and components — at fixed prices with prepayment. And this despite the fact that in 2023 the course of the Russian ruble fell sharply, and most of the mentioned components of Chinese, but in fact — of Western origin — are bought for dollars and Euros. Therefore, their value has increased sharply, and the enterprises of the Russian defense industry do not have enough funds even to cover interest on loans that need to be taken to pay the suppliers.

In addition, funds from defense enterprises can only be withdrawn after the contract between it and the state is finished. And since contracts for fulfillment of government orders in Russia are concluded for 3–5 years, all this time the money of enterprises is actually frozen. As a result, businesses suffer losses and are not able to work in a normal rhythm and to fulfill new government orders.

It is this state of affairs that explains the inability of the defense industry of the Russian Federation to provide the troops with the necessary number of weapons and military equipment, not to mention their quality. Because of this, the Russian army cannot achieve tangible success at the front and compensate for the lost.

Russia is no longer capable of producing new armored vehicles and modern artillery systems. It only modernizes the once stored. Not a single new tank has been spotted at the front. The same applies to aircrafts and helicopters. Since the beginning of the full-scale war, only a few vehicles that were at the plants have been transferred to the troops.

To some extent the production of missiles has increased. However, Russia can arrange relatively massive missile strikes on Ukraine no more than once or twice a month and in an amount of 40 to 80 missiles. This is all that it can manufacture. Most missiles are being shot down and the rest, although cause damages, do not in any way affect Ukraine’s defense capability.

And while the Russian defense industry is still more or less supported by the state, the vast majority of the civil sector of the economy is actually abandoned. For example, let us look at the state of Russia’s civil aviation, which literally went into a rapid tailspin. Like the whole economy of Russia. The number of emergencies with aircrafts increased in 2022–2023, and with the beginning of this year they happen almost daily. In January 2024 alone, such cases occurred up to ten times.

In particular, on January 12, Yak-42 rolled off the runway at the Arkhangelsk airport. The airport was then closed for several hours for flights. On January 15, a wheel tire of a passenger Boeing 737-800 of the Russian Yakutia Airlines burst out during the takeoff. On January 17, the Tu-204 of the Russian Post company rolled off the runway at the Mirny Airport. On January 28, another Boeing 737-800 could not fly from the Domodedovo Moscow Airport to Turkish Antalya. The pilots were forced to interrupt the takeoff because of the compressor stall of the right engine. On the same day, a similar problem arose with another Boeing 737-800, which was going to fly from Ulan-Ude to Moscow. On January 29, Superjet 100 of Yakutia Airline made an emergency landing at Yakutsk Airport. The reason was smoke in the front luggage compartment. At the same time, the right engine of Airbus A320 of the S7 Airlines failed while landing at Domodedovo Airport.

With the planes of foreign production, everything seems to be clear. As part of the sanctions, US and European companies do not serve them and do not supply spare parts, and therefore the planes fail. But the malfunction of Russian-made planes is the result and evidence of a systematic deterioration of the country’s economy. Even though those planes are largely made of western components, such as jet engines and avionics. Which are not supplied now…

After the next economic crisis in Russia begins, the above-mentioned problems will inevitably reach a new level and will require the Russian government’s extraordinary measures to keep the situation under control. Given the current Russian realities, it is possible that direct state administration will be introduced in all sectors of the country’s economy, including private business. However, even if this does not happen, the state support of private business (except oligarchic structures close to V. Putin) will cease, taxes will increase and state prices regulation will be introduced.

Russian entrepreneurs take into consideration such prospects, and therefore resort to preventive steps to protect their business. Moreover, traditional methods — such as raising prices for goods and services in the interest of creating their own financial reserves in case of crisis. However, this only contributes to its approach. Thus, in January 2024, the rates of inflation in Russia further accelerated, which led to further deepening of negative trends in the country’s economy.

Unfortunately, we have no less such economic problems. However, the war is taking place in our territory and Moscow managed to cause us significant economic losses… Until Ukraine received sufficient strength and means to repulse attacks from Russia and striking in response.

Therefore, in the second year of the war, Russia faced the same economic problems as Ukraine at its beginning. The third year of the war can be the last for more or less stable functioning of the Russian economy. And so, Moscow will lose the capability of continuing a full-scale war against Ukraine.