How Russia has avoided bankrupting itself after 2 years of waging war in Ukraine

• Two years into the war in Ukraine, Russia's economy still appears resilient.
• While wartime activities have supported the economy, Russia also entered the war in a sound economic position.

Russia's wartime economy is booming.

That may sound counterintuitive, but headline GDP growth is not unusual in times of conflict.

While there are doubts over the accuracy and completeness of the rosy economic data Russia has released over the past two years, Moscow looks poised to continue funding its war for a third year — and wars are expensive.

"From a purely economic standpoint, Russia has considerable room to continue waging war," Hassan Malik, a global macro strategist and Russia expert at Boston-based investment management firm Loomis Sayles, told Business Insider.

After all, Russia has been sanction-proofing itself since 2014, when it was hit with a raft of trade restrictions after it illegally annexed Crimea from Ukraine. On top of that, it's still supported by revenues from its oil sales.

Here's how Russia has managed to keep its economy strong even after two years of waging war.

No. 1: By waging war outside its own borders

One critical reason Russia's economy is still ticking is because of the location of the war.

"The war is being fought largely on Ukrainian land, and destroying largely Ukrainian homes, businesses, and farms such that the direct impact on Russian productive capacity and households has been comparatively limited," said Malik.

Consider the impact of the war on the economies of both Russia and Ukraine.

In 2022, the first year of the war, Russia's economy contracted 1.2%, according to official statistics. Analysts polled by Reuters expect Russia's GDP to have risen 3.1% in 2023. Russia has not yet released its full-year GDP growth for 2023.

In comparison, Ukraine's GDP plunged 29.1% in 2022 and the country's central bank forecast the country to have grown 4.9% in 2023. It has not released official growth figures.

In a scenario where a war is not fought on your home turf, war can act as a major demand shock, particularly for war supplies and manpower, Malik explained. That's what happened in Russia: The war boosted the economy.

No 2: By generating a demand for wartime goods and services

Then, there's the demand for the goods and services that keep a war running.

Russia's military needs physical supplies — things like weapons, ammunition, and bandages. The demand boosts the industries that produce those goods — especially domestically, since imports into Russia are restricted due to sanctions.

The demand for military goods is so intense that even a bakery in central Russia has been roped in to aid war efforts.

The shop — which showed off its freshly produced drones next to just-baked bread on Russian TV — is now sanctioned by the US.

Fighting a war also requires manpower.

Russia was facing a demographic crisis with a declining population and falling fertility rate even before its war with Ukraine. With the onset of the war, nearly 1 million Russians — including draft-age men — have fled their homeland, shrinking the country's labor pool even further.

Russian President Vladimir Putin's mobilization of men for the war created a labor crunch that has persisted since 2022.

Last year, Russia faced a shortage of 5 million workers as workforce vacancies rose nearly 5% from a year ago. In November, Russia posted a record-low unemployment rate of 2.9%.

Thanks to the manpower shortage, wages have risen — in turn supporting consumption and economic growth.

No. 3: By being self-reliant in weapons and commodity production

Russia is a major global economy — the world's eighth-largest in 2022 — in part due to its strong position as a producer of commodities like oil, natural gas, wheat, and metals.

However, unlike many countries, Russia is also self-sufficient in producing critical commodities like oil, natural gas, and wheat, which has helped it weather years of sanctions.

"While Western sanctions and trade restrictions have undoubtedly had some marginal impact on the Russian economy, the impact is particularly limited in a largely autarkic Russian defense industry," said Malik, referring to an economy based on self-sufficiency and limited external trade.

As one of the world's top arms exporters, Russia can also supply itself with most of its defense needs, even for sophisticated weapons, said Malik.

This, alongside measures Russia has imposed to boost its economy — including parallel imports, pivoting to alternative export markets such as China and India, and new supply chains — further dilute the impact of Western sanctions on the Russian defense industry and wartime economy, he added.

No. 4: By stimulating and steadying its economy with subsidies and policies

Government subsidies, spending, and policies are also propping up Russia's economy.

Moscow's attempt to prop up its wartime economy has been so aggressive that subsidies for discounted mortgages have created a housing bubble.

The Russian government has rolled out other types of subsidized loans for businesses, further stimulating demand in the economy.

Russian policymakers also stepped in quickly to steady the market and economy after Moscow invaded Ukraine. They took steps including shutting the Moscow Exchange for weeks, imposing capital controls, and managing monetary policy.

"That was done reasonably quickly. A lot of Russian financial instruments were immobilized," said Sergei Guriev, a former chief economist at the European Bank for Reconstruction and Development, at a talk last month.

No. 5: By keeping external debt low and exports strong

Russia entered the war with little external debt and its current account has been in surplus thanks in part to the war's impact on commodity prices.

"Such developments heavily compensated for Western moves such as the freezing of the central bank's reserves," Malik said.

Russia managed to allocate nearly one-third of its 2024 budget to defense spending, despite all the sanctions it's been hit with.

Malik isn't the only one who thinks Russia has room to run its war for longer.

Over the past year, experts including a former Russian deputy finance ministry in self-exile and several economists have all said Russia has the money to fund its war in Ukraine for a few years.

Alex Isakov, an economist at Bloomberg Economics, said in a report on January 17 that Russia's national wealth fund's liquid assets will last for another year or two if the country's oil export prices fall below $50 a barrel.

The average price of Russia's flagship Urals crude oil was about $63 a barrel in 2023.

Even so, Putin is caught in an economic 'trilemma'

While Russia has managed to avoid economic catastrophe after invading Ukraine in 2022 and incurring sweeping Western sanctions, it doesn't mean all is well on Putin's home turf.

Despite the boom, Putin is trying to solve an economic "trilemma" a former Russian central bank official said recently.

"His challenges are threefold: he must fund his ongoing war against Ukraine, maintain his populace's living standards, and safeguard macroeconomic stability," Alexandra Prokopenko wrote about Putin in Foreign Policy in January.

"Achieving the first and second goals will require higher spending, which will fuel inflation and thus prevent the achievement of the third goal," she added.

Putin already had to personally apologize for the price of eggs in Russia, which soared 42% in the 12 months prior to November 2023, according to data from the country's statistics agency Rosstat.

After all, rosy GDP figures alone are not a good measure of economic performance during wartime, said Guriev.

"You produce weapons and munitions, you pay for them from the budget, but these weapons and munitions don't contribute to quality of life, don't contribute to future economic growth," said Guriev. "They are shipped to Ukraine, where they are destroyed."

Russia's contribution from the war is boosting its economy so much that there's risk of stagnation — or even an "outright crisis" — once the conflict is over, according to a January report from the Vienna Institute for International Economic Studies.

"The longer the war lasts, the more addicted the economy will become to military spending," wrote economists at the Austrian think tank.