Putin's war fired up Russia's economy and beat sanctions — but big problems lie ahead

• Russia has shrugged off the Western sanctions imposed on it after Vladimir Putin invaded Ukraine.
• The country blunted their impact by ramping up trade with other countries such as India and China.
• Yet Russia's war economy is weaker than it appears and could face major problems, experts say.

Russia's invasion of Ukraine spurred the US and its allies to slap Moscow with sanctions aimed at crushing its war effort and economy.

Two years on, Russia has emerged stronger than virtually anyone predicted. Here's how the nation upended expectations — and why experts are skeptical its success will last.

Skirting sanctions

Western nations rushed to punish Russia's aggression by imposing price caps on its oil exports, limiting its imports of electronic components, freezing a big chunk of its foreign exchange and gold reserves, seizing the overseas assets of the Russian elite, and curtailing its central bank's ability to use dollars and euros.

The sweeping restrictions helped drag Russia into a recession in 2022. But its economy rebounded to expand by an estimated 3% last year, and the International Monetary Fund recently raised its growth forecast for this year from 1.1% to 2.6%.

Inflation, which spiked to nearly 18% in April 2022, has cooled significantly to 7.5% in February. Unemployment has dropped to record lows under 3% in recent months. Even the beleaguered ruble, which fell to a 16-month low against the dollar last fall, has strengthened.

President Vladimir Putin was just reelected for a fifth term after winning 87% of the public vote in a sham election. He's on track to become the longest-serving Russian leader since Catherine the Great in the 1700s.

Russians may be tired of the war, but a Gallup poll in December found a record 56% believed their local economy was improving. The share of respondents who said the same about their living standards also climbed to a new high of 46%.

India and China to the rescue

The sunny situation is a far cry from what many experts predicted. Russia defied their forecasts by quickly pivoting its economy away from the West and toward friendly nations, capitalizing on the fact that sanctions were not universally adopted or enforced.

A shadowy consortium of shipping, insurance, and oil-trading companies emerged to connect Russia with India, China, Turkey, the UAE, and other willing partners.

So-called ghost fleets transported Russian oil under other countries' flags, resulting in the nation's energy revenues holding up much better than expected. Russia was able to cash in on high energy prices, import military equipment and other supplies, and obtain Western products like phones and microchips via neighboring countries like Georgia and Armenia.

More recently, political infighting in the US over whether to continue funding Ukraine has arguably undermined the sanctions, as it's signaled that America isn't united in standing against Russia.

"The escape valve provided by China, Russia's ability to maneuver around many of the sanctions, and the US Congress's blocking of military aid to Ukraine have substantially eroded the symbolic and substantive power of such sanctions," Eswar Prasad, a senior professor of international trade policy at Cornell University and a senior fellow at the Brookings Institution, told Business Insider.

Trouble ahead?

Russia's spending on making military equipment and other war assets boosted its headline growth and bolstered the regions where defense-related production occurs. But other industries and territories benefited far less.

"That has been a stimulus, but other sectors are quite weak," Anne Krueger, a senior fellow at Johns Hopkins' School of Advanced International Studies who has held high-level positions at both the IMF and the World Bank, told Business Insider.

"Parts and supplies shortages may bite over time as the economy is on a war footing and consumers are losing," she added.

Western sanctions have had a "painful impact" on Russia's aviation sector, which has been unable to find adequate substitutes for Airbus and Boeing, Volodymyr Lugovskyy, an associate professor of economics at Indiana University, told Business Insider.

He also flagged the automotive sector, which has struggled to access vital electronic components due to export bans, and the agricultural industry, which faces a severe labor shortage.

Indeed, Russia is weathering a wider shortfall of workers because so many people are now serving in its military or have fled the country. That has driven up wages and prices, and fueled labor hoarding by companies.

Drone attacks

Russians have also faced shortages of staples like beef and chicken, which contributed to a 40% surge in the price of eggs last year as households scrambled to buy food. Gasoline is also in short supply, which has prompted Russian officials to clamp down on exports until domestic demand can be met.

The Russian government has a budgetary headache as tax revenues have tanked while spending has surged. Moreover, Russia's increased reliance on oil exports means that any disruptions, such as this month's drone attacks that destroyed an estimated 12% of its refining capacity, could have "dire consequences," Lugovskyy said.

At the same time, India is poised to cut back on its Russian oil purchases in the face of tighter sanctions, after becoming one of Russia's biggest customers in the post-invasion era.

More broadly, Russia is dealing with an exodus of people and money, declining access to tech and related expertise, reduced foreign investment, and pressure on the ruble as it's become harder to convert into other currencies.

Spending crunch

It's also unclear how long Putin can keep spending so briskly, and what his all-in approach to investing in the military-industrial complex will mean for Russians' quality of life and economic growth in the long run.

"Since the main drivers of the growth in 2023 were public investments and public consumption, it remains to be seen whether the Russian government will be able to maintain the last year's trend," Igor Delanoë, the deputy director of the Franco-Russian Observatory in Moscow, told Business Insider.

It's fair to say that if Western sanctions keep jamming up Russia's supply of vital imports while it's navigating so many other challenges, the nation could run into serious problems.

"Russia's ability to weather sanctions should not be overestimated, as the war effort has given the economy a boost, but this will not necessarily translate into a productive and prosperous peace-time economy," Prasad said.

Still, it's worth emphasizing the West misjudged Russia's resilience and could do so again. Delanoë cautioned that understaffed embassies, and experts traveling less to Moscow and communicating less with their peers there, will likely make it harder and harder to get a good view of the Russian economy from the outside.

"The risk for Western decision-makers is to have a distorted picture of Russian economic realities, which do not match the political expectations such as the collapse of the Russian economy and regime," Delanoë said.