Russia’s War Economy and the Impact of Sanctions on Military Production
With the Russian economy now on a war footing, if the West wants Ukraine to prevail in the war, it will not only have to sustain the delivery of weapons but also further tighten its sanctions regime against Russia.
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One year after February 24, the date of Russia’s brutal and massive attack on Ukraine, the war does not seem to be ending. On the contrary, it increasingly looks as if Russian President Vladimir Putin hopes to outlast Ukraine’s capabilities with a long and drawn-out war. After all, Russia’s economy, population, and military are larger than that of Ukraine. Moreover, Russia hopes that the Western public will become increasingly wary of a drawn-out war and become less supportive.
Russian GDP has been affected by the war and by the sanctions but less than independent forecasts suggested last year. In fact, the IMF estimates that the Russian economy contracted by 2.2 percent in 2022; for 2023, a growth rate of 0.3 percent is forecast, while for 2024, the IMF now forecasts growth of 2.1 percent. This is a substantial upward revision compared to previous forecasts by the IMF. Large oil and gas revenues during 2022 and the use of fiscal policy have allowed Russia to buffer the shock and sustain its economic base to a significant extent. In short, Russia’s economic base isn’t much weaker than a year ago.
Yet, to sustain a long-lasting war with substantial loss of material, Russia has had to change its economy, transforming it into a war economy. Russia has lost substantial amounts of weapons, ammunitions, and equipment. According to British Defense Secretary Ben Wallace, until mid-December 2022, Russia has lost 4,500 armored vehicles, 63 fixed-wing aircraft, 70 helicopters, 150 unmanned aerial vehicles (UAVs), 12 naval vessels, and over 600 artillery systems. At the height of the invasion Russia shot about 20,000 artillery rounds per day according to US officials.
On a War Footing
Accordingly, Russia has had to devote an increasingly large share of its economy to its defense industry. Federal military spending increased to at least 5 percent of GDP, or some $90 billion. Russia has lowered the transparency of its budget—actual spending may thus be higher. In addition, the Kremlin has obliged regional and local authorities to use their resources to equip soldiers with basic military goods in the draft. Russia’s budgetary position has moved from a 1 percent surplus to a 2 percent deficit, despite record high oil and gas revenues in 2022. Initial numbers for 2023 indicate that the Russian public finances show a larger deficit due to the fall in revenues as Russian oil trades at a large discount and due to increased military spending. Put differently, Russia’s economy is now substantially oriented toward war purposes.
Compared to Ukraine’s military spending of just $30 billion, Russia appears to have the upper hand. Yet, in the battle of material and will, two major factors have improved the odds of Ukraine.
First, the total military commitment to Ukraine by the Western coalition amounted to €41 billion according to the December data of the Ukraine Support Tracker by the Kiel Institute for the World Economy (IfW Kiel). The challenge to sustain that level of support is less a financial one. After all, €41 billion amounts to around 0.1 percent of GDP of the top five weapon suppliers in the West. The challenge is rather one of overcoming the bureaucratic, logistical, and political hurdles to increasing weapons and ammunition production. A relatively small increase measured in GDP in defense spending and weapon deliveries by the West would mean that Ukraine’s defense material far outmatches Russian military production. Despite the West’s comparatively large weapons industry, supplies have not kept up with the massive number of ammunitions used in Ukraine. In short, the West does not need a war economy, but it needs to solve its logistical (and political) challenges.
Second, economic sanctions have deteriorated Russia’s military capabilities. The sanctions imposed since 2014 following the annexation of Crimea have affected Russia. For example, the delivery of French Mistral-class helicopter-carrying attack ships was cancelled by France in 2014; the development and production of 4+ generation Sukhoi Su-57 stealth fighters was significantly slowed down; and the PAK DA bomber could not yet be developed. Since February 2022, sanctions against military and dual-use products have been significantly tightened. The Russian defense industry remains heavily dependent on parts and components imported from the West. This affected for example the production of the T-72 tanks, several modern air defense weapons (9K37 Buk, 9K22 Tunguzka), and the production of Kh-101 cruise missiles has also suffered as Taiwanese, Dutch, US, and Swiss components are no longer available. Russia's most advanced satellite-guided 300-mm Tornado missiles use a US-made gyroscope. Vehicle production, including military vehicle production, has suffered greatly. The renowned truck manufacturer KAMAZ had to stop the production of all its modern military-use platforms because the Bosch fuel injectors produced in Germany are no longer available.
Adapting to Sanctions
Yet, as the war continues, Russia has strengthened its war economy and adapted to sanctions. Adaptation measures in the defense sector included import substitution with domestically produced goods, refitting old war material, and using shell companies to import high tech goods via third countries such as Turkey and Kazakhstan. Recent work by researchers at RUSI shows how Russian high-tech imports via third countries have increased in the course of 2022. And a study by The Wall Street Journal documents the fact that Russia is increasingly procuring military components from China. Also, the United Arab Emirates is identified as allowing Russia to avoid some of the effects of the sanctions. Russia has also managed to import weapons from Iran and North Korea. Iranian drones have been shown to include chips that cannot be exported to Russia. These adaptation measures have allowed Russia to continue its war but at a decreased level of effectiveness.
If the West wants Ukraine to prevail in the war, it will not only have to sustain the delivery of weapons and financial and humanitarian support to Ukraine. It will equally have to further tighten its sanctions regime against Russia to respond to Russian adaptation. Loopholes need to be filled. Additional sanctions against Iran, for example to reduce their capacity to produce drones, and the strict persecution of shell companies as well as pressure on third countries can all slow Russia’s military capabilities. Sanctions enforcement and unity are key. Ukraine still requires determined and rigorous support from the West.
Guntram Wolff is the director of the German Council on Foreign Relations (DGAP). The op-ed is based on a policy brief by the author, András Rácz, and Ole Spillner.