Most people have a rather ‘filmi’ view of war and its effect on the economy of a warring nation. Generally, you mention the word ‘war’ and people conjure up images of the ravages of war, including widespread destruction of infrastructure and deaths of soldiers and civilians.
However, the fact is, contrary to popular perceptions, wars actually give the economy a boost. The Second World War came directly after the Great Depression and lifted the world out of it. If you are too young to know anything about the Second World War or the Great Depression, the most recent example of Russia is right before you.
Russia is laughing all the way to the bank
The following news might have escaped the notice of those who are interested only in political or crime news.
Much to the chagrin of the West that laboured hard since the beginning of the Ukraine war to hurt Russia by imposing sanctions on it, the simple but unpalatable fact is that in July 2024, the World Bank promoted Russia to the high-income economy from upper-middle income economy for the 2025 fiscal year. The World Bank assigns the world’s economies to four income groups: low, lower-middle, upper-middle, and high. India, just to satisfy your curiosity, is placed in the lower-middle income category.
Now hold your breath, Russian GNI (Gross National Income) per capita has increased by 11.2%. In simple words, this means that the average Russian is earning more than ever.
GNI was earlier called GNP ((Gross National Product). It measures the total domestic and foreign value added claimed by residents, at a given period in time, usually a year, expressed in current US dollars using the World Bank Atlas method. GNI comprises GDP plus net receipts of primary income (compensation of employees and property income) from non-resident sources. Estimates are converted from local currency units to current US dollars to facilitate cross-national comparisons. The Atlas method (which derives its name from a former World Bank publication called the Atlas of Global Development) evens out exchange rate fluctuations using a three-year moving average, price-adjusted conversion factor. The dollar estimate of GNI per capita is derived by applying the Atlas conversion factor to estimates measured in local currency units.
What scripted the Russian success story?
The positive effect of war on economies can be understood by a simplified example. Military spending and war mobilization increase capacity utilization, reduce unemployment (through conscription), and generally induce patriotic citizens to work harder. War efforts demand increased production of various items and seek development/innovations in the technological sector. That, in turn, demands more workers, thereby reducing unemployment. With the unemployment rate down we have more people spending more than they did earlier. This extra spending helps the retail sector, which goes on to hire more. A spiral of positive economic activity is thus created by the government going to war.
In economic theory, we call it ‘Military Keynesianism’, that is, a macroeconomic policy that involves increasing military spending to boost economic growth. Its criticism notwithstanding, successful historical examples include Nazi Germany and US under Franklin D. Roosevelt and Harry S. Truman.
The current growth of Russian economy is attributed to the following factors. The main driver of Russia’s economic growth is the Ukraine war and war related increased expenditure. The second, as pointed out by Russian economist Prof. Alexander Dynkin, President of Primakov National Research Institute of World Economy and International Relations, is Russia’s self-sufficiency in energy, raw materials, food, and skilled labour.
The third is Putin’s emphasis on Russia expanding economic ties with Africa, the Middle East, and Asia, a testimony to Putin’s world vision.
The World Bank says that economic activity in Russia was influenced by a large increase in military related activity in 2023. Growth was also boosted by a rebound in trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%). These factors led to increases in both real (3.6%) and nominal (10.9%) GDP, and Russia’s Atlas GNI per capita grew by 11.2%.
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According to London-based European Bank for Reconstruction and Development (EBRD), Russia’s resilient economy will grow further this year despite Western sanctions.
The IMF forecasts that Russia’s economy will grow faster than the entire world’s advanced economies, including the US, this year. At 3.2%, it is significantly more than the UK, France and Germany
How the US-led sanctions failed to achieve their objective
The simple fact on the ground is that sanctions imposed to ‘punish Russia for invading Ukraine’ have failed to hurt Russia to the extent they had expected and that, by itself, is a slap on their face.
A formal cap has been imposed on buying or processing Russian oil sold for more than $60 per barrel (world prices currently fluctuate between $80 and $100) if the trade involves Western shipping or insurance services. Russia has also been excluded from major global financial services, and around $290 billion of its central bank, the Bank of Russia, assets have been frozen that are invested in their jurisdictions. Russian airspace is closed to most western planes, and western ports are closed to Russian vessels.
Oleg Itskhoki of Harvard University and Elina Ribakova of the Peterson Institute for International Economics maintain that economic sanction is not a silver bullet. Moreover, as they point out, Russia was able to prepare for the financial penalties due to its previous experience with sanctions in 2014 after their invasion of Crimea. This time, they have successfully diverted much of their business away from Europe, ramping up trade with China and India.
Sanctions on oil export have been beaten by a large ‘dark’ fleet of uninsured vessels. The ‘shadow fleet’ has enabled Russia to create a parallel shipping structure, which disguises who it is trading with whom and how. For example, tankers transporting crude oil from Russia may involve a ship-to-ship transfer in the Laconian Gulf off the Greek coast, a common meeting point for shadow fleet vessels that obscures the origins of their cargo.
This year, Russia is exporting 239.9 million tons crude at the rate of 4.8 million barrels per day. This may be compared with Iraq’s 3.3 million barrels per day and Saudi Arabia’s 7.48 million barrels per day.
Russia has not been hit in its oil exports because India has been purchasing their oil. It suits India. According to a July 11, 2024 report in the Indian Express and Business Standard citing Express’s analysis of India’s official trade data, Indian oil refiners likely saved at least $10.5 billion in foreign exchange by purchasing Russian oil at discounted prices after the outbreak of the Ukraine war in February 2022. Indian refiners ramped up their efforts to buy oil from Russia at discounted costs between April 2022 and May 2024, resulting in savings. The average landed price (that is, after including freight and insurance etc.) of Russian crude imported by Indian refiners for FY24 was $76.39 per barrel, against $85.32, the average landed price of oil imported from all other suppliers. This development has pushed oil as one of the top commodities in the trade ties between India and Russia, with Russia emerging as India’s top oil supplier. Indian Express cites PM Modi having said that the world should accept that the India-Russia oil trade brought stability to global energy markets.
The farce of the sanctions can be visualized from another angle also. Some of the crude is refined into oil products at Indian refineries, and then exported to the US and other countries that are party to sanctions on Russian oil. Products refined outside of Russia are not covered by sanctions. This is known as a ‘refinery loophole’. The Centre for Research on Energy and Clean Air (CREA) has shown that during December 2022 to December 2023, out of a total of $9.1 billion worth of refined products made from Russian crude, US alone purchased worth $1.3 billion from India.
According to a CNN report by Nick Paton Walsh and Florence Davey-Attlee in February 2024, Russia’s federal revenues ballooned to a record $320 billion in 2023 and are set to rise further still. This will enable them to sustain a lengthy war without economic fatigue setting in.
According to a Reuters Exclusive report in September 2024, this year alone Russia is going to earn $240 billion from oil and gas exports, that is, $13 billion increase on 2023.
How USA is benefitting from the war
A number of international scholars have shown that the US is benefitting heavily from the war. Jonathan Masters and Will Merrow show that out of the $175 billion total, most of it is paying for American factories and workers to produce the various weapons that are either shipped to Ukraine or that replenish the US weapons stocks the US has drawn on during the war. This is done under the Presidential Drawdown Authority (PDA), which allows the president to authorize the provision of weapons or services from Defense Department stockpiles to partners.
Prof. Jeffrey Sonnnenfeld and Steven Tian maintain that 90% of Ukraine aid dollars are not actually ‘lost’ to Ukraine. Rather, the money stays in the US. Practically all the munitions Ukraine is most reliant upon are manufactured in the US where leading defence contractors have invested tens of billions in over 100 new industrial manufacturing facilities, creating thousands of jobs across at least 38 states directly, with vital subcomponents sourced from all 50 states. Investigation by Marc A. Thiessen for The Washington Post confirms this.
Anastasiia Lapatina points out in her paper in Lawfare that Ukraine gets most of the old American weapons pulled from US reserves; American companies produce new weapons to replenish them. America’s military-industrial complex also restocks inventories of its NATO allies who similarly help Ukraine. Not only has this revitalized the communities around large manufacturing plants in several states, it has created so many high-level jobs that some places are running short of qualified workers. Clever, isn’t it?
Everybody loves a good war
For Russia, the secret lies in continuing the war at a low level of intensity. As every power that has had invaded Afghanistan over the centuries, be it Mughals, the British, the Soviets and lastly the Americans, learnt it painfully, fighting battles and beating them in battles is one thing; holding on to the conquered territory, rebuilding ravaged areas and securing your hold on to that is quite another. Russia will face the same problems in the nearly 15% of Ukraine it has captured. Diplomatically recognizing the liberated Donetsk and Luhansk people’s republics is one thing; making them economically and militarily viable entities quite another.
Remember, it is not everybody’s cup of tea. Prof. Alexander Dynkin proudly says, “Our fundamental science is world class. Our national innovation system is successfully solving the tasks of technological sovereignty and using the vacated market niches.” Mark the words, science and innovation. Remaining nations of the world must introspect on these two aspects and see for themselves where they stand. Economies based largely on service sector cannot withstand the kind of economic pressure that was unleashed against Russia.
These are hard, undeniable facts and you cannot escape them even if you decry war and pretend to desire and promote peace, love and friendship amongst all nations of the world from every possible forum. Preaching peace for consumption of the dumb public, even as the very nations continue to spend the maximum on arms and armament, is nothing but chicanery of the worst kind. To talk of peace to the human race, which has fought close to 14,600 wars of various magnitudes in recorded history of some 5000 years, is simply unadulterated crap. Real life is not a romantic fool’s pipe dream. The Romans rightly maintained, ‘Si vis pacem, para bellum’, that is, ‘If you want peace, prepare for war’. In the modern context, we may modify it slightly, ‘If you want peace, prepare for war; fighting wars will make you wealthier’.
