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https://theowp.org/reports/effects-of-war-in-ukraine-on-the-russian-economy/

Effects Of War In Ukraine On The Russian Economy

 Marianna Schantz  August 10, 2022  No Comments

Russia’s invasion of Ukraine on February 24th, 2022, has triggered damaging ripple
effects on the global economy. With more than 12 million people estimated to be
displaced and more than 13 million people in need of humanitarian assistance,
according to the World Bank Group, the war in Ukraine is causing a great
humanitarian crisis. 

In the surrounding regions, a mass of refugees has put pressure on basic services,
and the main global economic impact has been through the commodity markets.
Prices for commodities that Russia and Ukraine supply have dramatically increased
including energy, wheat, fertilizers, and some metals. Russia has the world’s largest
natural gas reserves with 48,938 bcm in reserves, and it is the world’s largest
exporter of gas accounting for about 45% of the European Union’s imports in 2021,
according to Al Jazeera. 

Because of the limited sanctions during the 2014 Crimea annexation and a false
sense of security with hundreds of billions of dollars in reserves, President Vladimir
Putin believed he could ride out any economic sanctions the West fired. However,
the invasion of Ukraine produced a mass unity of the European Union in their
economic response. 

The first month of the war was characterized by disarray in politics and on the
battlefield, according to the Foreign Policy Research Institute. Multiple Russian
generals died on the battlefield, Ukrainian farmers towed away disabled Russian
tanks, and many Russian oligarchs fled the country along with their assets. After
initial major setbacks, Russia reoriented the army towards a concentration of forces
in eastern Ukraine, drawing out the war as long as possible. 

Countries around the world condemned the move to invade Ukraine, abruptly cutting
economic, business, and diplomatic ties. Over 1,000 companies – American,
European, and Japanese – abandoned business operations in Russia. 

According to Fortune, “Western nations booted Russia from SWIFT—the

international payments system that moves money around the world—and froze
Russia’s central bank assets, barring it from accessing its $630 billion foreign
reserve stash.” 

The combined economic impact on Russia caused the ruble to tank, yet recently the
ruble has rebounded and is doing quite well despite the war. However, in an
interview with NPR, Russian political scientist Ilya Matveev explains that the strong
ruble is a bad indicator of Russian economic importance because it reflects how
sharply imports have fallen. Importers no longer need so much foreign currency
because they are not allowed to import goods from the European Union, the U.S.,
and other Western countries. Because there is no use for foreign currency in Russia
as of now, this will hurt the Russian economy even more. 

Matveev explains there is rampant inflation in Russia, with yearly inflation estimated
at around 20%-25%. There are shortages of goods causing prices to spike, and
employment is cascading due to the closure of factories belonging to Western
companies and businesses. The effects are projected to become worse in the
coming months as the war continues along with harsh economic sanctions. 

Sanctions have also done great damage to Moscow’s military-industrial complex.

The war in Ukraine and sanctions have limited the Kremlin’s ability to produce
advanced military technology. Shortages on microchips and some high-precision
equipment due to the blockade all have restricted Russia’s ability to construct more
and more arms. The Russian military-industrial complex is heavily dependent on
imported high technologies, especially from Germany. However, with sanctions and
diminishing supply, it has proven incredibly difficult to produce modern weapons. 

Russia’s military is even losing civilian contractors due to its lack of financial
compensation, according to a letter from the trade union of the civilian personnel of
the Russian military in the Siberian region. The trade union complained to Russian
Prime Minister Mikhail Mishustin in a letter about extremely low wages and mass
layoffs. In April, a Vladivostok shipyard was supposedly unable to meet 25 billion
rubles worth of government orders to build two tankers, missile boats, and maintain
other vessels.

Russia has the world’s largest natural gas reserves with 48,938 bcm in reserves, as
previously mentioned, and it is the world’s largest exporter of gas accounting for
about 45% of the European Union’s imports in 2021, according to Al Jazeera. 24.8%
of the EU’s oil imports come from Russia. Though gas exports attract more
attention, Russia earns much more from its oil sales. Rystad Energy estimates that
higher oil prices will generate $180 billion in oil tax revenues this year which is
equivalent to 60% of Moscow’s 2022 federal budget. Many democracies have been
calculating how to phase out Russian oil in a way that will not drive prices too high
and crash the global economy. 

In May, EU leaders agreed to ban most Russian oil imports by the end of 2022.
According to BBC, the ban will affect oil arriving by sea, but not pipeline oil, following
opposition from Hungary. With Poland and Germany pledging to end pipeline
imports, about 90% of Russian oil imports will be blocked, cutting off a major source
of financing for Putin. 

Despite the EU’s efforts to block oil imports, Russia has reoriented its export
strategy towards Asia – notably China and India which have large, rapidly growing
economies. Though, the Asian markets do have limits. According to The Washington
Post, oil has a finite pipeline capacity in the region, and oil tankers must make long
journeys to deliver loads. This will eventually take a great financial toll on the
Kremlin. 

Senior analyst Daria Melnik at Rystad Energy stated that Russia’s production by
2030 will be 2 million barrels a day lower than before the war due to permanent
damage from closing down production in wells that cannot be restored. 

Though Russia benefits now from high prices of oil – and in turn tax revenues –
pivoting exports to Asia will take massive infrastructure investments that will make
Russia’s production and revenues drop immensely in the medium term. 

Author Recent Posts

Marianna Schantz
Bibliography: Marianna is a Correspondent Intern at the Organization for World Peace. She is
currently an undergraduate student at Tufts University double majoring in International Relations and
Russian and Eastern European Studies with a minor in French. She is particularly interested in
national security issues, Russia and Eastern Europe, and foreign policy.

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