Home MOREBUSINESS & ECONOMY Entrenched in Conflict: The Economic Imperative Driving Russia’s Endless War

Entrenched in Conflict: The Economic Imperative Driving Russia’s Endless War

by EUToday Correspondents
Sanctions
The imposition of extensive economic sanctions has isolated Russia from major global financial systems, freezing a substantial portion of its central bank assets and limiting its access to international markets.

Russian airspace remains closed to most Western aircraft, while Western ports deny entry to Russian vessels. Moreover, strict caps on purchasing and processing Russian oil, coupled with restrictions on military-related transactions, have further constrained Russia’s economic manoeuvrability.

Despite these adversities, Russia’s economy has not crumbled; rather, it has adapted to the exigencies of protracted conflict.

With its focus squarely on the ongoing war in Ukraine, the Russian economy has displayed unexpected resilience, even driving economic growth.

According to the International Monetary Fund (IMF), Russia is anticipated to experience GDP growth of 2.6% in the current year, surpassing forecasts for both the UK and the EU. Notably, Russia’s budget deficit remains comparatively low.

Central to Russia’s economic resilience is its strong and independent central bank, which has implemented aggressive interest rate hikes to mitigate inflationary pressures. Moreover, stringent government controls prevent capital flight, ensuring the stability of the ruble within Russia’s borders.

Innovative circumvention tactics, such as exploiting legal loopholes and leveraging intermediary countries, have allowed Russian firms to bypass sanctions effectively. The oil sector, in particular, has demonstrated remarkable adaptability, buoying Russia’s public finances despite external pressures.

However, the war itself serves as a double-edged sword for Russia’s economy; while high energy prices bolster government revenues, the exorbitant costs of sustaining military operations present a significant economic burden.

With approximately 40% of the government budget allocated to the war effort and military expenditure exceeding 10% of GDP, the conflict in Ukraine emerges as a pivotal factor shaping Russia’s economic trajectory.

Paradoxically, Russia finds itself ensnared in a dilemma: it cannot afford to win the war, yet it cannot afford to lose.

The economic repercussions of conquering and stabilising Ukraine would be prohibitive, while defeat would precipitate internal turmoil and international isolation.

Consequently, a protracted stalemate emerges as the least worst option for Russia, albeit one fraught with economic and social challenges.

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