After two years of war, can Russia be bullish on its economy?

But initial data for 2023 suggested a better performance. Minister of Economic Development Maxim Reshetnikov expected growth in GDP to hit 3.5%, higher than the pre-Covid growth rates of 2.8% in 2018 and 2.2% in 2019.

So, are sanctions working? Alicia Kearns MP, who chairs the UK Parliament's Foreign Affairs Committee, said in January 2024 that they were being circumvented.

"I think sanctions are working in some way but where we have failed is that there is currently too much sanctions evasion taking place in Central Asia, for example.

"Russia has been able to rebuild its defense industrial capability and that is where it is building its economy".

Firms in Russia

Increased defence spending and high oil prices throughout 2023 have certainly helped Russia.

Likewise, the initial exodus of foreign multinationals in 2022 has slowed. Most of those that were going to exit Russia have now done so.

Yet as the second anniversary of the invasion looms, some well-known Western companies remain. Some have even expanded to fill the gap left by others.

In July 2023, Business magazine Fortune published a list of around 400 Western companies still in Russia. It included Benetton, Nestle, Shell and Philip Morris.

in February last year, Philip Morris' chief executive Jacek Olczak was asked about its initial commitment to sell its Russian business. Olczak said it had proved more complicated than expected.

"If I had a buyer who could execute the transactions, yes, we would do it," he said. "But it doesn't exist… There is no hope." So, where did he end up in his thinking? "I'd rather keep this whole thing."

Civil society group B4Ukraine and the Kyiv School of Economics found that global corporations—including those that exited—made more than $14bn of profit in Russia in 2022, paying $3.5bn in tax to Putin's government.

Their report found that firms based in the G7 (a club of the richest nations) and the European Union were cumulatively the highest payers of tax to Russia on their profits there in 2022. In effect, they were helping to fund Putin's war.

Trade and inflation

After Europe turned its back, Russia sought other friends and bolstered its economy by increasing its trade with China and India.

Russia-China trade grew by around 30% in 2021-22 and 27% in 2022-23. It hit the $200bn mark in November 2023.

China has also invested in major Russian infrastructure projects and wants to jointly develop oil and gas fields.

Trade between Russia and India did even better, doubling between January and October 2023 to reach $50bn.

Given all this, the average observer might expect prices in Russia to have fallen. In fact, they are rising. Inflation is in double figures. Central bankers in Moscow are worried.

In December, they put interest rates up to 17% to protect the currency, but this has not stopped some worried Russians withdrawing money from banks.

There are other clouds, too. Russia's reserves are at their lowest in four years. The all-important price of oil has dropped. Russia's credit rating has fallen. And its GDP is now expected to contract by up to 5%.

Mounting problems

The US Treasury Department said other oil exporters had grown much more than Russia, adding that its economy was 5% smaller than it would have been, given pre-invasion forecasts. Others say Russia sold much less last year.

Alexander Knobel of the Gaidar Institute for Economic Policy and Alexander Firanchuk from the Russian Academy of National Economy found that Russia's overall exports in 2023 were projected to fall by 29% compared to 2022.

This is a return to the pre-Covid levels of 2019, while imports were up by about 10% compared to 2022.

Knobel and Firanchuk felt that, although important, China had other trading partners they considered more valuable than Moscow.

"China's dependence on supplies of manufactured goods from unfriendly countries surpasses considerably its dependence on imports of Russian raw materials," they said.

"So, there are risks of secondary sanctions affecting the mutual trade between China and Russia, particularly if imposed against individual companies."

Yigal Chazan from Geopolitical Monitor also pointed to Russia's problems, including high interest rates, inflation, and labour shortages, given that many highly educated workers have left Russia (most in the days after the invasion).

Read more: Why Armenia has become an attractive business haven for Russians

Although the rouble later rallied, the collapse in its buying power prompted the Kremlin to order Russian exporters in major sectors to convert most of their foreign currency earnings into roubles.

For now, capital controls seem to be working, with the rouble at $89 as of late January 2024. But for how much longer?

Foreign reserves

For all Putin's bravado, confidence in the Russian currency has been badly damaged. And as the winter thaws, Russia's energy exports will fall.

Russian reserves of more than $300bn have been frozen by the EU and other G7 countries, where there has been talk of even more extreme action: asset seizure.

Kearns said: "It should be Russian frozen assets paying for not only the defeat of Russia, but the rebuilding of Ukraine."

In response, Kremlin spokesman Dmitry Peskov said Russia would challenge any confiscation in the courts and take counter-measures.

"It will undermine the confidence of other countries in the US and EU as economic guarantors," he said.

"Therefore, such actions are fraught with very, very serious consequences. If something is confiscated from us, we will look at what we will confiscate."

Russia claims to have a comparable amount of foreign assets in Russian accounts, but this has not been verified independently.

Looking ahead

US Government analysts say the longer-term prospects are bleak for the Russian economy, with foreign direct investment in Russia net-negative since February 2022.

Washington also points to Russia's increasing 'brain drain' and decreasing access to new innovations, both long-term drivers of growth.

At the same time, Putin will count on 'Ukraine fatigue' and a shift in the West's priorities, such as to Israel and Gaza.

With the possible election of Donald Trump in America and far-right nationalists in Europe, does Moscow simply need to sit tight and ride out the storm?

There will be no surprises in Russia this year, analysts say. Putin will win a further term in office, and his critics will continue to be silenced or leave.

Yet some think the Russian president's display of confidence is a sign of fragility. He needs his citizens to keep believing that things are going well, even though the economic picture may not be as rosy as Putin paints.

Returning to his claim that Russia has overtaken Germany in terms of GDP PPP, economist Vyacheslav Shiryayev suggested that this was like comparing apples and pears.  

"You cannot compare the price of a train ticket for a high-speed, comfortable train ride in Germany with the price of traveling in our rickety elektrichkas in Russia," he said. "But this is what GDP PPP essentially does."

The best indicator was total GDP, he argued. In this, Russia was still eighth, behind Germany, the UK, and France. In terms of GDP per capita, it was outside the top 50.

For Shiryayev, Putin's claim is "like manufacturing a huge Zaparozhets (an old, unreliable Soviet car), then saying 'Our huge Zaparozhets is better than your Mercedes,' based purely on the amount of metal used… This is what Putin is doing".