Translated from GegenStandpunkt 3-25
Russia’s war economy
War is costly. The state, which wages it, pays for it with money it doesn’t have to spare. That is, with debts it vouches for and pays interest on – with even more debts.
In the past, this was called war credits. Accounts were settled with the peace treaty. To be sure, that didn't bring any profit even to the victor – the bourgeois state does not wage war for spoils in that sense. At most, its victory brought reparations from the loser. For the loser, defeat meant ruin in any case.
That’s no longer the case in modern capitalism. Now the settlement comes not only at the end, but takes place continuously from the very beginning: The debts for war are factored into the creation and circulation of national credit money as unproductive expenses. The effect is called inflation: a rise in the cost of living for everyone who doesn’t set the rising prices, but pays them. Cuts are also made on whatever wages and the national budget do for their survival. Through their ongoing impoverishment, the state pays for the costs of its war. Whether “the economy,” which pays wages and sets prices, continues to grow despite the devaluation of the earned money or whether it shrinks is also very much in question. This is determined by economic growth and the competition between nations for better money. This does not cease even in modern warfare; it’s merely – partially – postponed and gets going again in peacetime more than ever. This can economically ruin even military victors.
Russia’s war economy is a lavish lesson on this political-economic feat.
* Russia launched its “special military operation” in Ukraine by deploying its superior armed forces, which, according to relevant statistics, are the second most powerful in the world. To this end, it maintains a highly capable “military-industrial complex” that equips the Russian armed forces with all the necessary types of weapons, including strategic deterrent weapons, which enable Russia to wage war autonomously at the level of a global military power. As befits a modern state, it includes the financial expenditures for this as a fixed item in its budget. However, the support provided to Ukraine by the NATO countries – which are continuously supplying their proxy with ever-increasing quantities of increasingly powerful conventional weapons – has transformed the “special military operation” into a full-blown war of attrition. And so Russia faces the challenge of having to constantly renew the necessary military superiority on the ground while simultaneously maintaining its deterrent power against NATO. This war effort is straining its economy in new ways: the state is converting into a war economy.
I. The state’s demand for military supplies and its consequences for the established market and (re)production conditions
The state, first of all, has an enormous need for soldiers as well as military goods. It needs virtually every category of conventional weapon which comes into use on the battlefield and a reinforcements which enable it to take on the Western-equipped Ukraine. This includes vehicles, weapons, ammunition, the appropriate equipment for soldiers, as well as a combat-ready infrastructure in the wider area surrounding the front, and a vast amount of energy. Russia’s need for means of violence goes beyond the quantitative extension of the production of – partly older – military equipment. What is needed is a complete modernization of arms production: from drones to drone defense systems, hypersonic missiles and smart bombs, all the way to the full integration of various weapons systems into new capabilities in electronic warfare – including the ability to jam the enemy’s systems; Russia needs the entire spectrum of cutting-edge military equipment and technology. Wear and tear on the battlefield also ensures a constantly rising demand, so that the arms sector must draw on old stockpiles, fully utilize its existing production capacities, acquire new ones, and transition to three-shift production running at full capacity.[1]
The state orders and pays for what is needed with its money. So the military, the outlays for the frontline infrastructure and the production of weapons, backed by massive state purchasing power organized in line with the war aim, become the central reference point for the rest of the economy and at the same time enter into competition with it: Recruited soldiers are lost as part of the labor force; arms production absorbs metals, intermediate products, machinery, tools, etc., as well as labor from other industries, thereby causing shortages in many areas and thus, consistent with a free market economy, across-the-board price increases.[2] Because they pay higher prices, arms manufacturers become particularly valued customers and receive preferential treatment in terms of supply. While some companies benefit from this, the higher costs – particularly the sharp rise in wage costs for skilled workers – are in turn putting a strain on established business accounts and functioning commercial relationships in many branches. Companies are suffering from higher prices, longer delivery times, and even the complete failure of scheduled deliveries. Attempts to compensate for these issues are accompanied by a loss of quality and, in turn, higher costs. The affected companies are able to sell less, their profitability is declining, and, in worst case scenarios, they have to halt production. The disruptions continue to affect customers in other industries all the way down to the end consumer. Overall, Russia is thus grappling with significant disruptions across the entire national economy.
II. The material basis of the war economy and the effects of the sanctions regime
Inherited and expanded industrial capabilities, access to natural resources, and the results of participation in the global market
The state can procure the necessary means of violence on the basis of a national economy which in turn has the resources and industrial capacity to meet wartime needs through domestic production – Russia is one of the few countries with an independent arms industry and the corresponding industrial base. After the upheavals of the transition years, Russia, through its industrial restructuring program, has succeeded not only in preserving much of its former industrial base, but also in expanding and modernizing it. It has heavy industry, a large manufacturing sector particularly in mechanical engineering, and in some areas such as the nuclear industry can even produce high-tech products at a level suitable for the global market. The latter also applies to the arms sector, whose competitive products – ranging from missile defense systems to fighter jets – have made Russia the second largest arms exporter, and its ongoing innovations have made it a national technology driver. In addition, there are numerous other industries that produce for the large domestic market – IT, the civil aviation industry, automotive manufacturing, the construction industry, light industry, and a food industry that ensures a supply independent of hostile foreign nations.[3] Together with the institutions that identify and disseminate the knowledge needed in the field of research and development, they form a broad base of additional productive forces that are maintained and supported by the state.
This project has had the special advantage that Russia, as the world’s largest country by land area, possesses nearly every natural source of production[4] needed to meet domestic demand at low cost, while also enabling it to sell on the world market. Russia’s energy resources in particular, but also other minerals in high global demand – uranium, palladium, titanium, nickel, etc. – as well as agricultural products, serve as Russia’s top export hits, generate abundant foreign exchange reserves and provided the country with solid international solvency for its industrial policy objectives.
First, Russia used these foreign exchange earnings to gain access to foreign technologies such as industrial equipment, IT systems, machine tools, etc., that it could not produce competitively on its own; this was linked to hopes for technology transfer and complemented by the development of local production capabilities. Second, the steady stream of revenue from raw materials provided the companies known as the “raw materials giants” with a massive capital base that fostered growth[5] across entire supplier industries and created a large and, at the same time, very solid foundation for Russian finance capital to conduct its lending business.[6] As a financial center underpinned by its wealth of natural resources, Russia opened itself up to international financial markets in both directions: Russian capital increased its financial strength through global investments and, conversely, its appeal as an “emerging market” attracted an influx of Western capital, turning Russia into an object of speculation for international loans.
Through this integration into the global market, Russia made itself dependent on global business cycles – a fact it has often learned the hard way during the crises of recent decades. This, combined with Western boycotts and sanctions that were already in place at the time, slowed and undermined the country’s national development.
The Western sanctions regime and its consequences
It is precisely this dependence on the global market that the West – which acts as its supervisory power – is exploiting to take away Russia’s ability to wage war. Although the war is taking place outside Russia and only sporadically on Russian territory, Russia is facing an economic war of a new kind, aimed at ruining its economy.
First and foremost, this involves a boycott of Russian imports of every components that is – or is suspected of being – necessary for war production. Intermediate goods for weapons production, dual-use goods, electronics, tools, spare parts, means of production, and complex industrial facilities are being added to the sanctions lists which the West is attempting to make binding for the rest of the world through the threat of secondary sanctions.[7]
However, the combination of Russia’s economic distress and its vast foreign exchange reserves remains attractive to some third countries, allowing Russia to circumvent the import boycott – albeit on a reduced scale – through parallel imports, by switching suppliers, and large scale smuggling. This draws Western nations’ attention all the more to the second front of their economic war: Through every type of sanction, import bans within their own countries, and price caps, they are attempting to dry up “Russia’s war chest” and restrict Russian exports, which, in addition to steel, wheat, and fertilizers, primarily affect oil and gas.[8]
For the sanctions on imports as well as exports, Russia is excluded from the SWIFT international payment system. Together with further financial sanctions,[9] the aim is to deprive Russia of its ability to make international payments. This means excluding the ruble from international foreign exchange markets and ending its convertibility – steps which, while not completely stopping the trade in goods, makes its continuation more complicated and increasingly expensive for Russia. Furthermore, Russia is thereby losing its status as an object of speculation for international finance capital, which – combined with the freezing of Russian assets abroad, the massive politically mandated capital flight, and the ban on investments in Russia – severely restricts the financial power of Russian capital.
The resulting capital shortage, combined with the lack of necessary imported goods, is threatening production in many areas, forcing companies to restructure or shut down operations. This, in turn, disrupts established industry relationships, causes prices and costs to rise across the board, and leads to shortages for some companies,[10] while causing overproduction and sales difficulties for others.[11] Last but not least, the restriction of Russia’s access to Western means of production means that the production networks that have not yet been destroyed are forced to operate at a reduced capacity. To maintain its national war production, the state faces the task of providing its economy with a resilient material foundation. Its means for this are money and credit.
III. Financial and capital requirements for an efficient national war economy
This primarily pertains to the conversion to war production in the strict sense. The necessary weapons and infrastructure must be paid for in rubles, and the military must be maintained; arms contractors need secure access to the country’s abundant natural resources and the capacities of its industrial base. The state accomplishes this by providing the relevant actors with the necessary capital; it determines the amount for this with the following factors: First, existing production capacities must be activated; this means ensuring the conversion of existing factories, the recommissioning of old factories – in some cases leading to the revitalization of old Russian “rust belts” – and priority access for the defense sector to the necessary dual-use goods, resources, etc. Second, there is a need for the further development of military technology and, more broadly, society’s productive forces. The government identifies strategically important sectors, updates development strategies, commissions the development of national alternatives to Western technology, and accelerates their development – initiatives it has long envisaged under the ideal of technological sovereignty, but which now takes on a new sense of urgency. Third, the war and the shift in production are creating a greater need for new infrastructure.[12] This applies to the transportation and logistics sector, but also to energy supplies, the housing needed for the newly redeployed workforce, and last but not least the combat-ready expansion of the front lines and the corresponding access routes.
This demand also includes necessities resulting from the safeguarding of the nation’s overall supply. The state must ensure the resumption of disrupted production chains, reduce its dependence on imports as much as possible,[13] compensate for the loss of European markets by shifting logistics to the east,[14] and keep struggling businesses alive through various forms of support; partly by allowing the deferral of payment obligations to ensure the solvency of businesses, partly through tax relief, partly through direct payments from its budget and other sources, by providing subsidies or by stepping in directly as a “major investor.”[15]
IV. The state’s fundraising …
… through taxation of national capital accumulation
The state acquires the funds to finance its budget by statutorily accessing the monetary proceeds that its capitalist society creates under its sovereignty. It initially meets the increasing demand for its economic means of power by increasing taxes.[16] This includes arms companies and their suppliers; although their profits are made solely from state payments, the state – in its egalitarian view – nonetheless recognizes them as part of the ensemble of money-makers whose corporate enrichment serves as a source of its power. To the extent that the Russian state draws on the monetary wealth earned in its society, it simultaneously strains this very source. It damages an already burdened economy whose performance remains essential for its war and whose lack of capital it simultaneously takes into account, which is why it in turn limits its exactions and mitigates in many cases their impact through special conditions.
It finds an exceptionally durable source of revenue in the raw materials companies: The revenues they generate are particularly favorable relative to the low costs involved in extracting and transporting the raw materials. Compared to companies in the manufacturing sector, they can achieve enormous profit margins. Since they do not produce for the domestic market, but rather export to the global market, they generate significant foreign exchange; while sanctions have reduced export revenues overall, Russian raw materials remain an indispensable source of energy for many countries, so Russia continues to find buyers.
In addition to serving as a source of funding, export revenues continue to maintain Russia’s access to the global market and its international financial standing, despite all the financial sanctions. To this end, the state organizes an internal currency exchange system that takes into account the import needs of its economy, the capital growth of its natural resource companies, and, consequently, the servicing of its financial needs.[17]
The taxes and levies that the state imposes on the foreign currency revenues of the raw materials companies – converted into rubles – account for about one-third of its total budget revenue and, on paper, roughly cover the cost of the war – at least the officially reported expenses. In addition, the state uses the revenues from these raw materials companies to finance various state funds, most notably the National Wealth Fund (NWF), a special state asset pool based on commodity revenues that is largely invested in Russian securities and serves to reduce the impact of volatile global oil and gas prices on the state’s budget planning.[18] Since the start of the war, the state has increasingly relied on these funds – for example, to finance costly infrastructure projects or its budget directly – which is steadily depleting the fund’s liquid assets. In addition, the state requires the energy companies to use the power of their capital for various purposes that it defines: from the order to supply industry and ultimately the general population with electricity and heat at affordable prices nationwide, to mobilizing it for the maintenance and expansion of infrastructure, up to the development of the “Far East” with pipelines, roads, etc.[19]
… by mobilizing the nation’s credit ...
To meet the financial and capital needs of an economy mobilized for war production and sanctioned by the West, the state is not limited to the financial returns generated by the course of business in its society, from which it skims a portion. For its own financing, as well as for providing the economy with capital, it has at its disposal the national banking industry – which has the ability to make available, in exchange for interest, the power of money that has not yet even been created through successful capitalist business activities.[20]
This industry has been, of course, particularly hard hit by the disruptions to the nation’s economic life, to the many individual capital circuits, and to the reproduction of the country’s capital as a whole caused by war and economic warfare. The credit cycle – advances that are recovered through the debtors’ successful business transactions and, overall, through the accumulation of capital, thereby boosting the industry’s power to create credit – no longer functions as needed, given the confusion caused by conflicting new and old requirements. Industries essential to the war require advances on an unusual scale, while others no longer offer the usual prospects for success. The security of payments on interest and principal can no longer be obtained as before; this hinders or even prevents the creation of credit and lending. Where business continues, unpaid receivables may accumulate and must be written off as worthless. Wherever the state stimulates profitable production, restricts it through price dictates and controls, or allows it to fail due to a lack of purchasing power, it is called upon to act as the master and architect of the national credit system. It fulfills this task – by no means without causing new disruptions and imbalances – by deploying the entire repertoire of state credit management: by instructing the major banks, which belong to the state anyway, to extend low interest loans; through specialized banks with specific financing tasks; and by intervening in the credit business via subsidies, guarantees, etc.[21] Above all, by adjusting its banking regulations and offering favorable refinancing terms through its central bank, it gives its banks the leeway to largely free credit creation from being tied to available deposits.[22] These are all measures that demonstrate that the deposits, revenues, and collateral with which the banking industry, under ideal and normal circumstances, generally manages its credit cycle, do not meet the new performance requirements in the first place. Through its interventions, the state itself steps in with its own financial resources as an investor, a credit guarantor, and ultimately as the source of the credit creating power of the nation’s finance capital.[23]
The state also uses the services of the financial system for its own benefit: In accordance with the rules of capitalist statecraft, it covers the remaining gap between budget revenues and expenditures – which have also increased as a result of state loan subsidies – with bonds (OFZs) from its credit institutions, which do not deplete the banks’ financial power but strengthen it, because the debtor, the state, simply stands behind them with its sovereign power as the guarantor of their value.[24] Its decree creates the security and thus the financial and capitalist growth at its disposal as a financial mass for meeting its monetary needs: as a credit mass that the state itself, in its capacity as a central bank, transforms by virtue of its monetary sovereignty into purchasing power through the issuance of credit tokens, that is, by circulating them as rubles. In this way, it enables the banks to conduct their business activities, including the financing of government budget deficits.
Through the central bank, the state uses its power of decree to turn debts into means of payment that serve to give it free rein over the country’s wealth and population. By deploying the ruble as a means of command that is effective nationwide and omnipresent in the daily life of its society, it exercises its rule and acts as a monopoly on the use of violence, allowing its nation to wage war for years on end. Putin’s new Russia: with its war economy, a perfect example of the intimate symbiosis between capitalism and state power.
V. The disarray and trial by fire of Russia’s war capitalism
This does not, however, change the fact that the masses of credit with which the state manages its society are not economically justified – through the accumulation of capitalist wealth thereby brought about – as an anticipated increase in capitalist growth potential, realized in value as “abstract wealth,” on anything even appproaching the same scale. The state pays with debts and makes its society pay with debts, the vast majority of which does not represent future capitalist returns, but mere state consumption – and, at that, the most unproductive kind imaginable, even if some technological collateral benefits result from it: The use-values created and paid for are consumed on present and future battlefields; their value, quantified and circulating in rubles, is unproductively consumed.
Living “beyond one’s means” in this way is certainly not, in principle, alien to any modern capitalist state. In every case, the fiscal authority expends means of payment that represent a promise – which it has no intention of redeeming and is not even intended to be redeemed – of future payments on interest and principal in a nationally created and earned money, thus quantifying nothing but a state decree. To the extent that the commercial use of such means of payment – without any prospect of creating equivalent value – takes effect as competition for relatively scarce goods, i.e. as inflation, statistics record the result as a devaluation of the national credit money, which affects the various competing market participants differently as appropriate and represents a percentage reduction in national capital growth overall. This is also the case in Russia; and just as is customary everywhere in comparable capitalist economies, the authorities there deal with it in the same way: They calculate an inflation rate – in Russia’s case, approximately 10%; they diagnose the cause as an “overheating” of business activity due to an undesirable “excess of money”; and the central bank attempts to counteract this by raising the price of the liquidity that the banking sector draws down from it.
To this end, the central bank is raising the key interest rate to around 20%, which – by making borrowing more expensive – is intended to curb the increase in additional payment capacity and the accompanying price increases, thereby restoring the soundness of the nation’s creation of credit – with the contradictory effect that this not only increases the price of the state’s own indebtedness, but also puts an even greater strain on the ability to pay of Russian companies, which are already struggling under the rising interest burden. For this reason, the state is supplementing its central bank’s measures with an expansion of its credit subsidies, which in turn undermine the fight against inflation.[25] In Russia, this contradiction manifests in the form of an ongoing dispute between the head of the central bank – who complains that state support measures are sabotaging her monetary policy – and various business representatives who warn of an impending wave of insolvencies.
However, for Russia’s war economy, the core of the matter – the relationship between the state-authorized creation of purchasing power solely for unproductive state consumption and the actual expanded reproduction of the power of capitalist wealth – has its own special significance. With the credit it creates and allows to be created and uses as a means of payment, the state does not finance any useful, indirectly productive inputs, but rather destruction – blowing away, literally, a whole commodity arsenal. The funds expended for this purpose diminish the reproduction of the nation’s necessary productive wealth as a whole. Capital growth certainly does still take place; but the state’s capital advances that go into the growth of firms and industries vital to the war and credited accordingly do not pay for themselves through sales to other capitals – that is, by contributing to their reproduction and accumulation – but merely increase the state’s liabilities and act as an unproductive inflation of the national capital advance in relation to the overall social capital cycle. This is not accompanied by progress in the national production process, but rather its decline – a reduction in capital’s power to reproduce and grow. Because the resources that the state consumes for its war are no longer available to sustain that power, which for the affected business community manifests itself as rising prices that can’t be paid or can only be paid with devalued money. The Russian inflation rate – whether pegged at 10% or any other figure – fails completely to adequately reflect the extent of this damage.
Russia’s ruble capitalism has obviously been holding up for four years now. The states’s calculations add up because a source of money is available that brings in disproportionately more money than its operations cost in advances: the – previously mentioned – export of energy resources and other natural substances which are worth world money. In terms of the mathematical ratio between capital outlays and returns at the national level, this appears as an enormous increase in capital productivity, thereby justifying the national debts used to finance the war and the procurement of a growing stockpile of suitable military equipment. However, this is not true compensation for this unproductive expenditure. For the state, this revenue spares it from having to significantly increase its debt instruments, whose value is backed solely by its sovereign monetary authority. What it uses this revenue to pay for – the costs of war and the operations of its arms industry – does not thereby become productive; not only does it fail to increase the productive power of the nation’s capital, but it also deprives it of the necessary material resources. The money earned so inexpensively through exports is lacking precisely where it is not only earmarked for investment in maintaining and increasing the accumulation of national capital, but is also necessary, planned for, and indispensable to the status of Russian capitalism as a potent player in global business and as a force on world markets not only for oil and gas, but also for technology, for money and capital. The fact that the surpluses from the export business that Russia takes in despite all the Western sanctions are mathematically – as they say – equivalent to the costs of its war effort is nice for a ratio in which the central bank can offset foreign exchange reserves against the creation of liquidity in its balance sheets, rather than having to show only skyrocketing liabilities – ultimately – of the state power. This changes nothing about the diminution of the growth power of the nation’s total capital being caused by the disproportionate growth in the accumulation of credit required for the war within the “military-industrial complex.”
* Russia’s war economy is a severe test of the capacity of its national capitalism to serve as a material basis for the costly self-assertion of Russia’s world power in the Ukraine war against the wealth that the West is investing there in wearing down Russian military power. Consequently, this capitalism requires for its survival – that is, the restoration and expansion of its economic power – an outcome to the war that gives the national ruble economy the status of an economic power capable of comprehensively managing global markets for capitalist growth to its own advantage. If the productive power of national capital is to enable Russia to succeed as a militarily competitive world power, then there must be a victory that will sustainably preserve its national capitalism from ruin – that is, make it dominant on an international scale. That, too, is why Russia is fighting in Ukraine.
[1] “Poor regions such as Chuvashia experience a boom as Soviet factories are fired up again for the military ....The effect is most pronounced in rustbelt regions such as Anton’s Chuvashia in central Russia, which is home to 1.2mn people and where Soviet factories have been revived and are working around the clock to supply the war....To meet demand, some are returning to jobs they last did in the 1990s, when the Soviet Union collapsed, said Natalia Zubarevich, an economist and expert on Russia’s regions. ‘They’re in their sixties but they’re coming back because it’s really lucrative.’” (FT, July 13, 2024)
[2] In addition to the reorientation of many companies’ business activities toward the defense sector, soldiers’ pay sent home to their families is driving a significant increase in purchasing power in regions that might otherwise be economically left behind. The attrition of human material at the front and the exodus of nearly a million often highly skilled workers abroad are fueling intense competition for capable labor that drives up wages; estimates suggest a shortage of three to five million workers across the economy as a whole.
[3] Ensuring the people’s self-sufficiency in food and restructuring agriculture accordingly have been among the Russian warlord’s major projects over the past decade:
“Another important thing – this is a key moment and perhaps we will return to it again, but I believe it’s an important and fundamental phenomenon in our economy – that a natural restructuring of the economy began, because what we previously imported from Europe was cut from us, and like in 2014, when we introduced certain restrictions on the purchase of Western, European, primarily agricultural goods ... And today, as you know, we fully cover our needs in all the basic agricultural products and basic types of food.” (Putin at the Valdai Conference, fall 2023)
[4] Putin expects further exploration to yield significant capitalist benefits: “It shows that there is every opportunity for the mining industries to grow by leaps and bounds, including the strategic raw materials that are in short supply, and which will be in demand in the economy of the future. All this is not only a guarantee of the country’s resource sovereignty, but also a basis for the production of new materials, microelectronics and promising energy sources, for the promotion of domestic environmental and nature-saving technologies and scientific developments, for the creation of good jobs, and for making use of the natural competitive advantages of the Far East and the whole of Russia at a new level.” (Putin, September 2023, Plenary session of the 8th Eastern Economic Forum)
[5] This includes parts of the national machinery and plant engineering sector which supply the necessary material handling equipment; heavy industry, which provides the relevant infrastructure such as pipelines; and the IT sector, which provides appropriate sensor technology, navigation systems, modern drilling technology, and logistics monitoring.
[6] A Finnish research institute highlights the heavy concentration of highly solvent export companies in Russian lending business by classifying it as a cluster risk: “Large export firms, which typically enjoy excellent credit ratings and good debt-servicing capabilities, make attractive bank customers. On the other hand, the situation has led to a pile-up of credit risks. The ratio of bank loans of Russia’s five largest firms to total equity of the domestic banking sector was 36 % at the end of 2021.” (BoFIT, Weekly Revue, June 7, 2024)
[7] In the automotive sector, Western companies dominated the Russian market not only through exports but also through local manufacturing. Although they left behind some factories after their sanctions-driven withdrawal from Russia, they did not leave the capital necessary for production, nor do they continue to supply the assembly kits previously used in those factories. After the collapse of the Soviet Union, the aircraft industry was largely shut down – with the exception of its military sector and the production of a few models – and replaced by products from Airbus and Boeing. Although aircraft leased from the West are being confiscated and transferred to Russian ownership, the inspections and spare parts necessary for continued operation are being withheld from the airlines, which increases not only the estimated risk but also the actual number of accidents. In the energy industry, the withdrawal of Western technology – such as Siemens gas turbines – means that Russian power plants can only operate at reduced capacity, which lowers grid performance and drives up costs; the lack of spare parts and maintenance, in turn, leads to increased wear and tear and outages. Russian-made substitute products often have significant quality defects; this affects not only finished industrial products but he entire range of industrial intermediate goods – from screws to ball bearings.
[8] By reducing their purchases to only a fraction of previous levels – and planning to stop buying fossil fuels from the country entirely in the future – Europe’s major buyers are targeting Russia’s most important source of foreign exchange. Russia has indeed found new buyers, particularly in China and India, who are replacing a large portion of the lost revenue from Europe. However, this shift toward the East—forced by the sanctions regime—puts Russia in a weak negotiating position when it comes to price. The need to find new partners is being exploited by those buyers to secure substantial price discounts; thus, combined with the sanctions-related difficulties of transporting oil across the world’s oceans in uninsured tankers and receiving payment for it, this reduces the monetary return on the export of these energy resources. Etc.
[9] Western financial sanctions affect virtually everything a modern financial industry needs to conduct its business: Russian state assets, which serve as a source of refinancing for the Russian financial market, are frozen, as are the private assets of oligarchs close to Putin; state export loans and investment guarantees are canceled; most Russian banks are excluded from the SWIFT payment processing system; restrictions are being imposed on bank and crypto holdings, securities trading, and rating services; credit card and payment services are being blocked; insurance and reinsurance contracts are being prohibited, as are services such as trusteeship, auditing, bookkeeping, tax consulting, and management consulting.
[10] There is a particular need for modern chips, control electronics, and specialized microprocessors. In addition, there is a shortage of, for example, precision CNC machine tools and machine control systems. These shortcomings are affecting the production capabilities of many key industries.
[11] Since the loss of European markets, the Russian metals industry in particular has been struggling to sell its products (steel, aluminum, non-ferrous metals). This has caused prices to fall to levels that threaten the viability of businesses, which in turn disrupts suppliers’ business calculations and leads to widespread delays in investment and modernization.
[12] “In these conditions, it is critically important to increase labor productivity, upgrade industry, the agricultural industrial complex, the service sector, and many other sectors of the economy as well as the social sphere with the help of digital technologies, automation of production and management processes....We don’t have much choice – either we need to import labor from abroad, or increase labor productivity.” (Putin quoted in Tass, April 4, 2024)
[13] “I will cite a few more figures. In 1999, the share of imports in our country reached 26 percent of GDP meaning that imports accounted for almost 30 percent of our market. Last year, it was 19 percent of GDP, or 32 trillion rubles. Before 2030, we need to reach a level of imports of no more than 17 percent of GDP.” (Putin, Feb. 29, 2024)
[14] Trade with Asian countries, especially China, is considered the economic “lifeline” of the Russian economy: “Russia’s dependence on trade with Asia rose sharply in 2023 while its business with European markets plunged, with Asia's share of Russian exports and imports rising to 72% and 68% respectively, Russian customs service data showed.” (Reuters, Feb. 12, 2024)
[15] In addition to money, the force of law is the means by which the state ensures that production continues in accordance with its priorities: Where companies producing goods defined as critical could earn more money on the global market which remains accessible to them than by supplying the domestic market, the state imposes export restrictions and bans; and where foreign companies do not want to continue production or take their capital out of the country, the state forces them to continue production or simply expropriates and nationalizes them outright. Through countermeasures that complement financial sanctions – such as blocking foreign dividend and capital repatriation or imposing foreign exchange controls – Russia ensures that both its domestic production and financial markets are shielded from foreign influence.
[16] The so-called flat-tax system, with a uniform income tax rate of 13%, which was intended to make Russia attractive to international investors, is being abolished, and taxation – tiered according to income – is being raised to up to 22%. Corporate income taxes are being raised from 20% to 25%.
[17] Until the outbreak of the war in Ukraine, the ruble was a “free-floating” currency, meaning its value depended on how international currency traders exploited supply and demand for rubles to drive exchange rate fluctuations. Under the conditions of financial sanctions and exclusion from the SWIFT payment system, this market-based valuation has been replaced by a state-orchestrated internal foreign exchange market. It requires exporters to sell a portion of the foreign currency they earn abroad on the Moscow Exchange within a few days. For importers, it issues licenses that specify which companies are authorized to purchase the necessary goods from abroad and in what quantities. The exchange rate then depends both on commodity revenues minus all sanctions-related costs and on domestic demand for foreign currency based on approved import needs. With the aim of keeping the exchange rate stable and ultimately functional for the conflicting interests of importers (a high ruble exchange rate makes imports cheaper) and exporters (a low exchange rate increases ruble profits and, incidentally, tax revenues), the state intervenes in this market through the Bank of Russia and the Ministry of Finance by buying and selling currency.
The broad exclusion from the dollar-based global economy not only leads to a redistribution of foreign exchange earnings – in principle, fewer dollars and more yuan – but also raises the question of whether and to what extent these foreign exchange earnings actually guarantee Russia access to import markets. In its efforts to get this problem under control, Russia is proving resourceful, ranging from dollar financing via shadow banks to circumvent US regulatory authorities, to the new practice of settling trade using other currencies such as the yuan – which is not universally usable for Russia either – to planned attempts to introduce entirely new payment channels and methods. Ultimately, all these factors serve to increase transaction costs – a lasting damage caused by the Western sanctions regime.
[18] The government plans its budget based on tax revenues from the oil and gas industry. This planning is based on the assumption of a specific oil price. If revenues exceed projections due to higher prices, the government transfers the difference between actual revenues and its projections to the NWF. If the price on the world market falls, revenue shortfalls are offset using this fund.
[19] A particularly clear example is Rosneftegas: The company is a holding company that owns shares in the natural gas and oil conglomerates Gazprom (approx. 11%) and Rosneft (approx. 50%), but is 100% state-owned. As a result, the shares of Gazprom and Rosneft’s profit distributions do not go into the state treasury, but instead go to Rosneftegas, from which the government naturally draws as part of its extended budget: “These are the kinds of things – things that the Government has no money for after all the squabbling and fighting but which need backing all the same – that we will finance with Rosneftegaz funds.” (Putin, Dec. 23, 2016)
[20] The Russian financial sector consists almost exclusively of domestic banks, of which those that account for the lion’s share of the market (over 70% of assets) are largely or entirely state-owned. The Russian capital market – the trading of securities of all kinds – was not particularly large even before the war began and has lost even more significance due to its exclusion from the global financial market, which is why financing through stocks and bonds plays a minor role in Russia. The economy is primarily supplied with capital through lending by Russian banks.
[21] This particularly affects the defense industry, whose sales are guaranteed by the government’s substantial demand, albeit at prices set by the government and calculated with a tight eye on its budget. To ensure that these companies can still obtain loans at affordable interest rates, the government requires banks – which, due to the necessary confidentiality, have been granted a special license to act as a supervisory authority – to extend loans to them on favorable terms, partly through legal obligations and partly through voluntary offers.
In addition, the government operates a wide range of subsidy programs to provide low-interest loans to civilian sectors of its economy, such as agriculture, housing construction, and infrastructure development. Subject to certain conditions, Russian banks can participate in these programs and profit from them through various credit support mechanisms.
[22] The central bank has lowered the quality requirements for collateral to be posted, reduced the required capital ratios, and relaxed the formal criteria for credit reviews and documentation requirements. Banks that grant low-interest loans receive simplified access to central bank refinancing funds in the form of low refinancing rates; the valuation of non-performing loans has also been temporarily eased to relieve pressure on bank balance sheets.
The central bank states in a 2024 report:
“Due to the unprecedented scale of sanctions during the 2022 crisis, the Bank of Russia implemented the most extensive set of regulatory easing measures in history. The release of all capital buffers was accompanied by exemptions from loss provisions, loan repayment holidays for borrowers, etc. These measures contributed to maintaining smooth operation of the market and sustained bank lending.” (Report on the Bank of Russia’s Anti-Crisis Measures, Bank of Russia, 2024, p. 22)
The list of new regulations includes, among other things: a moratorium on recognizing negative revaluations of securities, the suspension of the revaluation of derivatives, the option to disregard a deterioration in debt service quality for certain categories of borrowers, changes to risk metrics for certain categories of borrowers, the release of macroprudential buffers (a type of crisis reserve), a reduction in macroprudential buffers for new loans, and the removal of the Basel buffers for capital adequacy ratios.
At the same time, the refinancing of these loans is being massively expanded:
“The banks’ need for liquidity support from the Central Bank linked to the mass withdrawal of cash was more than satisfied through repo transactions and loans secured by non-marketable assets. In some instances, repo auctions were held with no limits. In repo transactions, the Bank of Russia temporarily used fixed asset prices from before the onset of the sanctions crisis. As in past crises, the Bank of Russia temporarily eased the collateral requirements. The lowering of required reserve ratios also facilitated liquidity release.” (Ibid., p. 20-21)
Some of the measures were rolled back in 2024–2025 due to growing concerns about financial stability, but many measures remain in place.
[23] This is leading to a massive expansion of the credit volume, especially in the corporate lending division. The exact scale, specific nature, stability, and sustainability of this expansion are the subject of heated debate on all sides, precisely because the question of how Russia is financing this war is being confused with the question of its prospects for success. Here is a statement from the Western anti-“alarmist” camp:
“According to the Central Bank, the overall increase in corporate loans since 2022 is no more than $300 billion. That’s far less than the $415 billion cited by alarmists. More importantly, about two-thirds of this is a result of companies replacing foreign currency debt with ruble debt after the full-scale invasion of Ukraine. These new ruble loans are at higher interest rates, but eliminate currency risks. Moverover, they cannot be regarded as war loans.Most importantly, it’s wrong to add this money to official spending figures: all credit subsidies are already reflected in budget data: for example, in the state armaments program, the program to support SMEs, agricultural producers and others.” (The Bell, Jan. 17, 2025)
[24] Russia’s official national debt – which is essentially domestic debt – is low by international standards and has risen only moderately, to about 20% of GDP, even after the shift to a war economy. The government’s ostentatious pride in financing the war economy without a significant increase in new government debt contrasts with the political-economic reality that it has removed previous constraints on national debt through the central bank’s creation of ruble credit, allowing it to rise at a record-breaking pace.
[25] “Considering the significant expansion of subsidised lending, the issue of its implications for the national economy in general and for fiscal and monetary policies in particular is becoming increasingly important... Subsidised loans issued within this scheme also expand money supply, distorting the implementation of monetary policy. However, as these loans are issued on individual terms, this form of subsidised lending is less transparent, which makes it difficult to assess its effect on money circulation and inflation. In particular, there are no unified statistics on such lending ...” (Bank of Russia, Monetary Policy Guidelines for 2024–2026, Nov. 1, 2023, p. 100-101)