How does Russia’s economy keep booming despite West’s sanctions?

Russia’s budget revenue surged to a record high in December, even as the United States imposed fresh sanctions targeting Moscow’s banking sector in an effort to disrupt foreign trade payments and reduce export proceeds.

The Finance Ministry reported total revenue of more than 4 trillion rubles ($40 billion) last month, a 28 per cent increase compared to the same period in the previous year.

Russian economy booming despite sanctions?

The spike in revenue came despite Western sanctions designed to choke off funding for Russia’s war in Ukraine. US and allied measures have focused on restricting revenues from the country’s energy sector and the banks supporting it.

However, income from oil and gas soared by 33 per cent in December from a year earlier and rose by 26 per cent for the full year of 2024, bolstered by taxes, dividends, and economic growth.

“The volume of non-oil and gas revenues in 2024 significantly exceeded estimates in the 2025-2027 budget law, including from the largest tax sources,” the Finance Ministry said in a statement.

The increased revenue allowed the government to ramp up spending to unprecedented levels, with expenditures in December reaching 7.15 trillion rubles, surpassing the previous record set a year earlier. Russia’s budget for 2025 allocates roughly one-third of spending to military needs, reflecting its continued focus on the war in Ukraine.

Massive fiscal stimulus has underpinned Russia’s economic activity, with state spending and subsidized loan programs contributing over 10 per cent of GDP from 2022 to 2024. The military-industrial sector has become the primary driver of growth.

Cracks in the economy

This doesn’t mean that there are no causes for concern for Moscow.

Russia’s economic growth slowed in the third quarter of 2024 to 3.1 per cent, down from 4.1 per cent in the previous quarter.

Defence-related industries continue to grow but at a slower pace than in 2023. Other sectors, including extractive industries and agriculture, are facing significant headwinds due to declining hydrocarbon export prices, Opec+ production cuts, and a loss of momentum in farming output.

Labour shortages are straining industrial production, with facilities operating at 81 per cent capacity and 73 per cent of enterprises reporting difficulties finding workers.

Unemployment has hit a historic low of 2.3 per cent, leaving an estimated 1.6 million jobs unfilled. This shortfall, coupled with aggressive government and household spending, has increased reliance on imports, further pressuring the ruble.

The Russian currency has weakened significantly, losing over half its value against the US dollar and euro since the war began, according to an analysis published by the Kyiv School of Economics in December. Inflationary pressures are mounting, driven by heightened demand for foreign currency and rising import costs.

The military-industrial sector’s expansion is unsustainable without broader economic diversification, Moscow Times had reported recently.

Despite its booming revenue, Russia’s economy remains vulnerable to the cumulative effects of sanctions, war expenditures, and structural weaknesses. As defence spending dominates the budget, the strains on other sectors and the broader economy are becoming harder to ignore.