Even as a flurry of oligarchs had their superyachts unceremoniously seized last year, the Russian economy seemed to defy the impact of Western sanctions.
President Vladimir Putin had built up what was dubbed a “fortress balance sheet” with huge cash reserves that helped the Kremlin weather the loss of foreign investment.
Meanwhile, the ensuing energy crisis triggered a 144pc jump in Russia’s oil and gas revenues to $349bn in 2022. Departing Western brands were replaced. Life in Moscow remained largely unchanged.
At least initially.
Today, cash reserves are dwindling. Oil revenues have nearly halved. Russia is losing its workforce as thousands flee conscription, are sent to fight or die on the front lines. Foreign investment has disappeared and the rouble has plunged. Inflation is gathering pace.
“The situation is changing quite rapidly and in the negative direction,” geopolitical risk adviser Oksana Antonenko said at an event at Chatham House.
“At the end of this year, it is very clear that Russia will be in a much worse macroeconomic situation than it was last year, and this is going to be a sustained trend.”
While Putin was clearly prepared for the initial economic impact of the war in Ukraine, the conflict has dragged on far longer than he expected. As a result, the economy is increasingly exposed to the ongoing fighting and Putin is running out of options.
“He built up their defences very well. They had a lot of reserves and their debt ratios were very low. They were running fiscal and current account surpluses and the energy crisis helped them,” says Timothy Ash, associate fellow at Chatham House’s Russia & Eurasia programme. “Now that has been worn away.”
Last summer, in the early months of the war, the Kremlin was running a budget surplus of $28bn, according to the Kyiv School of Economics. By last month, the national account was in a deficit of $1.4bn.
“It is a slow burn,” says Ash. “As time goes on, the more difficult it gets for them. They will have to make choices, guns versus butter.”
Key to the slump in government finances has been the energy market. After surging to a high of $120 last summer, oil is now trading at around $80 a barrel and a price cap introduced by the West has limited how much the Kremlin can make from sales. The European Union introduced an embargo on Russian crude oil in December and on oil products in February 2023.
The Saudi Arabia-led Opec bloc and its allies including Russia have tried to push up the price of oil by cutting production but the Western cap on oil prices has limited the impact of these actions on Kremlin finances.
Russia’s oil and gas revenues are forecast to drop by 43pc this year as a result, according to the Kyiv School of Economics. At $198bn, income from fossil fuels will still be above pre-war levels. However, the cost of the war in Ukraine is more than soaking up the extra revenue.
“We have seen a massive pickup in spending likely related to the war,” says Elina Ribakova, non-resident senior fellow at the Peterson Institute for International Economics. “They pretty much filled the whole deficit that they had planned for the year.”
Sanctions and the exodus of Western businesses has seen Russian export earnings fall by a third in the first six months of the year and the balance of trade has plunged by 70pc.
The drop in exports has hammered the value of the rouble. It has lost 39pc of its value against the dollar and 47pc against the euro so far this year.
“For me the currency is the key bellwether,” says Ash.
In the initial phase of the war, the Russian government intervened to bolster the rouble.
“They were eager to have a strong currency to imply that sanctions weren’t working,” says Ash. “Now they need a bit of help. They are trying to bolster their own FX reserves. That suggests they don’t have as much liquidity as people think they could have. It is clearly a sign that things are not great.”
A tumbling rouble is stoking inflation. The Bank of Russia on Friday raised interest rates by 1 percentage point to 8.5pc as policymakers warned that underlying inflation had “exceeded 4pc in annualised terms and [was] still on the rise.”
The central bank said inflation was being driven in part because of “the limited availability of labour resources”.
Just as Russia is losing money, it is losing its workforce. This is happening on several fronts – not only are men getting conscripted and sent away to fight, large swathes of the working population have left for fear of being sent to war.
“The lowest estimate from the demographers that I have seen is that 500,000 people have left. Our own estimate is one million,” says Ribakova.
“Any talk of diversification, or creating a higher quality of life, that is all out of the window,” she adds.
Putin is of course reluctant to admit any of this and there is strong suspicion that official data on the health of the Russian economy is being massaged to paint a rosier picture.
Alternative measures suggest Russia is doing worse than its official statistics show.
Adrian Schmith and Hanna Sakho, economists at the European Central Bank, have compiled an economics tracker that uses 15 indicators independent of Kremlin data agency Rosstat. These include financial transaction data, imports, property listings and prices, labour market sentiment and retail sales.
The alternative tracker correlates with official data but has consistently been lower since the outbreak of the war.
For example, while official Rosstat figures said the economy contracted by 0.4pc, the ECB’s alternative measure pointed to a slump of 3.2pc.
Similarly, while official data shows unemployment in Russia is remarkably low, the German Council on Foreign Relations believes that hidden unemployment - a measure that encompasses unpaid leave and partial employment - in fact hit a record high of 4.66 million last summer.
Still, economists are cautious not to overdo the extent of Russia’s economic decline.
“It’s a slow grind but unfortunately there is a lot of durability there,” says Ash. “They can survive a long time.”
Russia is still earning around $425m per day from oil, according to the Kyiv School of Economics.
Ribakova, of the Peterson Institute for International Economics, believes the West should tighten sanctions further to turn what is currently a slow and painful economic burn into a roaring fire that will force change.
Yet officials may be reluctant: at this stage in the war, the effects of tougher sanctions are likely to be felt not so much by Putin and his allies as ordinary Russians, many of whom do not support the war.
Ash says: “The longer it goes on, the more difficult choices will be made, the more the population will begin to suffer.”