AYESHA RASCOE, HOST:
Russia has been hit with huge economic sanctions since it invaded Ukraine nearly two years ago. But the Russian economy has remained strong, defying many economists' expectations. We wanted to understand why that's happened, so we called Alexandra Prokopenko, a fellow at Carnegie Eurasia Center. She used to live in Moscow and advised the Russian central bank, but left the country after the invasion because of moral objections to the war. We started by asking her what she was hearing from friends and family back home about how life has changed.
ALEXANDRA PROKOPENKO: Life changed not so significantly as it was expected, but they see the differences and feel the differences. However, sanctions didn't play their role to immediately put Russia on its knees, which was obvious at the beginning that it's not possible. So I - when people are talking about sanctions, I always ask them to divide between sanctions narrative and sanctions regulation. In terms of regulation, sanctions are quite effective. In terms of narrative, well, it's failed.
RASCOE: Well, talk to me about that. Like, what is the sanctions narrative? Is that the idea that sanctions, you know, hurt the economy and kind of make the government change its behavior? Is that the narrative?
PROKOPENKO: That's the one part of the narrative - the Russian economy will collapse immediately. I mean, what do we see now? Economic growth in Russia in 2023 is likely to exceed 3%. It is - in terms of figures, I mean, it's great. It's more than economy of the United Kingdom or of Germans' economy. So what's behind these figures is that over a third of this growth is attributed to the war economy, where defense-related industries are flourishing at double-digit rates. This growth is not what we called, you know, improving people's well-being. It's more about the state spending on war.
RASCOE: So how is Russia paying for all of this extra military spending? Is it running a huge deficit?
PROKOPENKO: No. So a big part of this spending, Russia is paid by receiving revenues from China, India, Turkey and other buyers of Russian oil products and a big part is so-called non-oil-and-gas income which economy produce itself. So the economy is working, and it's creating taxes, government collecting taxes and paying with these taxes for the spending. And the third part, of course, there was a slight devaluation of ruble and tolerance to inflation. So Russian inflation now is above the target of the central bank, and probably it would be approximately 8% at the end of the year. And the target of the central bank is 4%. And ruble lost, I think, third of its value.
RASCOE: You talked about how they're making money from selling oil. And of course, there is that price cap that, you know, the West and the U.S. heralded. Can you talk about that? And then can you talk about how they're still making money off of the oil and gas industry?
PROKOPENKO: Because price cap and oil ban, which was imposed by G7 countries, wasn't enforced immediately, Russia had time to prepare. And Russian businesses - they were able to establish a significant number of tankers, so - to make logistical bridges to bring the Russian oil to their new customers. It's not a secret that Russia using shadow fleet, which serves its oil export. There is also pipeline export to China. And China is the largest buyer of Russian oil. So all this combined, it's a big amount.
RASCOE: I have to ask you about the labor force. You know, half a million people have left Russia, many of them well-educated professionals like yourself. Does that have an impact on the economy?
PROKOPENKO: Partly. So labor shortages - it is a limitation for Russian growth because the amount of oil or gas which India or China can consume from Russia is limited. So that's why we're talking that Russian economy is now operating on its maximum capacity. And I don't see any signs how it can grow faster. And when we are looking at this bright figures, about 3% of GDP growth or this super low unemployment rate, we need always keep in mind what there is behind. And behind is Vladimir Putin impossible trilemma for 2024, because he will need to fund the ongoing war against Ukraine, maintain the facade of business as usual for population and safeguarding the macroeconomic stability, which is quite complicated because Russia abandoned lots of institutions like budgetary rule or predictable tax system. So the situation looks solid, but it's very fragile.
RASCOE: That's Alexandra Prokopenko from the Carnegie Russia Eurasia Center. Thank you so much for joining us.
PROKOPENKO: Thank you. Transcript provided by NPR, Copyright NPR.
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