Economics of the Russia-Ukraine Conflict

Russia launched a full invasion of Ukraine last night. Most of the discussion I’ve seen has naturally focused on the fighting itself- what is happening, what is likely to happen, how did it come to this.

Since there are plenty of better sources to follow about that, I’ll simply offer a few observations on the economics of the conflict:

  1. Russia is not only more than 3 times as populous as Ukraine, it also more than twice as well off on a per-capita basis. This means its overall economy is more than 6 times the size of Ukraine’s. This gap has been growing since the fall of the Soviet Union, as Russia’s per-capita GDP growth has been much stronger, while its population has shrunk much less than Ukraine’s. Putting this together, Ukraine’s measured real GDP is actually smaller than it was in 1990, while Russia’s is larger.

2. Russia’s much larger economy allows it to spend much more on its military. Russia spends $60 billion per year, the 4th most of any country (after the US, China and India). Ukraine spends only $6 billion per year on its military. So Russia is starting with a big economic advantage here, though Ukraine has some of its own advantages, like fighting on their own ground and receiving more foreign support.

3. War is bad for business. Russian stocks are down 33% in a day, their biggest-ever loss; Ukraine shut down trading entirely, and their bonds are being hit even worse than Russia’s. Regardless of which side “wins” the fight for territory, both countries will be economically worse off for years as a result of the war.

4. Russia, though, expected that the war would lead to sanctions from the West that would harm their economy, and prepared for this by building up hundreds of billions of dollars worth of foreign reserves over many years.

5. US markets are down only slightly, much less than they would be if traders thought the US would get involved directly in the fighting. But this slight overall decline conceals huge swings. Companies that do business in Ukraine or Russia are big losers. But those that compete with Russian exports see their value rising given the expected sanctions. Because Russia’s biggest exports are oil and natural gas, the value of US-based oil & gas companies is rising, while alternatives like solar are also up substantially.

6. There is still some hope for Ukraine to expel Russian troops, but its not looking good, and even a victory would involve huge costs. This leaves people all over the world wondering, how did it come to this? How might future conflicts like this be avoided? There is of course a lot to say about military preparedness, nuclear umbrellas, and ways the West can impose costs on Russia as a deterrent. But what stands out to me is that a stagnant economy and shrinking population make a country weak and vulnerable. Ukraine has a worse economic freedom score than Russia; this combined with its relative lack of natural resources explains much of the stagnation. Political elites often focus on grabbing a large share of the pie, rather than growing the pie and risk empowering domestic opponents. But we’re now seeing how stagnation carries its own risks. A growing economy, and especially growing energy sources that don’t depend on hostile nations, is the path to independence and survival.

4 thoughts on “Economics of the Russia-Ukraine Conflict

  1. S Clare February 24, 2022 / 4:25 pm

    Thanks for this, this is a helpful lens.

    Could you possibly expand a bit on point (4) for me? I’m trying to think of the mechanisms of how the foreign reserves help. And especially how they relate to sanctions.

    1. Russian stocks are down because:
    (a) people expect long-term sanctions that harm Russian companies’ ability to raise capital and sell to consumers; and
    (b) countries at war have to shift resources towards things like their military and repairing damaged infrastructure instead of investing in productive capital. Not to mention the cost in human lives and injuries.

    2. Foreign reserves can be used to alleviate these costs in a couple of ways. First, they let the Russian government spend down these savings to alleviate the effect of having to shift resources to the war. Second, the government can also use these reserves to support domestic companies who are losing overseas business. Third, I guess it’s helpful that they’re held in foreign currencies and gold because they provide insurance against the ruble losing value.

    Am I missing any obvious dynamics?


    • James Bailey February 27, 2022 / 3:36 pm

      Those are the kinds of things I had in mind, yes.
      The big thing I was missing is that apparently much of these reserves were held overseas, and might be frozen by Western governments as part of the economic retaliation.


  2. S Clare February 24, 2022 / 4:42 pm

    Also, the GDP graph posted beneath point (1) makes it look like Russia’s economy is ~10 times larger than Ukraine’s. That’s pretty significantly larger than the ~6 times you mention in point (1).


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s