It's been two years since Russia's full-scale invasion of Ukraine  and there's one thing economists agree on: Russia's economy has not collapsed.

That was the outcome many predicted when the EU, the US and others imposed unprecedented sanctions following the invasion in February 2022.

Now, debate over Russia's economy in western capitals has a more sober tone. Few question its resilience anymore. Where there is disagreement is over how solid the foundations are behind the country's currently strong numbers.

The International Monetary Fund recently forecast that GDP (gross domestic product) would rise by 2.6% in Russia this year, a steep increase from its October estimate. That's on top of a growth rate of more than 3% in 2023. Meanwhile oil revenues are surging again and unemployment is at a historic low.

Yet doubts persist. The Kremlin has ramped up defence expenditure to such a huge extent that 40% of all budget expenditure in 2024 will be on defence and security. That's a war economy, and a dangerously overheated one at that, experts say.

There is a growing shortage of labor and doggedly high inflation. Sanctions also continue to do damage, particularly as western leaders seek new ways to hit Moscow's spending power.

How Russia survived and thrived

Elina Ribakova, an economist with the Peterson Institute for International Economics, told DW there are three main reasons why the Russian economy has held up so well.

The first is that the Russian financial system was sufficiently prepared to weather the wave of banking and financial sanctions which hit in the first few weeks, having been in crisis response mode since the invasion of Crimea in 2014.

The second is that Russia was able to enjoy massive earnings from oil and gas exports in 2022 because western powers were too slow to target those exports, even as prices surged after the invasion.

The third reason she identifies is that export controls have not worked sufficiently to prevent Russia using third countries to get in goods which it needs for its military-industrial complex.

However, Benjamin Hilgenstock from the Kyiv School of Economics says it is important to remember that while the Russian economy has done better than expected, sanctions have still had a big impact.

"The conclusion still stands that the macroeconomic environment for Russia has deteriorated significantly and that a lot of that has been due to sanctions," he told DW.

He highlights how Russian export earnings from oil and gas fell in 2023 compared with 2022 and the fact that the Russian Central Bank has had to hike interest rates to 16% due to high inflation.

Beating the sanctions

Yet Russia's performance owes a lot to how Moscow has gotten around sanctions. Two of the most striking are how it has circumvented export controls to keep procuring western goods and how it has kept selling its oil around the world, despite the western alliance introducing an oil price cap in December 2022.

That was aimed at restricting western services for the transport of Russian oil if the oil was not sold below $60 (€56) per barrel. However, for almost a year now Russia has been selling its oil at near market rates.

That is largely down to its so-called shadow fleet of ships, which have helped Russian oil reach markets in countries like China, India and Pakistan without being subject to the cap.

The United States has increasingly been sanctioning individual ships and entities it believes are breaching the cap and Hilgenstock says this is crucial to limiting Russian oil export revenues.

"These measures can effectively take vessels out of the shadow fleet for a considerable amount of time," he said.

In terms of restricting how Russia accesses western components by importing via third countries, Hilgenstock says banks have a critical role to play.

He highlights the executive order issued by US President Joe Biden in December which authorizes possible sanctions against foreign banks which allow transactions that help finance Russia's military-industrial base.

"Financial institutions have a large role to play when it comes to expert controls enforcement because they can see some of these transactions on the financial side that may be very difficult to trace physically," Hilgenstock said.

War economy risks

Another key driver of Russia's economic performance is defense spending, which has increased threefold since 2021.

"You have now mostly a war economy," says Elina Ribakova. She believes this is driving up GDP, with high public spending fuelling the production of large amounts of missiles, artillery and drones.

"That records you a lot of activity but it's not a productive activity for the medium term," she says. "It's not good for your economy. Basically, it's something that is wasteful."

Chris Weafer, an investment adviser who has worked in Russia for more than 25 years, says there will be negative long-term consequences if the extra spending is mostly on "consumable" goods rather than deeper investment into the country's industrial base.

"You'll deplete your reserves, and when the conflict does end, you'll end up with a much more damaged economy with a lot of head scratching as to what to do next," he told DW.

He says another key element of the country's war economy is how the labor market has changed. Conscription and the fact that around 1 million highly skilled workers have left Russia since 2022 means there are now worker shortages in multiple areas. Unemployment is almost non-existent but wages increased markedly over the course of 2023.

"That rise in income really has been a big driver of this rise in consumption inflation," he told DW. "The longer that they're not able to deal with it, then the more challenging, the more expensive and the more damaging this problem of the declining labor force will be on the economy."

Can it last?

Yet Russia's economy has defied dire predictions before. Weafer says the country's massive resource base has been consistently underestimated when sanctions were leveled. He points to the continued importance of its oil and gas to global markets, and commodities like its uranium, which the US still buys in large quantities.

He says the EU in particular has engaged too much in what he calls "political economics."

"They will say 'the economy didn't collapse in 2022 or 2023, but it will now because of military industrial spending and that'll collapse the economy,'" he says. "That's just political economics. That's wishful thinking."

For Ribakova, the fate of Ukraine remains closely tied to Russia's own economic performance. She says that while sanctions will never be enough to stop Russian aggression, it's vital that more is done from the Western alliance to further limit the Kremlin's capacity to prosecute the war.

"We're giving financial support to Ukraine with one hand, and then we're giving Russia with another hand. We're still buying their energy, we're not fully enforcing the oil price cap and embargo, and we are still not fully enforcing export controls," she says.

"It is a huge problem."

Edited by: Rob Mudge