Russia faces stagnating innovation, China dependence as war drags on

• Experts weighed in on how Russia’s war effort is impacting its economy a year after the invasion of Ukraine. 
• The longer the conflict persists the more likely Russia is to depend on China for resources, experts said.
• “Russia’s people are resilient, and they will do something, but technology cannot just be wished into existence,” a Wharton professor told Insider.

Russia’s war in Ukraine has dragged on for over a year, with the conflict showing signs of warping and deindustrializing its economy. 

Economists says the country will be facing a myriad of obstacles, including a slowdown of productivity and diminished innovation.

Russia’s economy has long benefitted from the country’s “very advanced digital capabilities,” Wharton Business School Professor Dr. Philip M. Nichols told Insider, adding that software and programming are will soon “experience revolutionary changes” like quantum computing.

“Russia will not have access to the technology that would enable them to replicate those hardware developments,” Nichols said, adding that soured relationships with other countries will leave its industries unable to adapt.

“It will be interesting to see how Russia works around the gap that will grow in fields such as artificial intelligence.”

Nichols, who has a secondary appointment in Penn’s Russia and East European Studies Program, added that: “Russia’s people are resilient, and they will do something, but technology cannot just be wished into existence.”

In imports, the government has had to search for alternatives to trading partners that that the Kremlin deems as “unfriendly countries,” which collectively represent more than 50% of the global economy, per a recent report from Finland’s central bank. 

Thousands of Russians have also fled the country, per Nichols, with a large percentage of those being younger and creative people. When skilled workers leave, this comes at the cost of productivity and innovation. 

Pivot to China

Russia has lost the world’s largest markets for its exports, which means it has to turn elsewhere for trading partners.

UC Berkeley Haas School of Business professor Dr. Donald Hanna says the longer the war persists, the more Russia will likely depend on Chinese as a result.

“How much of an economic setback that becomes for Russia depends on the relative pace of technological advancement in China and Russia itself (which has been hindered by brain drain sparked by the war) and on the nature of the trade/technology relationship that evolves between Russia and China in coming years,” Hanna, a macro economist, told Insider.

“The more China views Russia as a useful political foil against Western efforts to contain China’s advance and/or as a cheap source of raw material inputs, the less likely it is that the resulting economic outcomes will favor Russia.” 

If Russia reorients toward China as a supplier of technology and other “sophisticated materials,” Nichols says this likely leads to the two nations becoming more politically intertwined.

Russia’s store of natural resources may keep it from becoming a full Chinese client state, but sources within the Kremlin itself have said that they think it is like that Russia will eventually be a Chinese “resource colony.”

A more state-led economy 

As sanctions weigh on its economy, Russia has been undergoing a structural transformation to become self-sufficient.

“They are definitely headed into more state control, and likely into settling into some sort of longer-run equilibrium once the new trade infrastructure is established,” said Dr. Aleksandar Tomic, associate dean for strategy, innovation, and technology, and program director for the master of science in applied economics program at Boston College. 

“Under President Putin, the Kremlin has centralized political and economic control,” Nichols said. “Many firms have been nationalized, and even non-state firms go to great lengths to maintain close relationships with the Kremlin. As the economy stagnates or declines, that trend will accelerate.”

Nichols added: “I firmly believe that someday Russia will be a productive member of the global community and global economy. But this war has set that future back. No one knows why this war began, but regardless of the reasons, Russia bears the responsibility for invading its neighbor and will bear that burden for some time.”