How the War Economy Is Creating Extraordinary Winners and Devastating Losers — Often in the Same Country

You’ll notice something strange if you stroll through a Yerevan currency exchange on a Tuesday afternoon. The rates board flickers more frequently than it did three years ago, the lines are longer, and the men carrying bulky envelopes are not locals. They are young Russians who frequently carry laptop bags and pay cash for apartments that their Armenian neighbors could never afford. It’s a small, almost unremarkable scene. However, it provides you with the majority of the information you need to understand how the war economy functions.

The headlines tell a straightforward story. There are losers in wars. Aggressors are punished by sanctions. Everyone else is harmed. The reality is more unsettling and strange, as economists at Munich’s LMU have begun discreetly recording across almost fifty interstate conflicts. A war shock to a nation’s export basket of one standard deviation can increase output by roughly 1%. A twofold decrease in output can result from the same shock to imports. The math is harsh and divides countries into groups that most people would prefer not to consider.

Think about Armenia. In 2022, a nation that had experienced thirty years of current account deficits managed to post a surplus while experiencing growth of more than twelve percent. Similar trends were observed in Central Asia. Approximately $28 billion in mysterious inflows were absorbed by Turkey, which was sufficient to keep the lira stable during an election cycle that Erdoğan had no business winning. This wasn’t charity at all. Money was fleeing Moscow in search of a more peaceful place to sit.

The Gulf states, on the other hand, hardly made an effort to conceal their prosperity. Suddenly, Saudi Arabia, the United Arab Emirates, and Qatar became vital to a terrified Europe looking for alternatives to Russian gas. Fiscal surpluses came back. The size of sovereign wealth funds increased. There are those in Washington who subtly contend that the United States emerged victorious. In 2021, the prices at which American LNG tankers filled European terminals would have been absurd. Order books for the F-35 skyrocketed. Without a single American soldier being used in combat, a strategic adversary was weakened.

However, Ghana was forced into default by the same war that benefited the Gulf. Sri Lanka fell apart. With their import bills skyrocketing and their currencies weakening, Pakistan and Egypt were on the verge of collapse. These states may have been vulnerable in the first place, already damaged by COVID-19 and burdened with excessive debt. They were simply forced off the precipice they were already perched on by the conflict.

The division occurs not only between nations but also within them, which is more difficult to discuss. Pensioners in Britain are rationing heating while defense contractors are hiring. Chemical plants close and armaments factories grow in Germany. While middle-class Muscovites see their savings decline, Russia’s military-industrial areas are flourishing. Observing all of this, it seems as though the old map of who gains from conflict has been redrawn without anyone making a formal announcement.

The economists who dismissed Ukraine’s recovery in March 2022 are still shocked by the country’s current GDP levels, which are close to pre-war levels despite all reasonable predictions to the contrary. Good policy was beneficial. Aid did the same. However, it appears that most people simply continued to show up for work. That may be the most subdued lesson of this entire depressing time. Leaders, winners, losers, and spreadsheets full of spillovers are all produced by wars. In Kharkiv, Yerevan, and Karachi, they also create typical mornings when someone opens a store and hopes the profits add up. More than ever, whether or not they do depends on which side of the new economic map they reside on.