Adnan Vatansever, reader in Russian Political Economy at King’s College London’s Russia Institute, estimates that Russia’s spending on the war in Ukraine (including associated spending such as the spiralling cost of recruiting soldiers and welfare payments to casualties) could be approaching ten per cent of the country’s GDP.
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However, Vatansever explains that rising wages are also inflating demand, creating a “price spiral”. The result is that inflation in Russia is now running at nearly ten per cent. On Russian social media, clips have circulated of shoplifters raiding butter, the cost of which has risen by more than 25 per cent in the last year.
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The reason for this, Vatansever explains, is that “Russia is no longer a normal economy”. Putin is aggressively subsidising the lifestyles of Russian citizens with very high public spending, but because the country is disconnected from capital flows – there is almost no foreign investment in Russia, nor are Russians investing abroad – the demand for imported goods keeps growing, the rouble keeps getting weaker, and this compounds the effect of inflation.
Russia has also been artificially inflating its housing market by subsidising mortgages, creating a dangerous housing bubble. Property prices in Russian cities have more than doubled since the Ukraine war began, but when this subsidy was withdrawn for most homebuyers in July, demand halved, leaving an unstable bubble that Vatansever says “could lead, at some point, to a financial crash in Russia, if that bubble bursts”.
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For previous crises, Vatansever told me, Russia has been prepared with large financial reserves, but this is no longer the case; part of Russia’s policy of “de-dollarisation” involved holding around $207 billion of its central bank reserves in euro assets, which have been frozen since 2022, and won’t be thawed any time soon (unless they’re handed over to Ukraine). The one remaining financial buffer is Russia’s national wealth fund. If the global oil price falls below $60 a barrel this will, according to a report by the Russian central bank, be depleted in about a year. It is very hard to say how sincerely we should believe anything Trump says, of course – but most economists were already predicting a slower rate of growth for next year.
Russia’s Central Bank raised its key policy rate to 21 percent in late October as the Russian authorities struggle to manage a wartime economy that is in danger of overheating due to a combination of factors including rising inflation, sanctions pressure, and record defense sector spending. While Kremlin officials and many international analysts insist that the Russian economy remains in remarkably good shape, the country’s longer term economic outlook is becoming increasingly precarious.
Despite frequent predictions of impending economic meltdown, there is currently little sign that the Russian economy is in immediate danger. At the same time, the full-scale invasion of Ukraine appears to have placed Vladimir Putin in an unenviable economic position. If the war continues for an extended period and is accompanied by factors including increased sanctions, inefficient military leadership, and pervasive corruption, this could plunge Russia into a severe economic recession.
Ending the conflict also presents economic risks. Russia’s unprecedented military spending since 2022 has enriched elites and boosted domestic demand, overheating the economy. If the war ends, this fiscal stimulus will cease, potentially causing a significant drop in real incomes for much of the population. This could lead to heightened social tensions and undermine the stability of the ruling regime.
Vladimir Putin frequently claims that Western sanctions have been counterproductive and often uses his public addresses to boast of Russia’s wartime economic performance. Official data broadly supports this narrative, with Russia reporting strong GDP growth in 2023 and during the first half of the current year.
A range of factors are fueling the current growth of the Russian economy, with military expenditure perhaps the single most important driver. The Russian authorities allocated around six percent of GDP for the military in 2024, representing the highest total since the Cold War. Further increases are planned for 2025. Nor does this cover all war-related costs. Significant additional spending is required to fund a range of defense-related industries and to finance the occupation of Ukrainian regions currently under Kremlin control.
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Despite the outward appearance of stability, Russia’s wartime economy faces mounting challenges. Russia’s National Welfare Fund is steadily dwindling, while export revenues have gradually declined during 2024 as a result of tightening sanctions and constraints on resource extraction caused by limited access to modern technologies.
Economists are now warning that the Russian economy is in danger of overheating, largely as a result of unprecedented military spending. Meanwhile, Russia’s low unemployment rate of around 2.5 percent is more indicative of a severe labor shortage than a healthy economy. The problems caused by this lack of workforce add to the challenges created by sanctions-related restrictions on access to Western equipment, exacerbating Russia’s technological deficit.
Inflation currently poses the single greatest threat to Putin’s wartime economy, and was a key factor behind the recent decision to hike the country’s key interest rate. Russia’s Central Bank aims to reduce inflation to around four percent in 2025, but this may not be a realistic target. Indeed, official inflation data from the Kremlin may actually underestimate the rising cost of living for ordinary Russians.
Over the past year, even official Russian government bodies such as Rosstat have cautiously acknowledged negative economic trends such as rising inflation, labor shortages, and declining activity in some sectors of the economy. Taken together, these negative factors are likely to contribute to a period of slower growth, if not stagnation.
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Editor: The Reader must always keep in mind that The Atlantic Council is the propganda arm of NATO!
MOSCOW, Aug 28 (Reuters) – The Russian economy has shown solid growth in many sectors while unemployment remains at a record low, new data showed on Wednesday, prompting officials to hint at a brighter outlook for the year despite Western sanctions over the war in Ukraine.
Driven by military production, industrial output rose by 3.3% in July compared with a 2.7% increase the previous month, and by 4.8% since the start of the year, compared with 3.1% growth in the same period in 2023.
A preliminary estimate for gross domestic product (GDP) growth in the first half of the year stood at 4.6%, compared with 1.8% for the same period last year.
Officials attributed this growth to strong capital investment, including by the private sector, which in the second quarter rose by 8.3% year-on-year to 8.44 trillion roubles ($92 billion), following 14.5% growth in the first quarter of the year.
“Given such high results in the first half of the year, we expect even higher figures for the entire year of 2024 than we had initially projected in the economic forecast published in April,” said Polina Kryuchkova, deputy economy minister.
The data suggested the economy was holding up despite Western economic sanctions and problems with international payments with Russia’s major trading partners, such as China, which led to a 9% fall in overall imports in the first half of the year.
However, they also pointed to overheating, which forced the central bank to hike its benchmark interest rate by 200 basis points to 18% in July, the highest level in more than two years.
The central bank said persistent labour shortages and wage growth, as well as high inflation, were the main signs of an overheated economy and promised to maintain tight monetary policy and fight inflation until it cools.
New statistics showed that real wages rose 6.2% year-on-year in June, following an 8.8% increase in the previous month, while average nominal wages rose 15.3% year-on-year to 89,145 roubles a month.
Wage growth in Russia is being spurred by the payouts handed to contract soldiers fighting in Ukraine, which have become a new benchmark in the economy as workers in fast-growing sectors facing acute labour shortages demand similar pay from employers.
In the first half of the year, real wages grew by 9.4%, while nominal wages increased by 18.1% compared with the same period in 2023, according to the new data. Unemployment remained at a historically low level of 1.9 million people in July, or 2.4% of the workforce.
Rootless cosmopolitan,down at heels intellectual;would be writer.
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