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Compared to widespread expectations in the West two years ago – that sanctions and the devastating effects of Vladimir Putin’s war in Ukraine could simply lead to an economic collapse – the Russian economy is doing remarkably well.
Twelve months ago, Western analysts expected a general contraction throughout 2023. In contrast, the Russian economy grew much more strongly than that of Western countries (including the United Kingdom), with GDP expanding by more than 3%. Rising oil costs and increased exports to China and India helped Russia emerge from the disaster that many predicted.
The withdrawal of Western companies opened up new niches for Russian companies, while capital controls left them with no options yet to invest in Russia. And large increases in defense spending — particularly in soldiers’ salaries and family compensation, as well as in arms production — have helped fuel a mini-boom in the country’s poorest regions.
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Can this really be sustainable? Figures from the Russian Ministry of Finance recommend that the government’s overall fiscal stimulus amount to around 5% of GDP, more than what was implemented during the Covid-19 pandemic. At some point, all of this will have to be paid for. But for now, the Russian president is actively running to build a war economy.
In the 2024 budget, military spending will reach 6% of GDP for the first time since the Soviet era, accounting for 39% of the Kremlin’s budget (and will reduce investment in health and social protection). or stagnation, the biggest challenge is that the economy is “dangerously hot,” according to The Economist. Unemployment is at an all-time low (less than 3%), nominal wages have risen 15% year-over-year, and inflation is around 8%, forcing the central bank to raise interest rates to 16%.
Is Putin winning? It is too early to conclude. In a harsh reaction to a series of year-end op-eds portraying Putin as one of the “winners of 2023,” two Yale academics published in the pages of Foreign Policy just before Christmas a call for greater skepticism about Russia’s economic prospects. . In their article, Jeffrey Sonnenfeld and Steven Tian define seven tactics with which the war and the consequent exodus of Western corporations are damaging the Russian economy.
Rachel Lyngaas, lead economist at the sanctions department, said the combination of war, sanctions and Moscow’s political reaction “puts the Russian economy under abundant economic pressure” by “contributing to immediate growth in spending, a depreciation of the ruble , emerging inflation and a tough and tight labor market, reflecting a loss of workers. The main points that harm Russia are emigration, difficulties in obtaining high-tech imports, the forced reorientation of chains of origin and the lack of access to Western markets.
What will be crucial will be limitations on points of origin, acknowledges Liam Peach of Capital Economics. Peach estimates that the hit to Russian GDP so far is around 3%, up from the 5% imposed through the US Treasury, and more importantly, “source” The limitations are more restrictive today than in many years,” he says.
“One of the most important and lasting consequences of the war and sanctions is that the sharp easing of Russia’s productive capacity over the past two years has particularly limited the economy’s ability to grow without generating inflationary pressures. “Therefore, “even if the economy has so far faced sanctions, a larger war effort could simply be destabilizing to Russia’s macroeconomic stability. ”
For Putin, “winning” his re-election in a concerted vote will be easy. Managing his finances in the coming years will be much more difficult.
This article was first published in MoneyWeek magazine. Enjoy exclusive early access to news, reviews, and research from our team of monetary experts with a MoneyWeek subscription.
Simon Wilson’s early career in e-book publishing, as a business editor at Routledge and as a non-fiction editor at Random House, specializing in control e-books and popular businesses. There he published Customers. com, a bestseller from the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational e-book that encouraged its publisher to embark on a post-entrepreneurial portfolio life.
Since 2001, he has been editor of MoneyWeek, money editor, and longtime editor of The Week. Simon also works as an actor and teacher in companies; His current and future clients include investment banks, the Bank of England, the United Kingdom Government, several Magic Circle law firms, and the 4 primary accounting firms. He holds degrees in languages (German and Spanish) and in social and political sciences from the University. of Cambridge.