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Russia’s economy grew rapidly in 2023, thanks mainly to militarization. And that poses

International sanctions failed to stop the Russian economy from recovering to near prewar levels earlier this year, according to the latest statistics from the nation’s Federal State Statistics Service. Western news outlets and analysts now acknowledge it, too. Vladimir Putin is dancing on the bones of John McCain, declaring that Russia is no “gas station,” while presidential economic adviser Maxim Oreshkin insists that Europe has suffered more from its sanctions against Moscow than Russia itself. But not everything is sunshine and lollipops; millions of Russians are paying for the surge in military production as inflation reaches 7.5 percent. Amid indications of an overheating economy, a slowdown or perhaps even a recession is expected in 2024.

Western sanctions sent Russia into a recession after the February 2022 invasion of Ukraine, but the economy has bounced back, at least in certain metrics, and the downturn ended in August after a mere 10 months, according to the Center for Macroeconomic Analysis and Short-Term Forecasting. While TsMAKP perhaps isn’t the most objective think tank (its director, Dmitry Belousov, is the brother of First Deputy Prime Minister Andrey Belousov), Russia’s gross domestic product did grow 5.5 percent in the third quarter of 2023 and rose 3.2 percent in the first 10 months of the year. GDP was 1.1 percent greater in 2023 than during the same period in 2021, before the full-scale invasion of Ukraine and the West’s supposedly crippling sanctions.

Russia has outperformed the forecasts of its own Economic Development Ministry and Central Bank, which said in the spring that GDP growth on the year wouldn’t exceed 2 percent. Now even analysts at Bloomberg Economics say the rise in 2023 will surpass 3 percent. 

This week, Vladimir Putin declared triumphantly that Russia’s annual GDP growth will exceed 3.5 percent. “Any intelligent person must agree that this is a good indicator for the Russian economy,” the president explained, adding that only 2 percent of the country’s growth came from resource extraction. 

The spike in economic output this year is remarkable, but these indicators capture the nation’s recovery from a slump, like in 2021 after the coronavirus pandemic. In other words, Russia’s surging GDP isn’t the evidence of sustainable development that Putin claims.

From subsidized recovery to overheated economy

Russia’s manufacturing output has been booming, but money from the oil and gas industries nevertheless made up roughly a third of all federal budget revenue between January and October 2023. Yes, oil and gas production declined by 2 and 5 percent, respectively, but this was due primarily to obligations Russia accepted in a deal with OPEC to cut supplies. According to former Central Bank Deputy Chairman Sergey Aleksashenko, the primitive structure of Russia’s reliance on oil and gas exports has actually insulated its economy against international sanctions and helped the Kremlin sustain the war in Ukraine.

The federal deficit in 2023 is expected to be just 1 percent of GDP — half the authorities’ original estimate — despite skyrocketing allocations to military production. At the same time, annual spending on “national defense” and “national security” will exceed 6.2 percent of annual GDP and rise to almost 8 percent of GDP in 2024, reaching nearly 40 percent of all budget expenditures. 

Russia finances its deficit spending through reserves held in the National Wealth Fund (the liquidity of which the Finance Ministry currently estimates to be 6.94 trillion rubles, or 4.6 percent of GDP) and through government loans. By November 1, the total volume of soft loans had reached 11 trillion rubles — 7 percent of GDP and more than 14 percent of the credit portfolio of Russian banks. Major enterprises with state ownership (including Russian Railways, AvtoVAZ, Aeroflot, and Roscosmos) have started lobbying for preferential terms on loans.

Central Bank Governor Elvira Nabiullina has warned that the government fuels inflation by subsidizing more and more borrowing, which forces her office to maintain a high key rate. In November, inflation in annual terms reached 7.5 percent and showed no signs of slowing. Something that is slowing: Russia’s economic growth. According to the Central Bank, the recovery peaked in the third quarter of 2023.

Russia’s human problem

Shortages of industrial capacity and labor will also limit Russia’s manufacturing development, says Raiffeisenbank analyst Stanislav Murashov. Additionally, further hikes to the key interest rate will slow the growth of wages and complicate the work of upgrading enterprises technologically. With nearly full employment, labor will redistribute across sectors, driving workers from areas hit by rising interest rates like construction, retail, and finance into enterprises in Russia’s military-industrial complex, predicts Bloomberg Economics chief economist Alexander Isakov, who says future rate hikes will reduce lending and, in turn, consumer demand, raising the risk of another recession in the next six months to more than 70 percent.

More than 85 percent of companies are experiencing staff shortages, and skilled workers are the most scarce of all. Wages rose nominally by 13.2 percent in the first nine months of 2023, and unemployment fell to 2.9 percent (the lowest level in post-Soviet history), but these impressive statistics conceal major problems with labor productivity, which fell by 3.6 percent compared to 2021 — the worst decline since 2009. The emigration of skilled workers fleeing the war and political repressions, not to mention the participation and deaths of hundreds of thousands of people in the war, has removed from Russia’s labor pool another million or so workers.

While the invasion remains the government’s top priority, there will be relatively less funding for developing Russia’s human capital through spending on education and healthcare. The longer this continues, the harder it will be for the Kremlin to return to solving complex “civilian” issues, and the easier it will be to drag out the war.

Original article by Yulia Starostina

Adapted for Meduza in English by Kevin Rothrock

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