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Compared with widely held 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 performing remarkably well.
Twelve months ago, Western analysts expected a general contraction over the course of 2023. Instead, the Russian economy has grown much faster than that of Western countries (including the UK), with GDP growth above 3% . Rising oil costs and increased exports to China and India have helped Russia emerge from the disaster many predicted.
The withdrawal of Western companies has opened up new niches for Russian companies, while capital controls have left them with no option yet to invest in Russia. And the huge increase in defense spending (adding soldiers’ salaries and family allowances, as well as weapons production) has 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 that 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 cutting investment in health and social protection). For now, rather than giving in or stagnating, the biggest challenge is that the economy is “dangerously hot,” according to The Economist. Unemployment is at its lowest point on record (less than 3%), nominal wages have risen 15% year-on-year, and inflation is hovering around 8%, forcing the central bank to raise interest rates to 16%. %.
Is Putin winning? It’s too early to conclude. In a harsh reaction to a series of year-end op-eds touting Putin as one of the “winners of 2023,” two Yale academics published in the pages of Foreign Policy just before Christmas a call for more skepticism about Russia’s economic prospects. In their article, Jeffrey Sonnenfeld and Steven Tian lay out seven tactics by which the war and the resulting exodus of Western corporations are damaging the Russian economy.
Rachel Lyngaas, lead economist in the sanctions department, said the combination of war, sanctions and Moscow’s political backlash “puts the Russian economy under abundant economic pressure” by “contributing to immediate growth in spending, a depreciation of the ruble, emerging inflation and a rise in inflation. ” the difficulty in obtaining high-tech imports, the forced reorientation of origin chains 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 the hit to Russian GDP so far at around 3%, up from the 5% imposed through the US Treasury and, more importantly, “point-of-origin limitations are more restrictive. ” today than in many years,” he says.
“One of the most important and longest-lasting consequences of the war and sanctions is that Russia’s strong relief in generating capacity over the past two years has particularly limited the economy’s ability to grow without generating inflationary pressures. Thus, “although the economy has so far faced sanctions, a larger war effort could simply be destabilizing to Russia’s macroeconomic capacity. “
For Putin, “winning” re-election in a stage-managed vote will be easy. Managing its economy in the coming years will be much harder.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Simon Wilson’s early career in e-book publishing, as budget editor at Routledge and as non-fiction editor at Random House, specializing in popular e-books on business and management. 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-corporate portfolio life.
Since 2001, he has been editor of MoneyWeek, money editor, and long-time editor of The Week. Simon also works as an actor and teacher in companies; its current and future clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms, and the top 4 accounting firms. He holds degrees in languages (German and Spanish) and social and political sciences from the University. of Cambridge.