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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 economic collapse, the Russian economy is performing remarkably well.
Twelve months ago, Western analysts expected a global contraction later in 2023. Instead, the Russian economy grew much faster than that of Western countries (including the UK), with GDP rising by more than 3%. Increased exports to China and India have helped Russia emerge from the disaster that many predicted.
The withdrawal of Western companies has opened up new niches for Russian companies, while capital controls have left them with no option to invest in Russia. And the huge increase in defense spending — increasing soldiers’ salaries and family allowances, as well as weapons production — has helped fuel a mini-boom in the country’s poorer 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, representing 39% of the Kremlin’s budget (and reducing 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 its lowest ever recorded (less than 3%), nominal wages have risen 15% year on year and inflation is around 8%, forcing the central bank to raise interest rates at 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 define seven tactics by which the war and the resulting exodus of Western corporations are damaging the Russian economy.
Rachel Lyngaas, chief economist in the sanctions department, said the combination of the war, sanctions and Moscow’s political backlash “puts the Russian economy under abundant economic pressure” by “contributing to immediate spending growth, 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 coped with the sanctions, a larger war effort could simply be destabilizing for Russia’s macroeconomic stability. ”
For Putin, “winning” his re-election in a concerted vote will be easy. Managing its economy 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 money 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.