The Russian economy grew rapidly in 2023, largely thanks to militarization. And that poses enormous risks for the future. – Meduza

International sanctions failed to stop the Russian economy's recovery to pre-war levels earlier this year, according to the latest statistics from the country's State Statistics Service. Western news agencies and analysts now also recognize this. Vladimir Putin dances on the bones of John McCain, declaring that Russia is not a “gas station,” while the president's economic adviser Maxim Oreshkin insists that Europe has suffered more from his sanctions against Moscow than Russia itself. But not everything exists of sunshine and lollipops; Millions of Russians are paying for the increase in military production as inflation reaches 7.5 percent. Given signs that the economy is overheating, a slowdown or perhaps even a recession is expected in 2024.

Western sanctions plunged Russia into recession after the February 2022 invasion of Ukraine, but the economy has recovered at least in certain metrics, and the downturn ended in August after just ten months, according to the Center for Macroeconomic Analysis and Short-Term Forecasting. While TsMAKP may not be the most objective think tank (its director Dmitry Beloussov is the brother of First Deputy Prime Minister Andrei Beloussov), Russia's gross domestic product grew 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 higher in 2023 than in the same period in 2021, before the full-scale invasion of Ukraine and the West's supposedly crippling sanctions.

Russia has exceeded forecasts from its own economic development ministry and central bank, which said in the spring that GDP growth would not exceed 2 percent this year. Now even analysts at Bloomberg Economics expect the increase to exceed 3 percent in 2023.

This week Vladimir Putin triumphantly declared that Russia's annual GDP growth would exceed 3.5 percent. “Every intelligent person must agree that this is a good indicator for the Russian economy,” the president said, adding that only two percent of the country's growth came from raw material extraction.

The increase in economic output this year is notable, but these indicators reflect the country's recovery from a 2021-like slump following the coronavirus pandemic. In other words, Russia's rising GDP is not evidence of sustainable development, as Putin claims.

From a subsidized recovery to an overheated economy

Russia's manufacturing output is booming, but money from the oil and gas industry still accounted for about a third of all federal budget revenue between January and October 2023. Yes, oil and gas production fell by 2 and 5 percent, respectively, but that was primarily due to commitments Russia made under an agreement with OPEC to reduce supplies. According to former Central Bank Deputy Chairman Sergei Aleksashenko, Russia's primitive structure of dependence on oil and gas exports has actually protected its economy from international sanctions and helped the Kremlin maintain the war in Ukraine.

The federal deficit in 2023 is expected to be just 1 percent of GDP – half of the authorities' original estimate – despite skyrocketing allocations for military production. At the same time, annual spending on “national defense” and “national security” will exceed 6.2 percent of annual GDP, rising to nearly 8 percent of GDP in 2024 and accounting for nearly 40 percent of all household spending.

Russia finances its deficit spending through reserves in the National Wealth Fund (whose liquidity the Finance Ministry currently estimates at 6.94 trillion rubles, or 4.6 percent of GDP) and through government loans. As of November 1, the total volume of soft loans reached 11 trillion rubles – 7 percent of GDP and more than 14 percent of the loan portfolio of Russian banks. Large state-owned companies (including Russian Railways, AvtoVAZ, Aeroflot and Roskosmos) have begun to lobby for preferential terms on loans.

Central Bank Governor Elvira Nabiullina has warned that the government is fueling inflation by subsidizing more and more loans, forcing her office to maintain a high interest rate. In November, annual inflation reached 7.5 percent and showed no signs of slowing. Something that's slowing: Russia's economic growth. According to the central bank, the recovery peaked in the third quarter of 2023.

Russia's human problem

The lack of industrial capacity and labor will also limit the development of the manufacturing sector in Russia, says Stanislav Murashov, an analyst at Raiffeisenbank. In addition, further increases in the key interest rate will slow wage growth and make it more difficult for companies to modernize their technology. At near full employment, there will be a redistribution of labor between sectors, driving workers from sectors hit by rising interest rates, such as construction, retail and finance, to companies in Russia's military-industrial complex, Bloomberg Economics chief economist predicts Alexander Isakov, who believes that future interest rate increases will reduce lending and therefore consumer demand, increasing the risk of another recession in the next six months to over 70 percent.

More than 85 percent of companies suffer from a staff shortage, with skilled workers being the most scarce. Wages rose by a nominal 13.2 percent in the first nine months of 2023 and unemployment fell to 2.9 percent (the lowest level in post-Soviet history). However, these impressive statistics hide major problems in labor productivity, which fell 3.6 percent compared to 2021 – the worst decline since 2009. The brain drain of skilled workers fleeing war and political repression, not to mention participation and the Death of hundreds of thousands of people in the war has deprived Russia of another million workers from Russia's labor pool.

While the invasion remains the government's top priority, comparatively less funding is allocated to the development of 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” problems and the easier it will be to prolong the war.

Original article by Julia Starostina

Adapted for Meduza in English by Kevin Rothrock