The Russian Economy Bounces Back Despite Sanctions, But Problems Lurk
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. Russian President Vladimir Putin is celebrating the economic rebound, 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.
However, 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 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 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.
While Putin has declared triumphantly that Russia’s annual GDP growth will exceed 3.5 percent, analysts caution that these indicators capture the nation’s recovery from a slump, rather than evidence of sustainable development.
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. Despite a decline in oil and gas production due primarily to obligations Russia accepted in a deal with OPEC to cut supplies, the primitive structure of Russia’s reliance on oil and gas exports has insulated its economy against international sanctions and helped the Kremlin sustain the war in Ukraine.
Russia finances its deficit spending through reserves held in the National Wealth Fund and through government loans. Major enterprises with state ownership 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. According to the Central Bank, the recovery peaked in the third quarter of 2023.
Shortages of industrial capacity and labor will also limit Russia’s manufacturing development, and further hikes to the key interest rate will slow the growth of wages and complicate the work of upgrading enterprises technologically, according to analysts.
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, but these impressive statistics conceal major problems with labor productivity. The emigration of skilled workers fleeing the war and political repressions has removed another million or so workers from Russia’s labor pool.
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.