The x-ray of Russia’s economy could well have been signed by Vladimir Putin when he began his invasion of Ukraine two years ago. Essentially, for having overcome market forecasts and survived with hardly any red numbers -with only a 1.2% recess in 2022- to the double objective of the Mother of All Sanctions as the Western Council called the export embargo. The blockade of Siberian oil and gas and Moscow’s suspension of payments with the prohibition of trading in dollars and using the Swift payment transfer system has not had the expected effects.
The resilience of the Russian economy has been commendable. Especially if one takes into account that hostilities to control Ukrainian territory remain fully active, presenting a high level of uncertainty about the winner of the conflict. Russia has gotten rid of the status of the new global economic disease that some analysts predicted.
Nor is it that the Russian productive fabric lives in abundance. Nor does success accompany an army that seems, at times, more inclined to reduce its conquests to the Donbas region – Lugansk and Donetsk – and Kherson and Zaporizhzhia; that is, 15% of the Ukrainian territory.
But neither the financial bankruptcy nor the suspension of debt payments, nor the recession have broken into this double combat – military and economic – in which Putin has involved Russia. Even so, another ghost, that of inflation, with a long history of social aversion since almost the beginning of the Bolshevik Revolution, in 1917, has manifested itself again, with records that flirt with double digits.
The Russian situational diagnosis leaves both positive values and negative parameters.
Among the former, a growing industrial rate stands out, which has gone from 0.6% in 2022 to 3.5% in 2023 due to the activation of the weapons machine, which has contributed to curbing the impact of the sanctions of the US and its allies. and, at the same time, to satisfy a good part of the high demand for orders from the Russian army. “The war business has adapted to external vetoes,” admits the Ministry of Economy, which does not hesitate to proclaim that Russia “lives under a productive model of war” capable of manufacturing engines for ships, combat aircraft and armored vehicles or manufacturing metallic, electrical, computer or optical utensils.
Sergei Shoigu – the Kremlin’s economic architect – affirms that “the arsenal of anti-aircraft defense missiles has been doubled and the tank inventory multiplied by seven” and that federal accounts will continue to boost defense allocations “during the current triennium” by massive amounts. crude oil revenues – despite the G-7’s attempts to disrupt the Russian war industry with its caps on the price of a barrel or the assumption as a partner of OPEC + of the quota reduction decreed by the cartel – and the influx of commercial flows with countries such as Iran or North Korea, which sell material for drones and instruments for the war industry to Russian companies such as Kalashnikov Concern or Rostec.
In Shoigu’s opinion, this productive strategy made in Russia It contrasts with the permanent military and financial aid that kyiv demands from Europe and the United States.
The boomerang effect of the war machine: more inflation
The 3.6% increase in Russian GDP in 2023 has several black holes. The intensification of the military industry is transferring workers from other businesses, which has led to a crazy race of salary increases that, in recent months, has skyrocketed private sector salaries by 10.5% to sometimes equal the onerous perks that the Kremlin offers for joining the army.
Remunerations for engineers, production chain operators, mechanics and drivers have risen up to 20% to correct the demand for employment in sectors other than the military, which stands at 2.3 million with a historically low unemployment rate of 2.3 million. 9%. But these data leave a worrying trail. “The strategy of recruiting volunteers with bonuses and long, guaranteed pay is designed for a short-term conflict,” economist Alex Isakov warns. Bloomberg. However, the prolongation of the war “is leaving a spiral of inflation” with an original cause: “the massive mobilization of public spending on the production of weapons.”
It is the main headache for the Russian central bank to curb prices, which closed 2022 with a rebound of 13.8% and which continued to grow at 7.5% in December. For example, eggs became 61% more expensive in January; chicken, 28% or vegetables, 24% and the predictions for price increases this spring are 8.1%. All this despite the increases in interest rates, which have increased the price of money from 8.5% to 16% in 2023.
In recent times, the Russian currency has appreciated. Largely, to acquire production materials – own or imported – with which to satisfy the 6% of the budget allocated to Defense in 2024, the largest since the collapse of the USSR, and the provision of 5% of fiscal stimuli to homes and businesses.
The turbulent world order opens several avenues of water
The problem of the Russian economy is not one of growth. Not even inflation or the autarky that governs its productive system. Rather, it contains a structural burden created by a double flight of talent – highly qualified professionals – and foreign investments, with the departure of a thousand multinationals in 2022. In 2023, a quarter of a billion dollars have fled capitalization of its stock exchange centers, almost half of the capitalization levels prior to the occupation of Ukraine.
The increase in the price of money, the control of the ruble and the income from the rise in the price of a barrel could cushion prices. Although the background of the matter is the immutable strategy that must lead to war victory at any price. Hence, its economic leaders are considering extending indefinitely the current restrictions to support the Russian currency, while their monetary counterparts criticize the extension. sine die of a measure with a temporary nature.
This supervision requires export groups – including energy companies – to repatriate at least 80% of their foreign profits to supply the domestic market with foreign currency. And 90% of these amounts must be used to buy rubles. “It is an effective remedy in the short term, but it will end up distorting internal supply and demand,” explains Tatiana Orlova, from Oxford Economics, although “it avoids monetary volatility at times.”
To all this, we must add the uncertainty of the price of crude oil that feeds the federal coffers, which has paid for half of the liquid assets with which the Kremlin has paid for the war in Ukraine. In a country in which “only liquid capital can be considered a reserve” because the rest “usually disappears abroad,” Orlova clarifies.
Distortion of accounts
The IMF also shows concern on this point. Its managing director, Kristalina Georgieva, observes greater fiscal indiscipline due to Putin’s “war economy.” The number two of the multilateral organization, Gita Gopinath, emphasizes the dangerous cause-effect relationship between military expenditures and “excessively high” social transfers. She also warns of an overheated economy with an overflowing deficit and drifting inflation, restrictions on human and technological capital and increasingly strict global prohibitions, which will generate uncertainty about its dynamism in the medium term.
As if that were not enough, the international scene has become even more rarefied. With messages of encouragement from ultra-conservative American positions, either political, such as that of Donald Trump encouraging Putin to attack NATO allies that do not comply with their defense spending, or business, such as that of Elon Musk and his rejection of Congress provide more aid to Ukraine.
Although in the economic field it is where Putin encounters the most active resistance. The EU has just revealed a list with two dozen companies, including three Chinese, accused of supporting and supplying material to Russia that also includes Serbian, Indian or Turkish firms.
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