Despite Western sanctions on Moscow, Russia is growing and wages are rising strongly, which boosts consumption and the rush towards real estate. Has Russian President Vladimir Putin really succeeded in making his economy resilient?
This is how journalist Benjamin Beider began his lengthy report in Der Spiegel magazine about the steadfastness of the Russian economy despite the packages of sanctions being imposed on it.
Bader says that the chain of Western disdain directed at the Russian economy is long, starting with Google founder Sergey Brin’s sarcasm that the country of his birth was only a developing country and describing it as “Nigeria with snow,” to historian Yuval Harari, who said that Russia is “a gas station in which Nuclear weapons,” in addition to former German diplomat Wolfgan Ischinger, who described the Russian economy as a “dwarf.”
Nearly two years after the first sanctions were imposed due to the attack on Ukraine, the Russian economy has once again proven its surprisingly strong strength.
According to a preliminary estimate, GDP will grow by 3.6% in 2023, which is much faster than the economic powerhouse of all major European Union countries.
For a long time, economic figures received statistical reports from Moscow with some skepticism and caution. Moscow was manipulating those numbers on a large scale, says Jeffrey Sonnenfeld, a professor at Yale University. But such statements have become rare, as the rapid economic collapse that the West predicted in Russia Not achieved.
Are the statistics correct?
Independent experts largely confirm official Russian statistics such as those reported by QuantCube, a company that specializes in alternative methods of recording economic activity by evaluating satellite images. In the case of China, the company has already succeeded in detecting widespread distortions in Chinese growth statistics. Officially, however, there is a lack of evidence for this in Russia.
Benoit Belloni of QuantCube says, “We see no evidence of manipulation, and there are no signs of economic difficulties in Russia, and our data show the opposite,” according to what the German magazine reported.
Vasiliy Astrov of the Vienna Institute for International Economic Studies (WIIW) agrees with Belloni that Russia’s growth is real.
Since last year, WIIW has been monitoring Russian economic development with the participation of two other research institutes in Germany and one in Austria. Astrov’s colleagues examined the most important Russian economic statistics for anomalies, and only came to the conclusion that actual unemployment may be slightly higher. Of the officially announced percentage (2.9%).
But if the economic boom was not Russian propaganda, then what exactly caused it? Has the Russian economy really proven to be as invulnerable as President Putin says? Or is this growth primarily due to the massive expansion of arms production, into which the Kremlin is pouring billions?
Anatomy of a weapon boom
The Finnish Central Bank Research Institute “Buffett” tried to find an answer, and to do so, economist Helle Simula studied growth separately by industry sector, concluding that “there is not one economic development in Russia, but in fact there are two,” according to a report. Writer Benjamin Bader.
There are development sectors that include metal processing, production of electronics, optical devices, computers, batteries, and the vehicle industry in general.
All of these sectors enjoy high growth rates, and the reason for this – according to Simula – is that these industries also produce at least partly for the Russian army.
However, growth in sectors that are not linked to the Russian war machine is much weaker, and the trade and services sectors have not yet returned to pre-crisis levels in mid-2023, and there are no signs of a boom in the mining and raw materials extraction sector such as oil and gas except the sector. Contracting was an exception, as it benefited greatly from requests issued by the Ministry of Defense to establish new factories and fortifications.
In general, industries vital to the war effort have grown by 35% since the beginning of the war. On the other hand, many areas of the civilian economy are suffering. The production of household appliances has decreased significantly, and the automobile industry has not recovered from the sanctions in light of the withdrawal of many manufacturers.
The number of newly registered cars in Russia has risen again to more than a million, but most of the cars now in the country are imported from China, and with more than 1.5 million cars, Russia was ahead of France in 11th place among the most important car manufacturing countries until the outbreak of war.
This is the clearest indication of the shift from a civilian economy to a war economy. It appears that about 21% of the Russian central government’s total spending flows to the defense sector, but this cannot be completely confirmed, because Russia no longer publishes this complete information.
According to Simola, about 60% of the strong industrial growth in the first nine months of 2023 can be attributed to defense spending, and 40% of the growth of the entire economy.
But it is not defense spending alone that is driving economic growth in Russia, as wages have risen sharply across the country, and the increase will reach 7.6% in 2023, and special government payments may affect half a million soldiers, reports writer Benjamin Bidder.
According to Vasily Astrov, an expert on Eastern European affairs, “the number of working people in Russia is 74 million people.”
The fact that millions of Russians have been able to enjoy significant increases in their salaries in the past two years still has something to do with the war, albeit indirectly. The military mobilization has led to a growing skills shortage in the country, and in addition there are a million well-qualified workers fleeing abroad.
The Kremlin has directed that production at arms factories be dramatically increased in the second year of the war, and arms manufacturers need more employees to do this.
Therefore, employers – even in sectors not related to the war – must increase wages to avoid labor migration. In January 2024, 47% of industrial companies in Russia reported a severe labor shortage, which is the highest percentage since the start of company registration in 2014. 1996.
“If work becomes more expensive, investments in machinery and technology will be worthwhile, and this could give the Russian economy a limited growth boost,” says expert Astrov. “For a country where the average per capita income is still equivalent to 300 euros or less, this is actually a positive development.” However, the motive behind the attack on Ukraine was somewhat illogical,” says Astrov.
Is demographics an obstacle to the Russian economy?
Russia has been suffering from a demographic crisis for many years. After the collapse of the Soviet Union, birth rates fell more sharply than in Western Europe. Even without refugees and war deaths, Russia’s population would shrink by hundreds of thousands of people every year.
According to Kremlin estimates, the country will witness a shortage of at least two million workers by 2030, and by 2045 the population of the capital, Moscow, is expected to be about 700,000 fewer than it is today.
Economist Astrov warns against overestimating the consequences of the labor shortage. In the past, for example, many Central European countries – such as the Czech Republic and Hungary – had to suffer from enormous demographic problems, “but they remained able to achieve high growth rates for a long period.” The situation is currently similar in Russia, where high wages drive private consumption, and as a result sectors such as industry are experiencing steady growth.
Disturbing optimism
Most Russians have not yet noticed that the urban economy is shrinking, which is partly because other developments have overshadowed this trend, such as the increase in small and medium enterprise activities due to the sharp rise in income, which prompted the consumer to spend locally and dispense with foreign tourism and buying real estate in other countries. In addition to the rapid growth in granting loans, which the Central Bank was forced to slow down last year.
From a Western point of view, the credit boom is cause for concern, and economist Astrov says that “many companies and individuals look to the future with limited optimism.”
Survey data in Russia should now be viewed with caution, but polls from major survey institutes do not show any wave of pessimism either.
According to the independent Levada Center, 71% of Russians say that their country is developing in the right direction, which is the highest percentage ever measured.
According to the state polling institute, the percentage of Russians who are optimistic about the future has been at a consistently high level since 2022.
The consequences are evident not only in the two large cities such as Moscow and St. Petersburg, but also in the peripheries. In the city of Chelyabinsk, east of the Ural Mountains, apartment prices have risen by 37% since February 2023, and in Nizhny Novgorod by 31%, and among 16 Russian cities inhabited by millions. Population: The capital, Moscow, ranks second to last, with an increase of 13%.
The real estate boom has affected a significant number of industrial cities, where companies also benefit from weapons production.
However, experts do not assume that the arms boom will bring high long-term growth rates to the economy, and further significant expansions in arms production would further weaken the civilian economy. On the other hand, President Vladimir Putin is keen to preserve citizens’ hope that the war will not result in any personal losses for them.
The Russian Central Bank has already presented more pessimistic forecasts for the current year, as the Russian economy will only grow by between 1 and 2%, and the first signs of weak growth have already become clear, and according to analysts at the state-owned VIP Bank, the growth rate in the months The last three from 2023 to just 0.1%.
However, Russia is still far from the collapse that the West expected, according to Der Spiegel.
