Bloomberg said that after significant growth in the Russian military economy during the first half of 2024, it appears that this growth has passed its peak.
The agency notes that although military production continues to expand to support the war in Ukraine, this expansion was not sufficient to compensate for the decline in other sectors of the economy.
“We have passed the peak of growth probably in the middle of this year,” said Oleg Kuzmin, an economist at Renaissance Capital in Moscow. He added, “What will happen to growth next year is an open question, whether the downturn will be soft or hard for the economy.”
Military expansion and civil slowdown
Although military production contributed significantly to increasing production in Russia during previous quarters, the Finnish Institute for Economic Studies said, in a report issued in October, that this expansion was not sufficient to compensate for the slowdown in the civilian sectors, according to what Bloomberg reported.
In its latest report, the International Monetary Fund reduced its growth forecast for the Russian economy in 2025 from 1.5% to 1.3%.
Purchasing Managers’ Index (PMI) data issued by Standard & Poor’s Global also showed that the Russian manufacturing sector recorded a contraction in September 2024 for the first time since April 2022.
The Russian Economy Ministry said the economy grew by 2.4% in August, the lowest rate since the recession that followed the invasion of Ukraine in 2022.
In 2023, the Russian economy benefited from extensive defense spending, resulting in an annual growth rate of 3.6%.
But fears are now growing that increasing military production may come at the expense of civilian sectors, hindering the expansion of these vital sectors.
Interest rates and economic challenges
Meanwhile, Russians are already facing an interest rate crisis, as the central bank is expected to raise the base interest rate to 20%, in an attempt to control inflation, according to Bloomberg. This rise may increase economic pressure on consumers, who have been largely protected from the effects of sanctions imposed by the United States and its allies.
The Central Bank of Russia stated, in a recent report, that economic growth in the third quarter of the year was proceeding at a slower pace compared to the first half of the year, and that the economy is close to exhausting its full productive capabilities.
Despite this, the Central Bank expects the growth rate in 2024 to reach between 3.5% and 4%, which is a comfortable rate for similar economies, but expectations indicate that growth will slow further in the second half of the year, as a result of restrictions on production and labor shortages, with a slowdown in growth. Growth will increase further in 2025 and 2026, reaching about 1% annually.
Future prospects
Bloomberg Economics analysts indicate that growth driven by increased military spending has exceeded its peak, and indicators of economic activity have shown that industrial production has become flat due to pressures on production capabilities, which has led to a slowdown in growth in sectors not related to military demand.
“Manufacturing growth has slowed recently, suggesting that constraints on production capacity are starting to take a toll,” Tatiana Orlova, an economist at Oxford Economics, told Bloomberg.
She added that increased investment is necessary to maintain growth, but this is “unlikely given the high levels of interest rates.”
While Anders Olofgaard, associate professor at the Stockholm Institute for Transitional Economics, said, “Russia’s growth prospects were already bleak before the all-out invasion, and now they look even bleaker.”
