Russia’s economy has defied doomsayers–at least so far

There were dire predictions over the impact of sanctions and yet growth has increased, thanks to military spending. But there are deeper doubts over whether it can last and what lies ahead.

Sara Gironi Carnevale

Russia’s economy has defied doomsayers–at least so far

“If you look at Russia today, military production goes up, and consumption goes down. That is pretty much what the Soviet Union used to look like—high levels of production and low levels of consumption. I actually think that the Russian economy is in for very tough times.”

These were the words of Kristalina Georgieva, the International Monetary Fund’s managing director, speaking in February 2024, when the IMF upgraded its forecast for Russia’s economic growth, as measured by gross domestic product, to 2.6%. The previous forecast was for just 1.1%.

And the IMF recently upgraded this number again. It now expects growth of 3.2% in 2024—a faster rate than all of the world’s advanced economies, including the United States.

It’s clear that the “very tough times” predicted for the Russian economy have not arrived. This is the story of what is actually happening and why.

Russia’s GDP growth outlook is 2.6%, up from just 1.1% predicted in October 2023. The IMF recently upgraded this number again, with the new forecast expecting the Russian economy to grow by 3.2% in 2024, faster than all of the world’s advanced economies, including the United States. So where were the predicted “very tough times,” and how were they avoided?

Moscow City skyline at sunset showing architectural landmarks Ukraine Hotel and International Business Centre

Wrong forecasts

Economic forecasting is always complex and its inherent problems can be amplified in wartime. Russia’s campaign in Ukraine has made it all the more unpredictable.

Later, in 2022, the IMF expected the Russian economy to grow by just 0.7% in 2023. The World Bank had forecast that it would shrink by 0.2%. By early 2024, the country proved how wrong they both were, with a 2023 growth rate of 3.6%.

It came after immense government spending. Howard Shatz, a senior economist at the RAND Corp., said: “Russia is undergoing a massive fiscal stimulus, and that's a lot of what's behind the Russian growth that we see”.

Nonetheless, prominent economists have long argued that GDP is not the best measure of whether a country is doing well.

In 2020, Joseph Stiglitz said: “The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life. It does not even measure crucial aspects of the economy such as its sustainability: whether or not it is headed for a crash.”

In its definition of GDP, the IMF says it “measures the monetary value of final goods and services – that is, those that are bought by the final user – produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within a country's borders.”

So, as Shatz stated earlier this year, government spending—including immense amounts allocated to the military industry—continues to be a major factor in this push.

Despite GDP's imperfections, the fact that the IMF is adjusting its own forecasts for 2024 significantly over brief periods of time raises another important question about Russia’s economy after the invasion of Ukraine: Are Western sanctions working?

Russia's economy is growing at a faster rate than all of the world's advanced economies, including the United States.

Sanctions and spending

Analysts have difficulty reaching a consensus on the effectiveness of the sanctions against Russia so far.

Naturally, part of the reason for this is that the situation remains fluid, and new sanctions are being introduced on a regular basis. After the new round of sanctions following the death of Russian opposition leader Alexei Navalny in February 2024, the Wilson Centre noted that several Chinese banks had stopped doing business with Russia, suggesting that China could no longer be the reliable partner that would replace the West.

Economists William Pomeranz and Dan White said that Russia's high spending levels in early 2024 were unsustainable in the long term and came in the run-up to the presidential election in March. They concluded a study of the effectiveness of the sanctions on a positive note: "Despite naysayers, the sanctions against Russia are working. Time and a firm application of pressure should see an even bigger impact on the Russian economy."

Other analysts, including Bob Deen from the Clingendael Institute, acknowledge that things may not be going as planned. For some countries, the wider opportunities posed by the sanctions on Russia seem reason enough to ignore the bigger picture.

India continues to fuel its own growth with cheap oil imports from Russia, becoming Moscow's biggest buyer of the key export in 2023. In February 2024, oil from Russia made up around 32% of India's overall imports. In 2021, before the Ukraine war, the figure was 1%.

Similarly, the share of Chinese-manufactured heavy vehicles like trucks in the Russian market increased 600% after the war, when Western manufacturers withdrew, and local producers shifted their focus to military orders.

And the sanctions have not succeeded in cutting off all supplies of Western goods to Russia. The Eurasian Economic Union—which brings countries like Armenia, Kazakhstan and Kyrgyzstan into a trade partnership with Russia—has been considered by many as a "back door" for imports.

Intended as a means of avoiding future deadly conflagrations, nations' refusal to impose sanctions and targeted countries' ability to circumvent them made them ineffective in many cases

Read more: "Eat grass": The problematic record of sanctions

Trade between the EU and Kyrgyzstan increased by almost 1000% after Russia invaded Ukraine. It would be naïve to assume that all those products were meant only for the Kyrgyz market. While the European Union is trying to use "secondary sanctions" to exert pressure on countries doing trade with Russia, it is not always clear what crosses the border when bilateral trade takes place.

In the words of Alexandra Prokopenko, who worked as an advisor to the Central Bank of Russia before the invasion of Ukraine: "The Russian economy is a big and rigid animal; it is quite complicated to kill it with one shot. In the very short term, the economy is performing well. This growth is based, of course, on export revenues and high spending. The fiscal impulse from Russian authorities in 2022 and 2023 exceeded 10% of GDP, which is a historical high."

Outlook for higher taxes to cover state spending

Expectations for the Russian economy vary over timeframes. The outlook is very different for the short, medium and long term. The surge in trade between Russia and China is great immediate news for the Kremlin. However, it poses a severe problem when considering that the war in Ukraine will have to end sooner or later.

As Prokopenko told the DW news channel in April: "When Russian vehicle producers like Ural and Kamaz focused on import substitution and fulfilling the demand from the army and the state, the Chinese industry just occupied the market, and it will be quite complicated to push them out if, and when, the war ends".

In the meantime, military spending required by the war is powering economic growth. The 2024 budget approved by the Russian Duma a few months ago outlined a 20% increase in overall government spending, with the military component accounting for one-third of the entire budget. It will reach 6% of the Russian GDP—the highest it has ever been since the Soviet era.

This raises questions about sustainability and where the money is coming from. President Vladimir Putin has been considering changes in the tax system to allow his state to collect more money from citizens and businesses. The personal income tax most Russians pay today is just 13%, so there is room for an increase, especially among higher-earning citizens, without provoking much ire.

Corporate profits are currently taxed at 20%, and the New York Times recently reported that the Kremlin plans to increase this to 25%. Russia's budget also remains quite dependent on oil prices, so these numbers might be juggled if that market hits turbulence. The long-term reaction of citizens to higher taxes remains to be seen.

The sanctions have not succeeded in cutting off all supplies of Western goods to Russia. The Eurasian Economic Union has been considered by many as a "back door" for imports.

Tech troubles ahead

Another factor to consider for the longer-term is that Russia may be losing the technology war.

As Prokopenko points out: "Russia lost its claims to leadership in terms of artificial intelligence and biomedical technologies. Russian industries are struggling to get both hardware and software, they are switching from western companies to Chinese solutions".

When the IMF's Georgieva predicted those "very tough times" for the Russian economy, she explained it was "because of the outflow of people and the reduced access to technology that comes with the sanctions."

And she confidently added:  "Although this number looks like a good number, there is a bigger story behind it and it's not a very good story."

Only time will tell whether this is true. In fact, it could well be time itself that proves to be the critical factor in defining if this story for Russia's economy ends happily, or becomes a tragedy for the Kremlin.

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