Hard landing at peace?
Russia’s economy has become dependent on the war
By Max Bourne
May 8, 2024, 10:25 a.m
The hope in the West that sanctions could weaken Russia’s economy so much that President Putin would be forced to make peace has turned into the opposite two years after the attack on Ukraine: the war has transformed the economy. Peace could cause problems for Putin.
It is not as if the war in Ukraine and Western sanctions have not left their mark on the Russian economy. For example, gas exports have collapsed due to the extensive ban on exports to Europe. Gazprom, a reliable source of foreign currency for the Kremlin for decades, has just reported a record loss. Car production and other industries are also suffering from the flight of foreign manufacturers. But these losses have little impact on the Russian economy as a whole. It’s not just coping with the war – it’s booming partly because of the war. Some economists are already warning that the economy is overheating.
Russia’s economic output grew by 3.6 percent last year; this year, according to estimates, it could be a good 3 percent. This is largely due to the war-related industries. Since the start of the war, the number of arms factories has more than tripled from fewer than 2,000 to 6,000. In some regions there are reports of the construction of completely new industrial areas for the armaments industry.
According to official figures, the industry now employs 3.5 million people, 500,000 more than at the start of the war. At the same time, salaries have risen sharply – the media is talking about a whopping 20 to 60 percent. Meanwhile, unemployment in Russia has fallen to a record low of 2.8 percent.
“An economy cannot grow like this”
The boom is being fueled by government spending on armaments, which is expected to rise to the equivalent of over 100 billion euros this year. More than double the pre-war year of 2021. That would be more than six percent of economic output. However, experts estimate that the actual total spending on the Russian military and the war is far higher. As a result of the resulting economic boom with rising employment and income, part of this money flows back into the state treasury thanks to growing tax revenue.
Russia’s transformation into a war economy has now progressed so far and is having such a positive financial impact for large parts of the population that it will be difficult for Russian President Waldimir Putin to get out of the war, warns economist Elina Ribakova in the “Financial Times.” . The hope at the beginning of the war that the sanctions could force Putin to make peace by weakening the economy has turned into the opposite: the Russian economy has become dependent on the war. In the event of peace, however, it would face a “hard landing” with rising unemployment and falling prosperity.
However, other economists point out that current growth is not sustainable even if the war lasts longer. The economy is overheating, economist Ruben Enikolopov tells the Guardian. “The economy is currently running above its potential, depleting all resources, both labor and capital.” In some sectors, workers are already becoming scarce. “An economy cannot grow like this,” warns Enikolopov. “Some companies will soon no longer be able to continue.”