War and Social Services
Government spending fuels Russian growth
8/11/2023 8:43 p.m
Purchases for the war against Ukraine and higher social benefits for the population ensured solid economic growth in Russia in the spring. This also allowed the consequences of the sanctions to be offset. However, the domestic currency continues to fall.
Supported by government spending, the Russian economy grew again in the spring, according to official information. Gross domestic product (GDP) increased by 4.9 percent year-on-year in the second quarter Statistics Office announced. Economists had expected an average growth of 3.9 percent. Earlier, the Russian economy had contracted for four consecutive quarters year-on-year.
The basis of growth, however, is primarily government spending. Spending on the war against Ukraine has increased. This supports industrial production, which according to the information increased by 11.3 percent. Private consumption is boosted by increased social benefits and higher wages. According to the authority, it rose by 9 percent. The effect of the Western sanctions could thus be defused.
“The gross domestic product could reach the pre-war level again by the middle of next year,” said Natalia Lavrova, chief economist at the financial services provider BCS. It forecasts growth of two percent for this year.
However, observers see a danger for the economy in a worsening of the labor shortage if the armed forces should conscript even more soldiers. In addition, foreign trade slows down economic development. The ruble has fallen to its lowest level since March 2022 against the dollar and the euro.
The President of the Central Bank, Elvira Nabiullina, has primarily blamed the deterioration in foreign trade conditions for the ruble’s weakness. The price cap on crude oil imposed by western industrialized countries has led to a sustained decline in export earnings. This weighs on the trade balance and government revenues.