Russian war economy is overheating on a powder keg
Putin has moved the economy into full war-financing mode. This implies that he is planning for a long conflict in Ukraine
President Vladimir Putin has claimed that the Russian economy is performing, as he says, “better than previously expected”. This kind of understatement is unusual for the Kremlin leader: with a tight labour market and inflation showing no signs of abating, the Russian economy is in fact overheating.
Look beyond the surface, however, and it is clear not only that the current boom is temporary, but also that it is the prelude to a painful economic future. Putin has moved the economy into full war-financing mode. This implies that he is planning for a long conflict in Ukraine, which Russia invaded in February 2022.
Russia’s GDP will expand by 2.2% this year, according to the International Monetary Fund’s most recent prediction. That’s three times as fast as the euro zone’s expected growth this year. Back in February, the IMF’s forecast that Russia would grow by 0.7% in 2023 was widely judged to be optimistic. The main reason for the surprise boom is the spending bonanza unleashed by the government, which has broken with a long tradition of fiscal restraint to finance its war in Ukraine.
The defence budget has risen to an equivalent of 3.9% of GDP this year from 2.7% in 2021, the year before the invasion of Ukraine. It will jump by more than 70% in 2024, reaching about 6% of GDP, according to official plans. And these are conservative numbers, because other types of war spending – such as new construction in the occupied territories – are hidden in other sections of the budget.
The war effort is concentrating public resources on a military-industrial sector rife with corruption, inefficiency and alien to the concept of profit.
Military priorities are also weighing on the rest of the industry by mobilising human resources, contributing to a tight labour market. The unemployment rate fell to an all-time low of 3% in August – it had never been below 4.4% before the war. More than 300,000 Russian men have been mobilised for the war. Employers are complaining about staff shortages, which are becoming acute even in industries, such as textiles, with few connections to the war machine.
