In 1939, Winston Churchill famously said in a radio broadcast: “I cannot predict Russia’s actions to you. It is a riddle wrapped in a mystery within a riddle… ” Something similar could be said about the state of the Russian economy today. After Russia’s re-invasion of Ukraine in 2022, international economic sanctions were strengthened. But IMF figures show Russia’s economic growth appears to be robust, thanks to a massive war stimulus. Meanwhile, Russia’s central bank has raised its policy interest rate by more than 20% to curb inflation and avoid a fall in the value of the ruble, which could make it more expensive for Russia to import goods, especially from China. Add unreliable and unavailable Russian economic statistics into the mix, and it’s a mystery, but it’s hard to look beyond the mystery into the mystery. But sometimes, some evidence surfaces.
A report in the Wall Street Journal explains: “‘Destonomics’ Powers Russia’s War Machine; “Compensation for soldiers who died on the front lines is transforming the local economy of Russia’s poorest regions.” (Written by Georgi Kantchev and Matthew Luxmoore, November 13, 2024)
Russia, which has suffered heavy losses in Ukraine, is offering high salaries and bonuses to attract new workers. In some of the country’s poorest regions, military wages are five times the average. The families of those who died on the front lines receive large amounts of compensation from the government.
This is a life-changing amount for those left behind. Russian economist Vladislav Inozemtsev calculated that the family of a 35-year-old man who died on the battlefield after fighting for a year would receive about 14.5 million rubles (equivalent to $150,000) in soldier’s pay and death compensation. In some areas, this is more than the amount earned cumulatively while working as a civilian until the age of 60. Families may also receive other bonuses and benefits. “It is economically more profitable to go to the front and die a year later,” Inozemtsev said. He calls this phenomenon “death engineering.”
The subsidies are large enough to reduce poverty rates and widen budget deficits in some of Russia’s poorest regions.
Money flowing to military families can also carry financial risks. The payments would amount to about 8% of annual state spending by June 2024, widening the budget deficit, according to an analysis by research group Re: Russia. The payments have contributed to the high inflation rates plaguing Russia, prompting the central bank to raise interest rates to a near-record 21%. And the labor crisis is growing as more men go to the front, leaving employers short of welders, drivers and builders.
But in the Russian interior, war indemnity makes a big difference. In Tuva, a remote region where poverty rates are three times the national average, bank deposits have surged 151% since January 2022, a month before the invasion, according to central bank data. This is the highest increase in Russia and a sign that people may be losing significant amounts of money. The region is also experiencing a record construction boom, with new multi-storey residential complexes coming up in the regional capital, Kyzyl. It’s as if an entire generation has found work abroad and is now sending remittances.
The Stockholm Institute for Transition Economics (SITE), part of the Stockholm School of Economics, tried to spot loopholes in the report. “Russian economy in the fog of war” (September 2024). The report begins by looking at the size of the Russian economy from an international perspective.
In a global context, Russia is sometimes classified as a “great power.” There is a good historical reason for this. It was one of the two poles of the Cold War. It is still a major nuclear weapons state. It is a permanent member of the UN Security Council with veto power. Between 1998 and 2014, it was part of the G7 and became the G8 with the inclusion of Russia. And in terms of land size, Russia is by far the largest country in the world. However, in terms of economic size, Russia is not a ‘powerful country’ with a GDP of around $200 billion. This is about one-tenth of the combined GDP of the 27 EU countries (about US$20 trillion) and almost the same size as the Nordic countries combined. The size of the U.S. economy is approximately $27 trillion, which is more than 13 times that of Russia. Compared to other BRIC countries, Russia lags behind Brazil (USD 220 billion), slightly behind India (USD 360 billion), and accounts for only about 10% of China’s economy (USD 178 trillion). … That is, in the absence of short-term production constraints, there is no reasonable scenario in which Russia could outspend the West in military equipment and personnel if the West decided to enter into an all-out arms race with Russia in the long term. clincher.
In Russia, oil and gas exports alone account for about 14% of total GDP. Therefore, the Russian economy fluctuates depending on energy prices. The report cites one estimate that “between 60 and 95 percent of Russia’s GDP growth can be explained by changes in just one exogenous variable: changes in international oil prices.”
Another way to show how natural resources dominate the Russian economy is to look at trade flows. An analysis of what Russia exports and to whom shows that more than half consists of subsoil assets and more than 40% of the total is oil and petroleum products. Looking at imports instead, it is clear that Russia relies on the world for machinery, electronics, vehicles, pharmaceuticals and other goods that require innovation and competitive manufacturing. In short, in terms of trade relations, the Russian economy can be said to be an economy that mainly exports natural resources, imports industrial products, and is highly dependent on the import of high-tech products.
Starting in 2022, Russia stopped publishing various economic series and then started again. Official GDP figures are probably unreliable, and to the extent they are reliable they include mass production for wartime rather than the private economy. The report used oil prices to estimate the size of Russia’s GDP and then applied various inflation estimates to get results that “all alternative growth measures were negative, ranging from minus 2% to minus 11%.” ”
Unemployment in Russia appears to be very low, with the official unemployment rate at 2.4%. But what’s so grim is the combination of dead and wounded from the war in Ukraine and people of military age leaving the country. According to the report:
Beyond the aggregate numbers, there are also important details about what happens to the composition of the workforce. War requires large numbers of soldiers on the front lines, mostly young men, many of whom are killed or wounded. The war also triggered a migration of citizens due to sanctions and threats of conscription. In particular, those who migrate are primarily middle-class business owners and educated workers of conscription age. Migrants also transfer capital to their new home countries, as evidenced by the significant financial flows from Russia to the United Arab Emirates since the start of the invasion in February 2022 (Alexander and Malit, 2024). This means that brain drain not only reduces the skilled workforce, but also causes loss of capital and investment.
In snow-covered mountainous areas, conditions are sometimes ripe for an avalanche, but at the same time, it can be unclear exactly what causes an avalanche to occur. The Russian economy is currentlyThe defense and intelligence sector accounts for about 8% of GDP.It suffers from large budget deficits, double-digit inflation, interest rates exceeding 20%, and international sanctions. We don’t know whether the result will be an economic catastrophe or simply a stagnation and decline in the quality of life for civilians.
