After more than three years of bloody fighting, the severe impact of the Ukraine war on the Russian economy has begun to show, as oil revenue decreases and Western economic sanctions take effect, the Russian economy is now rapidly slowing down.
Putin constantly emphasizes the strong resilience of Russia in the face of economic sanctions. © Alexey Nikolsky / Reuters
Maxim Reshetnikov, Russia's Minister of Economic Development, said at the St. Petersburg Economic Forum in June that the Russian economy was "on the verge of a recession." However, Putin quickly refuted this statement and continued to emphasize the strong resilience of Russia in the face of economic sanctions.
But data does not lie.
Bloomberg data states that from January to April this year, the output of most industries in Russia declined significantly, such as leather industry down 17.8%, transportation down 10.8%, mining down 5.8%. The head of the Russian Central Bank, Elvira Nabiullina, had to cut interest rates twice in June and July, reducing the benchmark rate from 21% to 18%, in an effort to stimulate investment and production.
In July this year, the International Monetary Fund lowered its growth forecast for Russia in 2025 from 1.5% to 0.9%. In 2023 and 2024, Russia's GDP grew by 4.1% and 4.3% respectively. At that time, according to World Bank data, Russia's economy became the fourth largest in the world in terms of purchasing power parity and constant dollars, ranking after China, the United States, and India, surpassing Japan and Germany. Purchasing power parity and constant dollars are two economic terms, simply put, it means that if we do not look at exchange rates but only at real purchasing power, and exclude inflation factors, Russia's economic volume ranks fourth globally.
But this year, Russia's economic data has been sluggish.
Taking oil and gas sales revenue as an example, this income accounts for one-third of federal budget revenue, but in the first seven months of this year, this part of the income decreased by 18.5%. The reason is the decline in global oil prices (oil price was $66.4 per barrel in early August, about €51.8), and Russian crude oil prices fell faster, being pushed down to $47.6 per barrel by the eighteenth round of EU sanctions.
Many people say even though Russia is sanctioned by the EU, it still has China and India, right? But if you look at the actual data, everything is not as simple as it seems. For example, in 2024, China's overall import growth increased by 14%, but imports from Russia decreased by 7%. That is, although China buys more from all over the world, it buys less from Russia. In addition, in the context where the West refuses to buy Russian oil, Russia has turned its exports to China, India, and Turkey, but has had to sell at a low price. At the same time, to bypass sanctions, producers have had to add intermediate links, thus increasing costs.
Other than oil, due to sanctions, Russian companies find it difficult to obtain key equipment and components from Europe, the US, and Japan. Because they have not managed to get rid of their dependence on Western technology, companies have had to adopt a "patchwork" approach, i.e., dismantling several devices to make one that can still operate.
After the rapid slowdown of the economy, according to common sense, many people naturally guess when will Russia's economy hit rock bottom? After all, this is the key to whether the Ukraine war will stop. But the reality is far more complex. Russia's war economy is somewhat like the US during 1941-1945, with military spending driving the overall economy. This is why Russia's economy could grow sharply in 2023 and 2024.
However, unlike the US back then, Russia implemented a contractionary monetary policy while advancing its war economy. A war economy is essentially inflationary, concentrating resources and labor force in the defense sector, pushing up wages and prices. However, the Russian Central Bank raised interest rates significantly in 2023 and 2024, raising the benchmark rate from 8.5% to 21%, with real interest rates close to 12%, among the highest in the world. High interest rates suppress private investment, putting the private economy into a slump. After years of accumulation, problems have surfaced. According to data from the Russian Ministry of Finance, as of the end of July this year, the fiscal deficit has reached 4.9 trillion rubles (about 56 billion euros), exceeding the annual target by 30%. At the same time, total budget expenditures increased by 20.8%, but revenues are decreasing.
Over-reliance on the war economy has made it very difficult for Russia to access the international capital market, and it can only rely on loans from state banks and use the "National Wealth Fund". The balance of this fund has dropped from nearly 10 trillion rubles at the beginning of 2022 to 2.88 trillion rubles (30.8 billion euros) currently. According to warnings from Russian economists, it may be exhausted as early as next year. Normally, when funds run out, it might force Russia to seek peace, to reduce military spending and revitalize the civilian economy. But the reality is likely to develop in the exact opposite direction. When the military industry becomes the only pillar of the economy for a long time, everything becomes both dangerous and irreversible, possibly dragging the entire country into a deep military abyss in the long term. Peace, therefore, becomes even more distant. This may partly explain why Putin has been reluctant to immediately cease hostilities, instead keeping the Ukraine war in a stalemate, seemingly intending to keep it going indefinitely.
Therefore, the real problem with the Russian economy is not when it will hit rock bottom, but rather, after being burdened by accumulated issues, it may completely fall into the abyss of economic militarization. This poses a huge challenge for Ukraine and Europe.
Sources: rfi
Original: https://www.toutiao.com/article/7544057089430274602/
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