Vladimir Putin put the Russian economy on a permanent military regime.
Having signed three- Last month in the project budget for the year, the Russian President is preparing to spend more than 6% of GDP on defense next year, for the first time in the country's modern history.
The scale of this spending is reflected in the fact that a third of government spending in 2024 will be directed only to the army.
Some of this spending is expected to be financed by higher oil revenues, but spending will also come from other government sectors, including social security, housing, education and health.
Analysts say this has left Russia in a precarious position: a combination of higher inflation, declining investment and a demographic crisis poses a threat to the country's economy.
Benjamin Hilgenstock of the Kiev School of Economics (KSE) says that while the Russian economy faces many risks, predictions of a “catastrophic collapse” have not materialized.
High oil prices and redirection trade to China and India ensured the country exceeded many gloomy forecasts.
Russia's central bank recently raised its economic growth forecast to above 3% this year, double its forecast for the year. several months ago.
In early December, Anton Siluanov, the country's finance minister, said the country's exports to Asia had more than doubled to 60%.
Russians with deep pockets are also unlikely to change their spending habits, even after the Kremlin's invasion of Ukraine led to an exodus of Western brands amid waves of sanctions.
“Moscow is full of Del Boys,” he says. one businessman who has lived in the Russian capital for many years, referring to the main character-trader from “Only Fools and Horses.”
“They used to be comrades, now they are Del Boys. You can literally get everything. Bentley seems to be all the rage these days.”
Chris Weafer, founder of consultancy Macro Advisory, who splits his time between the UK, Central Asia and Russia, says he has no problem with his weekly shopping.< /p>
“There are different ways to attract what people want,” he says. “In the store where I live you can buy Parma ham, French and Italian cheeses, French wine — all the things you shouldn't have access to. All of them are available, and the price is about 20% higher than before the conflict.”
Weafer says luxury goods carry higher markups but are still easy to purchase after the State Duma passed a law legalizing so-called “parallel imports.” This protects Russian companies that import products originally sold in other countries from criminal liability.
“The real inflation came in consumer durables and luxury goods like smartphones,” Weafer says. “And foreign trips. If you want to go on holiday to Dubai or Turkey, it will be 30 to 50 percent more expensive than two years ago.”
Putin’s strategy has a cost, however, beyond more expensive caviar and champagne.
Many of the country's brightest and best men went abroad or were killed on the battlefield. Increased Kremlin defense spending, coupled with a tight labor market, has also fueled a wave of inflation.Rising prices prompted a rare apology from Putin after an angry pensioner confronted him about egg prices. which are now 40% more expensive than a year ago.
Inflation in the economy rose from 2.3% in April to more than 7% in November.
Unfortunately, inflation has increased,” Putin said at his year-end press conference. “By the end of the year it is expected to be 7.5%, and maybe a little higher — 8%.
The central bank has responded decisively, raising interest rates to 16%, with many economists predicting that borrowing costs will increase. will continue to rise in an attempt to return inflation to the target level of 4%.
Liam Peach of Capital Economics believes that inflation will continue to rise and be in double digits.
“The central bank has kept its end-2024 inflation forecast unchanged at 4% to 4.5%,” he says. “But we think it will be difficult to achieve this. Given the overheating economy, sharp supply-side constraints and additional fiscal stimulus, we think inflation could reach 10% by the middle of next year.”
KSE's Hilgenstock adds that if current trends continue, the only way for prices is up. If prices continue to rise at the average level of the last three months, inflation will peak at 12.7% in October 2024, he said. «There's a good chance of double-digit inflation,» he says.
While higher interest rates may put pressure on prices, they also put pressure on the economy.
Hilgenstock says big changes in government spending mean the war in Ukraine is quickly becoming a major driver of Russia's economic growth.
Although defense spending at 6% of GDP is still far less than 17% , spent by the Soviet Union at the height of the Cold War, it is still much higher than the average for the period from 2019 to 2021, and comparable to US military spending in the 1980s. According to the think tank Carnegie Endowment for International Peace.
While Hilgenstock believes Ukrainians and their allies should prepare for a long, protracted fight, he adds: “This war will end someday. And military spending will decrease again.
“Then we will see what the fundamentals of the Russian economy would actually look like if the stimulus were removed, and what would be left of an economy that is now largely focused on one main goal.”
Response He adds that it is not that much.
“It’s not that Russia’s oil and gas industry is in particularly good shape,” he says. “New investment has long been under sanctions.”
The number of so-called greenfield foreign direct investment projects, in which facilities are built from scratch, fell from 330 in 2019 to nine this year, according to GlobalData.
This could deprive the country of investments that contribute to productivity and improved living standards.
Hilgenstock adds that while barrels of oil can easily be redirected to other countries, you cannot build a new gas pipeline in overnight.
“The weaponization of gas flows essentially destroyed one of the key cash cows of the system — Gazprom,” he says. “And there is no easy solution on the horizon. You can't export the same amount of gas in other ways because if you want to increase gas exports to China, for example, you have to build a lot of new infrastructure. It costs money. And it takes time, resulting in Russia becoming even more of a one-trick pony.”
Macro Advisory's Weafer says the short-term sustainability of the economy is not sustainable.
«The big problem is that all of this is coming at the expense of previously planned economic development through 2022,» he says.
Russia's «national projects program,» initially delayed by the pandemic, was a $400 billion plan aimed at raising living standards in Russia. It included spending billions of dollars over six years on infrastructure and creating new industries to diversify the country's economy away from oil and gas.
“All that money is now going toward funding the military,” Weafer says. . “This means the government has suspended long-term planning to maintain current stability. The longer this situation continues, the more the economy will deteriorate.
An analysis of Putin's latest budget by the Stockholm International Peace Research Institute shows deep spending cuts in key areas.
Education's share is expected to fall from 4.8% of total government spending in 2023 to 4. 2% in 2024, and healthcare spending is expected to fall from 5.2% of the Russian budget to 4.4% in 2024.
Weafer believes the forecast is disappointing. “At the end of the decade, you may well have a situation where the economy is stagnating, Russia is even more dependent on commodity exports, and you have a full-blown demographic crisis where the labor force is rapidly shrinking.”
“So to say, that Russia survived the crisis is not true. He managed to stabilize the situation. But the crisis will unfold in terms of demographics, economic stagnation and lack of diversification over the next five, six or seven years if the current situation with sanctions and investment does not change.”
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