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Back in 1939, Winston Churchill famously said in a radio broadcast: “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma …” One might say something similar today about the state of Russia’s economy. . However, Russia’s economic growth appears robust, according to IMF figures, because of enormous wartime stimulus. Meanwhile, Russia’s central bank has hiked its policy interest rate above 20%, partly to choke off inflation and partly to avoid a depreciation of the ruble (which would make it more expensive for Russia to import goods from China, in particular). Add unreliable and unavailable Russian economic statistics to the mix, and it’s hard to see into the riddle, though the mystery, past the enigma. But some evidence does bubble to the surface now and then.A report from the Wall Street Journal describes (by Georgi Kantchev and Matthew Luxmoore November 13, 2024).
Facing heavy losses in Ukraine, Russia is offering high salaries and bonuses to entice new recruits. In some of the country’s poorest regions, a military wage is as much as five times the average. The families of those who die on the front lines receive large compensation payments from the government.
These are life-changing sums for those left behind. Russian economist Vladislav Inozemtsev calculates that the family of a 35-year-old man who fights for a year and is then killed on the battlefield would receive around 14.5 million rubles, equivalent to $150,000, from his soldier’s salary and death compensation. That is more than he would have earned cumulatively working as a civilian until the age of 60 in some regions. Families are eligible for other bonuses and insurance payouts, too. “Going to the front and being killed a year later is economically more profitable than a man’s further life,” Inozemtsev said, a phenomenon he calls “deathonomics.”
The subsidies are large enough to reduce poverty rates in some of Russia’s poorest areas, and also to balloon budget deficits:
The money flowing to military families can also carry economic risks. The payouts cost around 8% of state expenditures in the year to June 2024, expanding the budget deficit, according to an analysis by Re: Russia, a research group. The payouts have contributed to a high inflation rate plaguing Russia, leading the central bank to raise interest rates to near-record 21%. And more men going to the front is stoking a labor crunch, leaving employers short of welders, drivers and builders.
In Russia’s hinterland, though, the war payouts make a big difference. In Tuva, a remote region where the poverty rate is three times the national average, bank deposits have jumped by 151% since January 2022, the month before the invasion, central-bank data shows. That is the highest increase in Russia, a sign that people are able to squirrel away substantial amounts of money. The region is also in the midst of a record construction boom with new multistory residential complexes arising in the regional capital of Kyzyl. It is almost as if an entire generation has found work overseas and is now sending back remittances.
The Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics has tried to see through the smoke in its report (September 2024). The report starts by putting the size of Russia’s economy in international perspective.
In a global context, Russia is sometimes labeled a “great power”. There are good historical reasons for this. It was one of two opposing poles in the cold war; it remains a major nuclear state; it is a permanent member of the UN security council with veto powers; between 1998 and 2014 it was part of the G7 which with the inclusion of Russia became the G8; and in terms of land size Russia is by far the largest country in the world. In terms of economic size, however, Russia is not a “great power” with a GDP of around 2000 billion US dollars. That is about 1/10th of the combined GDP of the EU-27 (about 20 000 billion US dollars), or approximately the same size as the Nordic countries combined. The size of the US economy is about 27 000 billion US dollars or more than 13 times the Russian economy. Compared to other BRIC countries, Russia is behind Brazil (2200 billion US dollars), distanced with some margin by India (3600 billion US dollars), and only around 10 percent of the Chinese economy (17 800 billion US dollars). … In other words, there is no reasonable scenario where Russia could afford to outspend the West on military equipment and personnel if the West decided to enter a full-blown arms race with Russia in the longer run, when short-run production constraints are not the deciding factor.
For Russia, oil and gas exports alone are about 14% of total GDP. Thus, Russia’s economy fluctuates with energy prices. The report cites one estimate that “between 60 and 95 percent of Russia’s GDP growth can be explained by changes in one exogeneous variable alone: the change in international oil prices.”
Another way of illustrating how natural resources dominate the Russian economy is to look at trade flows. A break-down of what Russia exports, and to whom, shows that more than half consists of sub-soil assets, and more than 40 percent of the total is oil and oil products. When instead looking at imports, it is clear that Russia depends on the rest of the world for machinery, electronics, vehicles, pharmaceuticals, and other goods that require innovation and competitive manufacturing. In short, the Russian economy in terms of trade relations can be described as exporting mainly natural resources, while importing manufactured items and being highly dependent on importing advanced products.
Since 2022, Russia has stopped and then re-started the publication of various economic series. The official GDP numbers are probably not trustworthy, and even to the extent that they can be trusted, they involve heavy production for a wartime rather than a civilian economy. The report uses the price of oil to estimate the size of Russia’s GDP, and then applies a range of possible estimates of inflation, withe the result that “all the alternative measures of growth are negative, ranging from around minus 2 to minus 11 percent.”The unemployment rate in Russia appears to be quite low, at an official rate of 2.4%. But the grim reason is a combination of killed and wounded in the Ukraine war and people of military age fleeing the country. As the report notes:Beyond the aggregate numbers, there are also important details when it comes to what happens with the composition of the workforce. The war requires soldiers in great numbers at the front lines, mostly young males, with many of them ending up killed or injured. The war has also triggered an outmigration of citizens due to sanctions and the threat of conscription. Notably, those emigrating are predominantly middle-class business owners and educated workers in conscription age. Furthermore, migrants also move their capital to their new home countries, as for instance shown by the significant financial flows being directed from Russia to the United Arab Emirates since the invasion began in February 2022 (Alexander and Malit, 2024). This suggests that the brain drain not only results in a reduction of skilled labor but also in a loss of capital and investment.In snowy mountain regions, the situation is sometime ripe for an avalanche, but at the same time, exactly what might cause the avalanche to happen can be unclear. Russia’s economy is currently spending a, while running large budget deficits, double-digit inflation, interest rates north of 20%, and suffering under international sanctions. I do not know if the result will be an economic avalanche, or just a stagnant and declining standard of life for civilians.More By This Author:
