Russia's war‑driven economy faces looming stagnation crisis
The Russian economy, driven by war spending and masking structural problems, is on the brink of stagnation. Although the Kremlin continues to fund the war in Ukraine, rising debt, falling resource revenues, and inflation reveal that the war machine is beginning to falter, reports "Business Insider Polska".
The Russian gross domestic product grew by 3.5% in 2023, and the official unemployment rate is only 2.3%. These figures, though impressive at first glance, are misleading, notes "Business Insider Polska".
The economy relies heavily on military spending, which distorts the picture of other sectors. Only the military industry records significant growth – production in this sector has increased by over 10% since 2021, while the rest of the industry has recorded only a 3% increase.
Rising costs of the war
Record spending on defence and internal security will consume over 43% of the state budget in 2024. To meet these costs, the Kremlin is forcing Russian banks to provide preferential loans to companies connected to the military.
Since 2022, corporate debt in Russia has grown by an incredible 563 billion Canadian dollars. This "hidden war debt" could lead to the destabilisation of the banking sector and exacerbate inflation, which is already at 9.6%, it says.
The Russian labour market suffers from a chronic shortage of workers, which is driving up wages in some regions, especially in the military sector. Meanwhile, pensioners and workers outside key industries cannot expect wage increases to keep pace with inflation.
Resource income, which constituted 40% of the budget in 2019, has now fallen to 27%. Sanctions on the Russian "shadow fleet" and discussions in the EU about limiting LNG imports may further restrict the Kremlin's revenues from this source.
The Joe Biden administration has imposed additional sanctions on Russian oil trade, and the EU is considering new restrictions on Russian gas. At the same time, the situation on the front and war fatigue in Western countries are becoming key to the future of the conflict.
Russia teeters on the edge of an economic abyss. Although Putin's regime tries to maintain an image of stability, the war machine is becoming increasingly costly, and the economy is beginning to lose room for further growth. Everything suggests that the Kremlin is heading towards stagnation and new challenges, which could significantly impact the future of the war and Russian society.
