Russia's war‑driven economy on the brink of stagnation
The Russian economy, driven by war expenditures and masking structural problems, is on the brink of stagnation. Although the Kremlin continues to fund the war in Ukraine, the combination of increasing debt, declining resource revenues, and rising inflation suggests that the war machine is gradually grinding to a halt, 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 heavily relies on significant military spending, which distorts the picture of other sectors. Only the military industry is experiencing substantial growth, with production increasing by over 10% since 2021, while the rest of the industry recorded only a 3% increase.
Rising costs of the war
Record expenditures on defense and internal security are projected to consume over 43% of the state budget in 2024. To meet these costs, the Kremlin forces Russian banks to provide preferential loans to companies associated with the military.
Since 2022, corporate debt in Russia has surged by an incredible $415 billion. This "hidden war debt" could destabilize the banking sector and deepen inflation, which already stands at 9.6%, according to the report.
The Russian labor market suffers from a chronic shortage of workers, which drives up wages in some regions, especially in the military sector. Meanwhile, retirees and workers outside key industries cannot expect raises that keep pace with inflation.
Resource revenues, which accounted for 40% of the budget in 2019, have now fallen to 27%. Sanctions on Russia's "shadow fleet" and discussions in the EU about limiting LNG imports may further restrict the Kremlin's income 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 lines and war fatigue in Western countries are becoming crucial for the future of the conflict.
Russia is teetering 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. All indications suggest that the Kremlin is heading towards stagnation and new challenges that may significantly impact the future of the war and Russian society.
