Analysis-Putin grows war economy but incomes suffer 'lost decade'

LONDON (Reuters) – During his re-election campaign in 2018, President Vladimir Putin promised a significant improvement in living standards for Russians. However, six years later, as Russians head to the polls once again, Putin is reiterating old promises with new deadlines.

In a recent speech, Putin announced plans to spend over 11.5 trillion roubles ($125 billion) on various initiatives, including mortgage subsidies, tax breaks for young parents, and infrastructure upgrades. He highlighted Russia’s economic growth, with a GDP increase of 3.6% last year, outpacing the Group of Seven nations that have imposed sanctions on Moscow for its actions in Ukraine.

Despite these claims, data indicates a more challenging reality. The war-driven economy, with round-the-clock operations at arms factories, is grappling with labor shortages, population decline, and low productivity and investment levels.

While there has been a nominal increase of 7.6% in real incomes since 2018, they remain slightly lower than in 2013, prompting economist Yevgeny Suvorov to describe the period from 2014 to 2023 as a “lost decade.”

A survey commissioned by the central bank revealed that 28% of respondents struggle to afford basic necessities like food or clothes due to financial constraints. Inflation has been on the rise, exceeding the target of 4% set by the central bank, reaching 8.4% in 2021, 11.9% in 2022, and 7.4% in 2023, with interest rates at 16%.

Putin recently hinted at increasing taxes on corporations and higher-income individuals, deviating from previous assurances made by his finance minister regarding tax stability for the next few years. The cost of the ongoing conflict has strained the state budget, with a third of expenditures directed towards defense.

In his state of the nation address, Putin outlined ambitious plans that would require significant financial resources each year. However, experts noted that many of these proposals are revamped versions of previous unfulfilled commitments.

Despite reductions in poverty rates and improvements in wages in some sectors, the overall economic landscape remains challenging. There is a scarcity of skilled workers, with many leaving the country or being called up for military service in Ukraine.

Putin’s goals for increasing life expectancy and labor productivity have been extended to later years, reflecting the difficulties in meeting previously set targets. The economy’s reliance on defense-related industries presents unique challenges in achieving broader economic growth.

Economists emphasize the importance of addressing structural issues and enhancing productivity to sustain long-term economic stability and social development. Putin’s ambitions for Russia’s economic positioning and exports face hurdles in the face of ongoing internal and external challenges.

As Russia navigates complex economic and geopolitical pressures, the tension between military priorities and economic stability is expected to intensify. The dual goals of achieving military success in Ukraine and maintaining macroeconomic equilibrium pose significant challenges for Putin’s administration.

Despite Russia’s current ranking as the fifth-largest economy in terms of purchasing power parity, concerns remain regarding its GDP per capita and overall living standards compared to global benchmarks. The economy’s resilience during prolonged conflict is uncertain, raising questions about its ability to sustain internal stability and economic growth.

($1 = 91.5800 roubles)

(Reporting by Darya Korsunskaya and Alexander Marrow; Writing by Mark Trevelyan; Editing by Hugh Lawson)