(Reuters) – According to annual data due to be released on Wednesday, Russia’s economy experienced a significant rebound from a slump in 2022. However, the growth is largely dependent on state-funded arms and ammunition production and does not reflect an improvement in the living standards of the Russian people. President Vladimir Putin, who is seeking re-election in March, has expressed confidence in the estimated 3.5% GDP growth for 2023, stating that it demonstrates the country’s ability to transition away from the West amid sanctions due to the Ukraine war.
Russian-based economists, however, argue that the economy is showing signs of overheating as a result of the ongoing conflict in Ukraine. They suggest that despite the current optimism, stagnation or recession could be on the horizon.
The statistics service Rosstat’s GDP growth assessment, expected to be released on Wednesday, is anticipated to show a rebound from a revised 1.2% drop in 2022. However, economists caution that this headline figure does not provide adequate insight into the living standards of most Russians.
Economist Sergei Khestanov explains that while the defense industry’s production contributes to GDP growth, the civilian economy receives little benefit from this process. He notes that similar conditions were present in the Soviet Union, where extensive military production did not translate to improvements in people’s lives.
According to Russia’s Centre for Macroeconomic Analysis and Short-term Forecasting (CAMAC), around 60-65% of increased industrial output in the last two years can be attributed to the Ukraine conflict. However, other economists argue that Russia’s economy is being fueled by one-time, unproductive investments that yield limited future benefit. Economist Alexandra Suslina highlights that production in the military-industrial complex essentially throws money out of the economy, with conventional tanks and bombs not contributing to long-term economic growth.
The International Monetary Fund (IMF) expects Russia’s economy to outpace all G7 economies this year but fall short of emerging European economies. The IMF’s 2.6% growth prediction exceeds that of Russia’s own economy ministry at 2.3%. It is noted that while Russia’s tight labor market initially supported wage growth, real wages have now started falling.
Unemployment in Russia currently stands at a record low of 2.9%, with a substantial number of people having fled the country or joined the military. However, Russia’s labor productivity index, a key national development goal, experienced a 3.6% year-on-year decrease in 2022, signaling a decline in labor productivity.
The economy’s stretched labor market is further evidenced by record-high capacity utilization and stubbornly high inflation, prompting the central bank to maintain high interest rates. While it may be too early to predict a recession, there are indications that the economy is starting to stall in certain sectors.
The IMF’s forecast anticipates a decline in Russian growth to 1.1% next year, well below that of the world’s advanced economies. Economist Yevgeny Nadorshin views the current economic growth as a precursor to an impending economic crisis, reminiscent of the country’s previous crisis in 2004, which may not even necessitate an external shock.
(Reporting by Darya Korsunskaya; Writing by Alexander Marrow; Editing by Gareth Jones)
