Rising war costs push Russian economy towards stagnation
The Russian economy, fuelled by war expenditures and concealing structural issues, is on the verge of stagnation. Although the Kremlin continues to fund the war in Ukraine, increasing debt, declining resource revenues, and inflation indicate that the war machine is beginning to grind 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 relies heavily on excessive military spending, distorting other sectors' performance. Only the military industry is experiencing significant growth - production in this sector has increased by over 10% since 2021, while the rest recorded only a 3% increase.
Rising costs of the war
Record expenditures on defence and internal security will consume over 43% of the state budget in 2024. To meet these costs, the Kremlin is compelling Russian banks to provide preferential loans to companies associated with the military.
Since 2022, corporate debt in Russia has increased by an astonishing £340 billion. This "hidden war debt" could destabilise the banking sector and worsen inflation, which already stands at 9.6% - states the report.
The Russian labour market suffers from a chronic shortage of workers, which drives up wages in some regions, particularly in the military sector. Meanwhile, retirees and workers outside key industries cannot expect pay rises in line with inflation.
Resource revenues, which accounted for 40% of the budget in 2019, have now fallen to 27%, and 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 further sanctions on Russian oil trade, and the EU is considering new restrictions on Russian gas. Meanwhile, the situation at the front 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 signs suggest that the Kremlin is heading towards stagnation and facing new challenges that may significantly impact the future of the war and Russian society.
