Russia on economic brink: War spending depletes reserves

The Russian economy, dominated by military sector financing, is on the brink of exhaustion, warn economists from the International Monetary Fund. After the aggression against Ukraine, Russia almost completely shifted its economy to a war footing.

As much as 20 trillion rubles (approximately £160 billion) has already been spent on national defence, supporting the military industry and paying bonuses to contract soldiers. However, as Bloomberg Economics expert Alexander Isakov notes, the effect of these fiscal stimuli has peaked, and stagnation has begun to affect construction and freight transport, reads the report.

The IMF forecasts that in 2025, Russian GDP will grow by only 1.3% and will drop to 1.2% by 2029. This phenomenon is due to declining private consumption, lack of investment, and an increasing labour shortage. The Kremlin admits there is a shortage of about 2.5 million workers in the labour market, but independent economists estimate that the real gap is as high as 5 million, driven by mobilisation and mass escapes of men abroad.

Russia is also losing ground to other countries, including BRICS members like China and India. In 2025, Russia's GDP is expected to grow one-third slower than in developed countries and three times slower than in developing countries. According to forecasts, next year Russia's GDP will grow 3.5 times slower compared to China and five times slower compared to India.

An additional blow to the Russian economy is the anticipated drop in oil prices, a key resource for the country's budget. Prices are expected to fall from the current £62.56 per barrel to £56.05 per barrel by 2025. The Russian economy still relies on energy resource exports, and the state budget is based on assumed average oil prices, which will further hinder development in the coming years.

According to the Bank of Finland's Institute for Emerging Economies (BOFIT), capacity utilisation in Russia currently exceeds 80%, which has not happened in the country's recent history. However, the Russian government is not investing in the modernisation and development of civilian sectors, leading to even greater stagnation. Experts emphasise that, in the longer term, investments in military production and dismantling market institutions may weaken the Russian economy.

As noted by Konstantin Sonin, a professor at the University of Chicago, these short-term actions may strengthen Putin's position, but in the longer term, they become a "ticking time bomb" for future generations. Although the current war has not significantly worsened Russians' lives, its long-term effects may be catastrophic for Russia's economic development - reads the report.