Russian economy faces brink with fading wartime boost
In 2024, the economy reached its limit and is unlikely to improve. Although in 2025 war production will continue to drive GDP, this boost will soon fade, predicts Jan Starosta, an expert on Russia from the Institute of New Europe, in an interview for "Puls Biznesu".
According to official Kremlin data, the Russian economy is thriving despite the sanctions imposed by the West due to the military invasion of Ukraine. The International Monetary Fund forecasts that in 2024 GDP will grow by 3.6 per cent. However, Jan Starosta from the Institute of New Europe believes this is merely an illusion.
"This is hollow growth driven by internal consumption, which is a form of escape from high inflation. On paper, the economy indeed looks robust, but ordinary Russians are finding it increasingly difficult to live each year, with the standard of living declining. The cost of living for average Russians has noticeably increased," says the expert in an interview with "PB".
The growth - whether real or superficial - is the result of switching the economy to a wartime footing. According to Jan Starosta, this may be the reason why Russia will not want to end the conflict.
"The economy is overheated. Shifting production to wartime footing in 2022 was costly, as data shows that the fiscal stimulus alone cost about 10 per cent of GDP, or around 120 billion pounds. Reverting production would entail additional costs, leading to a decrease in domestic demand and real wages for part of the population, which could result in social unrest," explains the expert.
The near end of El Dorado
What will happen next? "In 2024, the economy reached its limit and is unlikely to improve. Although in 2025 war production will continue to drive GDP, this boost will soon fade. A marked decline in growth dynamics should occur in 2026," assesses Jan Starosta.
The expert from the Institute of New Europe is not alone in his opinion. Russia is heading towards an economic collapse, which could threaten the power of Vladimir Putin, predicts analyst and "KyivPost" correspondent Jason Jay Smart. He points out that the crisis in the real estate market, rapid inflation, and the depreciation of the rouble are destabilising the country, causing social discontent and undermining the regime's foundations.
The state budget, based on oil prices of 72 dollars (58 pounds) per barrel, is under pressure due to falling commodity prices. Experts, in turn, forecast the necessity for a rouble devaluation of 22 to 35 per cent to sustain government spending.
