Russia's economic growth undermined by inflation and labour crisis
The Russian economy is facing considerable challenges. Inflation is soaring, interest rates are high, and there is a shortage in the labour force. Three years of conflict with Ukraine have significantly influenced the economic landscape of Moscow.
The Russian economy, three years after the invasion of Ukraine commenced, is contending with serious issues. Inflation, labour force shortages, and high interest rates are the primary challenges the country is confronting. Military spending is contributing to GDP growth, but it does not equate to long-term development.
According to Rosstat data, Russia's GDP increased by 4.1% in 2024, a figure that Prime Minister Mikhail Mishustin described as a "historic record". However, as reported by the independent portal Meduza, this growth is illusory as it fails to take inflation into account. Military spending comprised nearly one-third of the federal budget, contributing to GDP growth.
Russian economy: Problems of the civilian sector
Expert Iwona Wiśniewska from the Polish Centre for Eastern Studies emphasises that the civilian sector is not keeping pace with market needs. Production outside the defence sector is stagnating, and private investments are nearly at a standstill. High interest rates, reaching 21%, restrict investment possibilities, further impeding economic growth.
Russia is contending with a labour force deficit. Officially, it stands at 2 million people, but it could be even 3 million higher. Companies are increasing salaries to attract workers, but this does not resolve the issue.
Pensioners and public sector employees are the most affected in this scenario. Their incomes cannot keep pace with the rising cost of living.
Sanctions imposed on Russia by the West are making access to Western goods and technologies difficult. Russians are increasingly turning to Chinese products. Despite the sanctions, Russia still finds ways to circumvent them.
Iwona Wiśniewska from the Centre for Eastern Studies, in an interview with PAP, states that the activity of defence plants influences the Russian economy. "The government pays them significant amounts, creating demand in the economy in this way. However, the civilian sector is unable to meet buyers' needs," Wiśniewska emphasised.
Nevertheless, as noted by the independent Russian portal Meduza, nominal GDP does not account for inflation and does not reflect the real economic situation in the country. State spending on the defence industry last year was unprecedented in post-Soviet Russia, accounting for nearly one-third of the federal budget.
The Central Bank of the Russian Federation is struggling to manage inflation, and high interest rates limit investment opportunities. The Meduza service pointed out that GDP growth during wartime is not unusual, as similar trends have been observed in other countries during armed conflicts.
