Russian economy grows and can sustain Putin’s war – 02/20/2024 – Vinicius Torres Freire

On Saturday, it was two years since Russia invaded Ukraine. It will also be two years of embarrassing wrong predictions about the Russian economy.

Vladimir Putin’s country’s GDP grew by 3.6% in 2023. In the euro zone, growth should have been 0.6%. In Brazil, 3%. In the USA, it was 2.5%, excellent, given American wealth.

The previous summary of the opera is that Putin has circumvented sanctions, in the short or medium term he can sustain the war and manages to implement a plan to detach from the West.

At the beginning of 2022, the World Bank, IMF, banks and even the Russian Central Bank predicted that Russia’s GDP would decrease by around 9% that year. The drop was 1.2%.

It was then predicted that 2023 would be bad, from GDP to public deficit. It was not. The IMF predicts growth of 2.6% for this 2024; Putin’s finance ministry predicts less: 2.1%.

It’s a war economy, they say. True, it affects the well-being of the average Russian now and suggests cloudy and dark days in the future, when the war is over — if it is over.

“If it ends”: the defense budget was 2.7% of GDP in 2021; in 2024, it should reach 6% of GDP (for total public expenditure of around 36% of GDP). It’s money to sustain a long war.

Spending on bombs, tanks or combat planes replaces spending on civilian private consumption, investment in civilian productive capacity and infrastructure and in education, health and social expenditure services.

When the war ended, some special conditions would be needed so that a nasty recession would not occur (suppressed private savings and/or continued government deficit stimulus and/or sufficient trade transactions with the rest of the world).

That’s for the short term. In the long term, the Russian economy will suffer from less access to technology and investment from abroad, even if China can plug some of the holes.

He must suffer from a lack of brains — many people fled the country, from military service, from the lack of perspective on life under a Tsar’s war, etc. Russian productivity is unlikely to grow.

That said, Putin circumvented sanctions from the West and allies. He trades oil. Russian barrels are sold at a more discounted price than before the war, but above the ceiling that the West wanted to impose.

In the five years before the start of the epidemic (2015-2019), oil and gas revenue was 40.8% of total government budget revenues.

In 2022, the first year of the war, it was 41.6% of the total (the result of the increase in sanctions, which were late, and the increase in the price of a barrel caused by the war). In 2023, they fell to 30.3%, the lowest since 2006, apart from the 2020 epidemic, partly because of the fall in the price of the commodity.

The public deficit grew. But the country tends to have fiscal discipline — Putin is an “austericide”, so to speak, ironically. Public debt is small, around 20% of GDP.

Inflation was 11.9% in 2022 and 7.4% in 2023. Considering the global famine, it was in the range. The basic interest rate went from 7.5% per year to 16% per year throughout 2023. Bad, but this is a country at war.

Unemployment dropped to 2.9% (a number influenced by the fact that people have left the country or are at war). The average salary grows more than inflation in a country where purchasing power is 80% greater than Brazil’s and inequality is much lower.

Yes, the economy may have overheating problems, as their own BC recognizes. Note, however, that this is almost a “normal country” debate.

It seems unlikely that it will be possible to maintain the standard of living with continued and increasing spending on war. When will there be a problem is the question. For now, Putin has the gas, literally, to maintain his shooting, beating and bombing program.

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