Ukrainian war rockets Russian economy to 5.4% growth in early 2024

Russia’s economy experienced a robust growth rate of 5.4% in the first quarter of 2024, according to official statistics released on Friday. Meanwhile, President Vladimir Putin dismissed concerns that military spending on the Ukraine conflict was becoming unsustainable. 

Ukrainian war rockets Russian economy to 5.4% growth in early 2024
Photo credit: Russian MoD

Since the incursion into Ukraine in February 2022, the Kremlin has deeply integrated military expenditures into Russia’s economy. This significant financial commitment has spurred economic growth and softened the impact of Western sanctions. However, it has also triggered inflation and prompted comparisons to the excessive defense spending that weakened the Soviet Union in the 1980s. 

Data from the Rosstat statistics agency revealed that the first-quarter growth marked an increase from the 4.9% expansion seen in the last quarter of the previous year. Despite this growth, the inflation rate also edged up to 7.8% over the month.

“It is not critical yet”

During a state visit to China, President Vladimir Putin addressed concerns about Russia’s massive military expenditure. He refuted claims that the spending, which has surpassed 8% of GDP, was unsustainable. “It is not critical yet. In the Soviet Union in 1985-1986, defense spending was 13% of GDP,” he noted. 

“Considering our economic status, macroeconomic indicators, and budget revenue projections, defense and security spending of just over eight percent is not critical,” Putin added. Earlier that week, he called Russia’s military budget a “great resource” that should be managed “carefully and effectively.” On Friday, Putin stated that experts affirm Russia’s state finances could bear even higher expenditure. 

Last week, Russian forces launched a significant new offensive in Ukraine’s northeastern Kharkiv region. Putin has indicated that he believes the key to Moscow’s success on the battlefield lies in outspending Ukraine and its Western allies.

Rostec's Kuban 163rd plant repaired a record number of BMP-2 IVFs
Photo credit: Rostec

The Inflation

Russia’s strategic pivot of sending its key energy exports to nations like China and India has acted as a lifeline, allowing it to sidestep the dire economic impact of Western sanctions. Over the past two years, China has emerged as Russia’s crucial economic partner. 

On Friday, President Putin criticized U.S. efforts to exert pressure on China over its partnership with Russia. He labeled U.S. threats to sanction Chinese banks and companies doing business with Russia as “illegitimate,” adding that financial institutions in both countries are collaborating to resolve issues with cross-border transactions. 

UFA offers a $33K salary in Su-27, Su-35, and Su-57 production
Photo credit: UEC

The United States has been targeting businesses in other countries, including China, that it claims are aiding Russia in acquiring sanctioned military goods. Although this has contributed to impressive headline economic growth, Russia’s escalation in military spending has introduced some domestic economic challenges.

Higher inflation in April

According to Rosstat, inflation edged up from 7.7% to 7.8% in April, surpassing analysts’ projections and drifting further from the government’s target of 4.0%. In a move to curb inflation, the Central Bank has increased its key interest rate to 16%.

AN-APG-81-AESA - F-35's radar detects a Russian Su-57, but within a certain range
Photo credit: Northrop Grumman

Meanwhile, sectors not bolstered by military activity—like services and IT—are experiencing unprecedented labor shortages. Many young men have either been drafted, left the country, or joined the rapidly expanding weapons industry.

Russia is restructuring its economy

How long can the Russian economy continue to sustain the war in Ukraine? On the surface, traditional metrics might suggest the economy is in surprisingly good shape. However, these figures can be misleading when considering the true nature of Russia’s wartime economy and the ongoing challenges faced by President Vladimir Putin and his potential successors. 

Putin tours Uralvagonzavod, dispatches T-90M tanks to the Army
Photo by Samil Ritdikov

Russian officials and propagandists often boast about Russia’s GDP growth being stronger than many European countries. However, they omit that the Russian economy is increasingly shaped by unusual trade dynamics due to unprecedented sanctions, restricted capital flows, and heavy state involvement. Russia is undergoing significant economic restructuring, leading to notable shifts in wealth and income distribution among its population.

Western sanctions – in the rear-view mirror

To the Kremlin’s relief, the shock from the full-scale invasion in 2022 and the subsequent severance of trade and financial ties with the West is now mostly behind them. The Russian economy has adapted, with key industries finding alternative suppliers or more indirect trade routes to obtain necessary goods and components. While logistical disruptions occurred, they did not result in significant production stoppages. Currently, Russia’s foreign currency earnings are on par with pre-war levels. 

Putin tours Uralvagonzavod, dispatches T-90M tanks to the Army
Photo credit: Telegram

Much of the economy has been reoriented to support military needs. Production of military goods has ramped up, including both basic items like artillery ammunition and more sophisticated technologies such as Il-76 transport planes and unmanned aerial vehicles [UAVs]. 

It’s important to note that relying solely on traditional macroeconomic measures—like inflation, interest rates, and GDP growth—can be misleading when assessing what is happening in Russia today.

Active participation of the state

Russia moves 'improved' Ufa sub from Baltic to Pacific fleet
Photo credit: Admiralty Shipyard

In market-driven economies, authorities guide economic participants through various signals, whether rhetorical or action-based, such as adjusting interest rates. Their decisions are then scrutinized by businesses and the general public. These signals help outside observers gauge the economic health of a country. 

This isn’t fully applicable to present-day Russia. While Russia no longer operates under a planned economy like the Soviet era, nor does it resemble the ‘goulash socialism’ seen in Central Europe during the mid-20th century, it’s also incorrect to label Russia as having a free-market economy. Instead, what we see is dirigisme: substantial state intervention in all economic processes.

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