Russia’s war economy: this is the Kremlin’s new plan

17 January 2024 - 13:00

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The Russian economy is increasingly moving towards a militarized economy, centered on and dependent on the conflict in Ukraine.

Russia's war economy: this is the Kremlin's new plan

The war in Ukraine has led Russia to deal with restrictions and heavy sanctions but there has not been, at least for the moment, the collapse of its economy. Looking down at 2024, Instead of Western sanctions, Moscow’s major concerns are the devaluation of the ruble, rising inflation, and a real estate bubble.

There are multiple interpretations of the facts. For Alexandra Prokopenko, a former Russian central bank official, the Russian Federation is pouring so much into the Ukrainian conflict that this effort is draining resources from the rest of the economy. In other words, the Defense sectors – and more generally everything connected with war – is overshadowing the civil industries.

Russia has allocated almost a third of its budget for 2024 - totaling around 380 billion euros - to defense spending. Social spending, including salaries, pensions, and benefits, will instead represent around a fifth of the same pie.

Russia’s war economy

Russia, therefore, is moving towards a war economy, centered and dependent on the conflict in Ukraine. The military sector is also “draining” labor from the civilian workforce, leading to an abnormally low unemployment rate of 2.9%, Foreign Affairs noted. Moscow is also grappling with a manpower crisis and a massive brain drain.

Ultimately, the sanctions-hit Russian economy appears resilient as it is driven by wartime spending. So the sanctions have no effect? This is 2024’s million-dollar question. “The main mistake of Western experts and politicians was to make up fairy tales according to which the entire Russian economy is managed by the state. The sanctions were applied on the assumption that (the Russian one) was a state economy, inflexible, and therefore destined to collapse rapidly. But it was a mistake because the Russian economy is largely a market economy,” economist Vladislav Inozemtsev, founder of Moscow’s Center for Post-Industrial Studies, told El Paìs.

Just as an example, Russian private companies have found ways to survive despite sanctions by venturing into creating new sales channels and supply chains, and targeting illegal imports through non-Western countries.

Putin’s challenges

The Russian authorities expect GDP growth for 2024 to be around 3.2%. Janis Kluge, an economics expert at the German Institute for International and Security Affairs, wrote on the Riddle think tank that 2024 will be the ultimate test for the Russian system after two positive years – 2022 and 2023 – caused by the reserves accumulated before the war and the extra revenues at the beginning of the offensive coming from the shock in international gas and oil prices (caused by the war itself).

There seem to be three challenges that Vladimir Putin is facing at the moment. Financing the ongoing war against Ukraine, maintaining the standard of living of its population, and safeguarding macroeconomic stability. Achieving the first and second objectives requires higher spending, and this could fuel inflation and prevent the third bullet point from being reached.

However, accurate predictions and forecasts are hard to come by. As mentioned, any prediction of an imminent Russian "collapse" fell into the void. Of course, the Kremlin faces a complex and delicate situation, but still far from total failure. Barring sensational twists.

Original article published on Italy 2024-01-22 07:23:00. Original title: La nuova economia di guerra della Russia: così si muove Mosca


# Russia
# War

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