Russia’s GDP decreased last year, but less than many had anticipated.
The International Monetary Fund (IMF) stated in February that it expected final GDP estimates to show a modest 2% decline in 2022, a 0.3% increase in 2023, and then a comeback to almost 2% in 2024, demonstrating the strength of the 145 million people’s economy and its capacity to withstand the additional expenses of the Russia-Ukraine war.
So what is the current economic scenario in Russia? Is it contracting due to the Ukraine war on one front and the sanctions on another, or is the conflict itself strengthening the nation’s economy?
Differences between the IMF study and other studies
The IMF’s emphasis on conventional economic measurements like gross domestic product (GDP) has drawn criticism from certain analysts who claim it is unsuitable given the ongoing conflict because the figure is inflated by growing military spending.
When this is removed, a study by the Centre for Policy Research (CEPR) network of researchers reveals that last year’s recession was twice as terrible as government data indicate.
This IMF assessment, however, considers military spending, which has increased dramatically since the invasion started, notably since the implementation of conscription for 120,000 civilians last year.
The CEPR member and economist Mikhail Mamonov, a specialist on sanctions based in Princeton, cautions against using GDP as a barometer for any nation directly participating in a war, particularly Russia, where the official data are likely to be manipulated. According to his analysis, a 10% decline in retail spending indicates a sharp recession in the real economy.
In a CEPR study, economists Hanna Sakhno of the University of Groningen and Adrian Schmith of the European Central Bank went beyond consumer spending to create a “domestic demand tracker” to gauge private sector activity.
Once the focus shifted to non-military activity, the pair concluded that Russia’s recession last year was wider and worse than the official data indicated.
Although it was impossible to provide a conclusive analysis without considering all facets of military spending, they claimed that private consumption decreased by 4% rather than 1.8% in the official data.
Even official statistics indicate the harm done to the non-military economy. In December 2022, Russia’s total imports of products decreased by around 20% from the previous year, while imports of technology fell by 30%.
Production of television receivers dropped by 36%, excavation machines by 53%, and cars by 67% last year. The production cuts will continue as long as sanctions against key components are in place.
Do these indicate bankruptcy?
The amount of money Russia has is unknown, but Oleg Itskhoki, a Russian sanctions specialist, says it would be prudent to assume there isn’t much. According to him, the payroll cost for enlisting conscripts and the additional military equipment required to replace lost tanks and wasted rockets will have increased defense spending from 4.1% of GDP in 2021 to 7% last year.
Welfare payments to relatives of those who perished in the battle increase the cost, while universal benefit payments to those who have children have further depleted Russia’s coffers. The ripple impact on total government spending has been pronounced.
According to the state statistics office, it increased by 59% in January. However, this number is probably understated.
In addition to rising spending, the government’s revenue is also declining quickly. Russian employees make low average salaries, pay very little in taxes, and make up a small proportion of the population compared to retirees.
The World Bank estimates that in 2021, income per head will be just $12,200 (£9,875), compared to the UK’s $46,510.
Russian workers currently pay a flat income tax rate of 13%, but starting in 2021, that rate will increase to 15% for individuals making more than 5 million roubles ($49,000).
Even though this generated an additional 83 billion roubles in its first year, these earnings represent a small portion of the oil and gas sales, accounting for most of the Russian state income.