Politics

Russia’s ailing economy

Since the Kremlin’s war of aggression on Ukraine, there has been much speculation about the state of the Russian economy. Data from the Russian statistical office have long been subject to secrecy or there are doubts about the credibility of the published data. Estimates by international organizations such as the World Bank or the International Monetary Fund (IMF) suggest a slump in the production of Russian goods and services of more than three to four and a half percent – Russian institutions such as the Central Bank and the Ministry of Economy of Russia naturally see the development more positively and estimate the slump at less than three percent.

 

Institution GDP-Growth 2022 GDP-Growth 2023 Date
IMF -3,4% -2,3% Oktober 2022
Worldbank -4,5% -3,6% Oktober 2022
Russisches Wirtschaftsministerium -2,9% -0,8% n.v.
Russische Zentralbank -2,9% -2,4% Dezember 2022

 

The economic slump is due in particular to sanctions imposed by the West. Numerous components and Western know-how are missing to build washing machines and cars in domestic plants and factories. When the war in Ukraine broke out and the sanctions hit Russia, countless Russians were looking to invest their savings in more durable consumer goods such as cars, furniture and technical equipment to escape possible inflation. This quickly reached heights of 12 to 14 percent, comparable to those in Europe. However, these goods were far from being available to the extent that they were in demand. This is also evident from the price increases in individual categories: at the forefront are household goods and furniture, health goods, most of which are manufactured abroad, but also electronic goods. The fact that the slump has not been more severe is due to the fact that energy prices remain high worldwide, flushing foreign currency into the Kremlin’s war chest. A much bigger conundrum remains the production of goods and services. The sanctions are accompanied by numerous restrictions for which the Russian economy cannot simply step in, such as security systems for cars, microchips or other components – but it is equally unknown how many of the production bottlenecks in various press reports are due to the exuberance of various editors.

However, the gradual lowering of the interest rate by the Russian central bank with November to 7.5 percent from a high of 20 percent in May points to an easing of inflation. Combined with abundant cheap energy, this makes domestic investment more attractive. Russia’s Manufacturing Purchasing Managers Index (PMI) also suggests that Russian firms’ order books are filling up again after a dry spell during the past few months, when they had been bobbing around in negative territory since the start of the war. This index is considered an early indicator of business development in the manufacturing sector and provides information on how the production of goods will develop in the future. Above a value of 50, this indicates an expansion of production, while a value below 50 indicates a decline in production in the future. At 50, this is a neutral value. In an international comparison, Russia has indeed returned to its average level of previous years – while its economic war is causing considerable damage to comparator countries such as the USA and Germany – whose order situation is constantly deteriorating.

 

PMI Manufacturing of selected countries

Russia’s economy is thus more resilient than many assume. In contrast to Europe, energy is abundant in Russia, and due to production closures by numerous Western companies, a great deal of demand in the country lies idle. It would not be surprising if an investment boom were to start here in the medium term, where Russian capital replaces Western capital, similar to what happened in agriculture after the blowback in the form of sanctions in the wake of the annexation of Crimea in 2014. Since then, Russia had increased its output of agricultural products enormously. By decoupling Russia’s economy from that of the West, this could create numerous opportunities for Russian investors themselves. The goods produced there would most likely be of lower quality, but at least cheaper and affordable for the general population.

New ideas have a hard time in Russia

But Russia’s economy has been suffering for much longer from its structures, which are an obstacle to emerging entrepreneurship. While other regions of the world, above all China and even India, were able to take advantage of the liberalization of world markets in the 1990s to secure valuable market shares for themselves, Russia has been bobbing along without any significant development. On the contrary, every global crisis, such as the bankruptcy of Lehman Brothers in 2008 and the subsequent world financial crisis or COVID-19, was followed by another crash from which Russian society was unable to recover. In the process, it even managed to produce its own Internet company, Yandex, which is ahead of even Google in the Russian-speaking world, something that old Europe was unable to do. But the Kremlin’s political influence on the IT giant in the form of data skimming and its media propaganda now threatens to put an end to even this success story. Since February 2022 at the latest, the search engine no longer outputs any homepages that have not been approved by the Kremlin. Today, the company is even threatened with bankruptcy due to a lack of capital and hardware supplies from the West.

Share of global gross domestic product (in percent)

Adjusted for purchasing power, Russia’s per capita GDP appears to be keeping pace with global development. However, it must be borne in mind that a large part of Russia’s GDP is derived from raw materials sold to the rest of the world in the form of gas and oil. The curve is correspondingly volatile when compared to China or India. While the curves of these two countries are slowly but constantly rising, the purchasing power of Russians is extremely dependent on international commodity prices, which, for example, plummeted after the Lehman Brothers bankruptcy.

Gross domestic product per capita of Russia, China and India

 

In addition, incomes in Russia are very unevenly distributed – an average GDP per capita thus hardly says anything about the broad standard of living of the individual citizens within the population if the income is concentrated only on individual oligarchs and many others go empty-handed. Finally, the development for individual Russians reveals the development of household incomes. These are falling continuously, and Russian households have lost practically a third of their purchasing power within a decade, from $43,000 (PPP) in 2010 to just 27,000 in 2021.

Median household income in PPP-$

However, the country is being hit even harder by demographic change, which is taking place here even more than in Europe. While Russia’s demographic pyramid is inverting more and more anyway, young men are being sent to war in Ukraine or fleeing abroad from military service and strict martial law – especially those who would have the education and technical skills to replace Western production and develop appropriate methods are fleeing. In addition, there is self-destructive behavior by many Russians themselves, which Anne Case and Angus Deaton described for America in “Deaths of Despair and the Future of capitalism.” An epidemic of alcoholism and opioid abuse is raging in the country, especially the run-down industrial areas of the former Soviet Union. With 43 male suicides annually per 100,000 inhabitants, Russia has one of the highest rates in the world – not counting the wave of mysterious suicides by pro-Kremlin businessmen and oligarchs who took their lives in the aftermath of the Ukraine invasion. From this starting point and the prevailing structures, it is questionable whether Russian society will be able to take advantage of the opportunities that arise to create thriving businesses and innovations that improve the lives of the population.

 

 

 

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *