GDP is the bluntest of economic measures, a single number made to describe the trillions of events and decisions that make up a modern economy. It has its uses, nonetheless, and its main purpose is to tell the simplest possible story about the direction an economy is headed: is it growing or shrinking? But simple stories are often misleading. Take the IMF’s pronouncement in April that Russia’s economy would grow faster than any of the G7 countries: Russia was winning the race! The Russian economy, commentators held, was “roaring”; it was “on steroids”.
The truth is that the same measures that have allowed Russia’s economy to appear to be growing are forcing it ever closer to disaster. Putin’s reputation for economic competence is about to run out, and he will not be saved by a friend in the White House.
Some of the numbers look good. While G7 economies (Germany aside) are creaking under the weight of their debt – the UK, US, France and Italy all owe more than 100 per cent of GDP – Russia’s debt-to-GDP ratio is less than 15 per cent. Real (inflation-adjusted) wages have increased dramatically – by more than 9 per cent in the past year – which means most Russians are able to buy more and feel significantly better off.
But the appearance of economic success is a mask that is stretched ever more thinly over the deep structural problems in the Russian economy. Any country that shifts to a wartime economy can expect to see a rise in GDP; war is an economic activity, after all, and Russia’s spending on its invasion of Ukraine has been huge. Adnan Vatansever, reader in Russian Political Economy at King’s College London’s Russia Institute, estimates that Russia’s spending on the war in Ukraine (including associated spending such as the spiralling cost of recruiting soldiers and welfare payments to casualties) could be approaching ten per cent of the country’s GDP.
The war is also the reason for those rising wages: two million people have been recruited into the military-industrial sector, and British intelligence estimates Russia has suffered 700,000 casualties in the war so far. For an economy that was already at effectively full employment, this creates a very tight labour market, pushing up wages across the economy. One expat Russian in London told me they had considered moving home, enticed by the jobs on offer, the high wages and improving standard of living.
However, Vatansever explains that rising wages are also inflating demand, creating a “price spiral”. The result is that inflation in Russia is now running at nearly ten per cent. On Russian social media, clips have circulated of shoplifters raiding butter, the cost of which has risen by more than 25 per cent in the last year.
Worse still, Russia does not seem to be able to control this inflation. On 25 October, the Russian central bank raised its key interest rate to 21 per cent, well beyond the levels set in Western economies even during the inflationary crises of the 1970s. In any normal economy, very high interest rates would be expected to sharply reduce inflation and strengthen the currency, but in Russia inflation has continued to rise and the rouble has fallen to its weakest level since the Ukraine invasion in March 2022.
The reason for this, Vatansever explains, is that “Russia is no longer a normal economy”. Putin is aggressively subsidising the lifestyles of Russian citizens with very high public spending, but because the country is disconnected from capital flows – there is almost no foreign investment in Russia, nor are Russians investing abroad – the demand for imported goods keeps growing, the rouble keeps getting weaker, and this compounds the effect of inflation.
Russia has also been artificially inflating its housing market by subsidising mortgages, creating a dangerous housing bubble. Property prices in Russian cities have more than doubled since the Ukraine war began, but when this subsidy was withdrawn for most homebuyers in July, demand halved, leaving an unstable bubble that Vatansever says “could lead, at some point, to a financial crash in Russia, if that bubble bursts”.
The re-election of Donald Trump to the White House is generally thought to be positive for Putin at a diplomatic level. For the Russian economy, however, Trump represents a looming risk, because however exceptional Putin believes his country to be, Russian prosperity ultimately depends on Western consumers.
The reason for this is that Russia runs on oil. With most of its gas exports to Europe stopped by pipeline closures and sanctions, it has become an economy dependent on a single commodity, and while oil prices are high, money flows into the Russian current account. What scares the Russian central bank is the risk of a global financial slowdown that reduces consumer demand around the world, and therefore the price of the oil that is intrinsic to manufacturing and trade. That is exactly the world Trump is promising: a world of de-globalisation and trade barriers.
For previous crises, Vatansever told me, Russia has been prepared with large financial reserves, but this is no longer the case; part of Russia’s policy of “de-dollarisation” involved holding around $207 billion of its central bank reserves in euro assets, which have been frozen since 2022, and won’t be thawed any time soon (unless they’re handed over to Ukraine). The one remaining financial buffer is Russia’s national wealth fund. If the global oil price falls below $60 a barrel this will, according to a report by the Russian central bank, be depleted in about a year. It is very hard to say how sincerely we should believe anything Trump says, of course – but most economists were already predicting a slower rate of growth for next year.
Russian businesses, too, are fully exposed to the risks of their own economy, because they have been borrowing at home rather than abroad. It is hard to imagine how any business in a country with a severe labour shortage and a base rate of 21 per cent could make the case for investment, job creation and growth.
In the long term, what has long been evident is that Putin’s presidency has been little different from the Soviet era, in that he has made Russia a military giant but an economic dwarf. His gangster state has never been able to diversify; while the world buys Chinese cars and American software, the only thing we buy from Russia is oil, and the gradual turning away from hydrocarbons will eventually expose this as an appalling waste of a country’s potential.
Russia’s formidable levels of education and scientific prowess have been wasted, because under the Putin regime a lack of property rights and the rule of law drive its innovators and entrepreneurs abroad. Under another government, Vatansever says, Russia “could have easily emerged as one of the top five or six economies in the world”. Instead, the world’s largest country has dropped off the list of its ten largest economies. “We are likely to witness the gradual decline of Russia’s economic significance on the world stage”, he concluded. If Russia’s economy is roaring, it is roaring with dismay.
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