Russian Economy Shows Resilience Amidst Western Sanctions, Buoyed by Arms Industry, but Challenges Loom

Despite facing Western sanctions, the Russian economy has managed to demonstrate a degree of resilience, with growth primarily driven by the arms industry. This economic resilience, however, is not without its challenges, as the impact of the year-and-a-half-long conflict in Ukraine is increasingly being felt by Russians through a weakening ruble, reduced purchasing power, declining oil and gas exports, and rising import costs. While the Kremlin has been known to withhold economic data, Russian media are now openly discussing these economic challenges.

The conflict in Ukraine, initiated by Kremlin leader Vladimir Putin 18 months ago, has been a focal point of international sanctions against Russia. The Russian economy’s growth is largely attributed to the war economy, with a substantial increase in weapons and ammunition production. However, experts caution that this growth may not be sustainable in the long term.

Other sectors of the Russian economy are grappling with issues such as a lack of orders and insufficient investment. The recent hike in the base interest rate, coupled with unstable currency conditions, has made credit prohibitively expensive, dampening enthusiasm for investment.

A survey by the Russian central bank in August revealed that most businesses in Russia had reduced production for two consecutive months. These businesses cited labor shortages, partly due to military service obligations, and logistical delivery challenges. Russia’s need to purchase costly materials and spare parts with foreign currency adds to its economic woes.

With limited access to the European Union due to sanctions, Russia has resorted to costly imports, sometimes circumventing sanctions through alternative routes. However, lengthy transport, import tariffs, and unfavorable exchange rates against the euro and dollar have eroded purchasing power, contributing to an inflation rate of 4.3 percent in July, according to the central bank.

The Russian media is preparing the population for the possibility of a prolonged weak ruble while emphasizing that there is no macroeconomic reason for panic. Nevertheless, Russia faces a shortage of foreign exchange due to reduced oil and gas exports and the need to repay foreign debt in Western currencies.

To address these challenges, there is discussion about stricter controls on capital outflows, given that a significant amount, estimated at around $243 billion or 13.5 percent of Russia’s GDP, left the country in 2022.

A primary concern in Russian media is the declining purchasing power, with per capita income nearly doubling in the past two years but, when adjusted for inflation, being 6.5 percent lower than in 2013.

Experts suggest that further efforts are needed to stabilize the ruble and enhance its status as a symbol of Russian sovereignty. One proposed measure is mandating companies to sell a significant portion of their foreign exchange earnings from exports, which could help stabilize the currency. However, there is skepticism about the long-term effectiveness of these measures, and concerns persist that the situation could spiral out of control.

Article by Prague Forum

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