Russia's economic gamble: Growth stalls as reserves dwindle
The Russian economy, which has transitioned to a war footing and received an infusion of trillions of rubles, is nearing the depletion of its reserves. According to the International Monetary Fund's forecasts, GDP growth will slow to 1.3% in 2025, widening the gap with China and India.
9:56 AM EDT, October 25, 2024
The Russian economy, heavily anchored in military sector financing, is on the verge of exhaustion, according to economists from the International Monetary Fund. Following the aggression against Ukraine, Russia almost completely refocused its economy to support the war effort.
Approximately 20 trillion rubles (around $205 billion) have already been spent on national defense, supporting the military industry, and paying bonuses to contract soldiers. However, as Bloomberg Economics expert Alexander Isakov mentions, the impact of these fiscal stimuli has peaked, and stagnation is beginning to affect construction and freight transport, the report states.
The IMF predicts that by 2025, Russian GDP will grow by only 1.3% and will further drop to 1.2% by 2029. This trend is attributed to declining private consumption, lack of investment, and a growing labor shortage. The Kremlin acknowledges a shortage of about 2.5 million workers in the labor market, but independent economists suggest the actual gap may be as large as 5 million, influenced by mobilization and the mass exodus of men abroad.
Russian GDP lagging behind China and India
Russia is also losing ground to other countries, including BRICS members like China and India. By 2025, Russia's GDP is expected to grow one-third slower than in developed countries and three times slower than in developing ones. According to forecasts, next year Russia's GDP will grow 3.5 times slower compared to China and five times slower compared to India.
An additional setback for the Russian economy is the anticipated fall in oil prices, a key resource for the country's budget. Prices are expected to decline from the current $81.29 per barrel to $72.84 per barrel by 2025. The Russian economy remains dependent on energy exports, and the state budget is based on assumed average oil prices, which will hamper development in the coming years.
According to the Bank of Finland's Institute for Emerging Economies (BOFIT), capacity utilization in Russia currently exceeds 80%, an unprecedented situation in the country's modern history. However, the Russian government is not investing in the modernization and development of civilian sectors, leading to even greater stagnation. Experts stress that, in the long term, investments in military production and the dismantling of market institutions may further weaken the Russian economy.
Konstantin Sonin, a professor at the University of Chicago, notes that these short-term actions may bolster Putin's position, but in the longer term, they become a "ticking time bomb" for future generations. While the current war has not significantly worsened Russians' lives, its long-term effects could be catastrophic for Russia's economic development, the report says.
