3 ways Russia's war-time economy is set to weaken after a surprisingly strong 2023
REUTERS/Maxim Shemetov
- Russia's economy is bound to weaken in 2024, researchers at Finland's central bank said.
- That's because Moscow's surprising growth spurt in 2023 isn't sustainable.
- Russia is set to spend a record amount on its military this year, will which hinder growth.
Russia's economy is set to weaken this year, according to researchers from Finland's central bank.
Russia won't be able to maintain the surprisingly strong growth it saw, the Bank of Finland's Institute for Emerging Economies said in a recent report. Researchers at the institute are forecasting Russia's economic growth to slow to 2% this year, followed by 1% year-over-year growth in 2025 and 2026.
That's a stark contrast from what Russia saw last year, with its economy growing 3.6%, according to Russia's federal statistics service. But much of that growth was fueled by military spending amid the country's war against Ukraine, and there's a limit to how much that can continue to fuel its economy, the researchers said.
"With Russia already experiencing severe capacity constraints, growth this year is expected to decelerate. Russian economic growth in the years ahead will remain subdued and fuelled mostly by government spending. Russia's long-term potential growth rate, in particular, has been reduced by the shift to a wartime economy," the report said.
The report pointed to three areas of the Russian economy that could take a hit.
Inflation could get worse
Russian central bankers will be challenged in their goal of bringing down high prices. Russian inflation came in at 5.9% for 2023, according to BOFIT data, well above the 4% price growth central bankers are shooting for.
Russia's central bank has already hiked interest rates to 16% to reel in inflation, but efforts to control prices will be contradicted by robust military spending, which will stimulate price growth, the report said.
"To finance the war effort, the Russian government is prepared to abandon earlier fiscal and monetary policies characterised by conservative budget rules and inflation targeting," the researchers said. "State spending will increase considerably in 2024 mainly due to war-related expenses, which will certainly hamper measures to bring down inflation levels," they later added.
Private consumption will slow
Russian consumers are unlikely to spend at the same pace they did last year. Even in its own budget plans, Russia is expecting demand in the public sector to sag in 2025 and 2026.
Private investment in the nation is unlikely to make up for that decline, the report added. High borrowing costs and risks stemming from the Ukraine war have put off investors, with Russia losing around $19 billion in foreign direct investments in 2022 alone, according to United Nations data.
"Continued high growth in 2025 and 2026 is very unlikely," researchers said of Russia's economy, though they noted that the outlook for private demand was dependent on its "military situation."
"Private consumption will continue to grow due to labour constraints, albeit at a slower pace," they later added.
Wages growth will ease
Salaries in Russia jumped last year as the country grappled with a worker shortage, but wage growth is likely to slow in 2024 as private consumption sags, the report suggested.
"The significant wage hikes of 2023 are unlikely to repeat this year and growth in private consumption slows down," researchers said.
Russia is struggling with a severe shortage of workers, which is one of the nation's "biggest bottle necks" to economic growth, the report added. Moscow had a deficit of nearly 5 million workers by the end of 2023, according to an estimate from the Russian Academy of Science's Institute of Economics.
"To achieve continuous growth significantly above the long-term potential growth rate will require redirection of capital investment to civilian uses along with significant productivity gains. This goal becomes all the more elusive due to the fact that the Russian population, and particularly the pool of young men available to the labour market, keeps shrinking," the report said.
Other economists foresee a difficult future for Russia as the conflict in Ukraine drags on. At this point, Russia can't afford to win or lose the war, one European economist recently warned, as its economy is now too dependent on conflict in Ukraine to keep itself going strong without it.
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