Don’t Underestimate the Russian Economy

The Russian economy showcases growth despite imposed sanctions and punitive measures taken against the nation amidst the ongoing Ukrainian conflict.

Feb 07, 2024 | By Michel Santi

“The Ruble has collapsed. The Russian stock market closed due to fears of capital flight. Interest rates have more than doubled. Credit rating agencies have significantly downgraded Russia.” These were essentially the statements made by Antony Blinken, US Secretary of State, echoing the sentiments of Western officials who were counting on “massive and unprecedented consequences” for the Russian economy a week after the conflict with Ukraine began. The imposed sanctions and punitive measures were supposed to cripple the Russian economy. However, after a temporary setback, the Russian economy has now announced growth equivalent to that of France and the UK, and better than Germany, which is contracting.

Antony Blinken, US Secretary of State (Image courtesy of Getty)

The Russian bureaucracy has defied Western predictions that anticipated a “strangulation” through heavy economic and financial artillery. Moreover, the standard of living for Russian citizens, which was expected to exert intense pressure on their leaders to reverse course, has barely declined. The state has multiplied its stimuli towards the private sector, providing interest-free loans and investing jointly with certain companies. The only current threat to the Russian economy is a shortage of labour. The gradual shift from a civilian economy to a wartime economy has mobilised more and more workers, both to join the ranks of the armed forces and to retrain in military-related factories. In the end, Russia now enjoys what could be described as full employment, with an average of 2.5 job openings per unemployed person.

At its lowest point in 30 years, the unemployment rate is now at three percent, causing concern among Russian business unions and entrepreneurs who must navigate a context where the country’s resources are channeled towards the war effort. Factories have reverted to the 3/8 shift system reminiscent of the Soviet era, with the Russian workweek now being the longest in a decade. In summary, both the economy and the job market are running at full capacity and are no longer able to produce more than what is already being produced in early 2024, which is evidently a concern for the leaders. The Minister of Economy has identified the labour shortage as the “most significant internal risk to the economy.”

The defense industry itself is reportedly short of 400,000 workers, despite the reallocation of a significant portion of employees from sectors such as cashiers and cooks. The highly sensitive field of new technologies is suffering the most, as the country lacks around 700,000 coders, programmers, and cybersecurity specialists who are fervently sought after by various government structures. This drastic reorganisation of Russia, dedicating six percent of its GDP to the military sector – an unprecedented level since the era of the USSR – has gained popular support. Industries dedicated to defense allow exemption from military service. In addition, social subsidies for retirees, the disabled, single mothers, the elderly, and families with more than one child are at their highest levels in the country’s history. Families who have lost a soldier on the front lines are offered housing or the equivalent of three decades of the soldier’s salary.

The country has found new outlets and decisively diversified its partnerships to replace the West. Russian financial transactions on the Chinese CIPS network, a competitor to SWIFT, have doubled in volume in two years, and nearly 20 percent of its exports are now denominated in Yuan. Interestingly, some countries like Armenia, Serbia, or Kazakhstan have become massive importers from Europe, reaching their highest historical levels, in a hypocritical scenario where European executives are fully aware that their goods sold to these countries ultimately end up in Russia. In this regard, the Russian state currently has abundant resources as its sovereign wealth fund is rich with approximately USD 150 billion. It faces only one threat: a shortage of labour and soldiers.

As for the country’s magnates whose superyachts have been confiscated, and whose assets totaling USD 100 billion have been frozen, they still have around USD 400 billion in deposits scattered around the world. They have quickly replaced the French Riviera and Courchevel with Dubai and Turkey. Finally, young contenders now revolve around Putin: those known as the “princes,” supported by the elite, who will take over from 2030 onwards. The sanctions imposed by the West have thus had the collateral effect of the emergence of a new caste of oligarchs who – no longer needing Europe or the United States – are looking in other directions.

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