Russia's Economic Slowdown Amid Peak Military Spending
Russia is experiencing a significant economic slowdown following a peak in military spending, as reported by Bloomberg. After witnessing substantial growth in military production during the first half of 2024, the Russian economy is now facing challenges that threaten its overall stability. Despite military output continuing to expand to support the ongoing conflict in Ukraine, this growth has not been sufficient to counterbalance declines in other crucial sectors of the economy.
Oleg Kuzmin, an economist at Renaissance Capital, indicated that Russia has likely passed the peak of its economic growth, stating, "What will happen to growth next year is an open question, whether it will be a soft landing or a hard landing for the economy." The International Monetary Fund (IMF) has also revised its forecast for Russian economic growth in 2025 from 1.5% to 1.3%, reflecting growing concerns about the sustainability of the current economic model.
Impact of Military Expansion on Civilian Sectors
The Finnish Institute for Economic Studies highlighted in its October report that while military production has significantly contributed to Russia's output growth, it has not been enough to offset the slowdown in civilian sectors. The S&P Global Purchasing Managers' Index (PMI) data revealed that the manufacturing sector contracted in September 2024 for the first time since April 2022, indicating a troubling trend for the economy.
The Russian Economy Ministry reported a growth rate of just 2.4% in August, the lowest since the recession that followed the invasion of Ukraine in 2022. Although 2023 saw a growth rate of 3.6% largely due to increased defense spending, there are rising fears that this focus on military production may hinder the expansion of vital civilian sectors.
In addition, the Russian Central Bank is expected to raise its benchmark interest rate to 20% to combat inflation, which could further strain consumers already facing economic pressure. As the economy approaches its full production capacity, the Central Bank projects growth rates for 2024 to be between 3.5% and 4%, but warns of a slowdown in the latter half of the year due to production constraints and labor shortages.
Analysts from Bloomberg Economics have noted that the growth driven by military spending has likely peaked, with industrial production stagnating under pressure from capacity constraints. Tatiana Orlova, an economist at Oxford Economics, emphasized that increased investment is critical for maintaining growth, but high interest rates make this unlikely. Anders Olofgaard from the Stockholm Institute for Transition Economies added that Russia's growth prospects were already dim before the full-scale invasion, and the outlook appears increasingly bleak.
