Two years after the Kremlin’s invasion of Ukraine, many in Russia have reason to feel the wartime economy is working well for them in a setback for Western sanctions designed to pit the populace against the country’s leader, Vladimir Putin.
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Bloomberg News
Bloomberg News
Published Mar 14, 2024 • 4 minute read
(Bloomberg) — Two years after the Kremlin’s invasion of Ukraine, many in Russia have reason to feel the wartime economy is working well for them in a setback for Western sanctions designed to pit the populace against the country’s leader, Vladimir Putin.
Wages have soared by double digits, the ruble has stabilized, and poverty and unemployment are at record lows. For the country’s lowest earners — a key constituency for the Kremlin — salaries over the last three quarters have risen faster than for any other segment of society, clocking an annual growth rate of about 20%, Federal Statistics Service data show.
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Ahead of Russia’s March 15-17 presidential election, with Putin all but assured of winning a fifth term, public discontent over the economy largely isn’t there. Though the war has left hundreds of thousands killed or wounded, and long-term challenges continue to build with officials still wrestling inflation that is running ahead of their target, for now, the Russian leader is pointing to the economy and claiming success.
Russia is approaching the election “in good form,” said Sofya Donets, an economist at Renaissance Capital, pointing to “very optimistic” consumer sentiment and assessments of the current and future financial situation in surveys. “They already show a level that does not at all resemble a crisis.”
The government is spending massively on social support for families, pension increases, mortgage subsidies and compensation for the relatives of those serving in the military. The price tag for Putin’s pre-election promises may total tens of billions of dollars over the next six years.
Read more: Putin’s Pre-Election Promises May Cost Russia $130 Billion
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The war on Ukraine has intensified an acute labor shortage as military recruitment draws workers out of the market, with Putin last month saying that employers had a deficit of 2.5 million people.
That has benefited ordinary Russians who as a consequence are enjoying security in their near-term employment with managers reluctant to let anyone go. While the unemployment rate remains at a historic low, hiring expectations have soared to a record level, according to the central bank.
A big and persistent source of economic worry for the Kremlin remains rapid price growth that eats into Russians’ incomes. While that’s not fading, salaries are increasing faster, driven by massive government spending and the labor shortage. Average monthly wages in 2023 reached more than 74,000 rubles ($814), about 30% higher than two years ago. Before last year, Russia had not seen an increase in real disposable income of more than 5% for many years.
Read more: War in Ukraine Drains Nearly Half of Russia’s Liquid Assets
“For a significant number of Russians, the war became an opportunity for social and economic mobility that was previously impossible. Some managed to launch a new business,” said Anna Kuleshova, a sociologist at the Social Foresight Group. “Some received payments for their husbands and sons at the front, which made it possible to finally buy an apartment, a car, move from a village to a city.”
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Putin boasts that unprecedented international sanctions have failed to derail the Russian economy, which has instead expanded, largely due to massive injections of money from the budget, military production and record trade with China. Putin has cited data showing Russia breaking into the top five economies in the world in terms of purchasing power parity, after overtaking Germany, to back that up.
The economy has started this year with similar momentum. January’s data on retail sales, real wages and industrial production came in better than the market forecast.
What Bloomberg Economics Says:
“The government’s military spending spree is not free — it comes at a cost of reduced energy export revenue and dwindling foreign exchange reserves that Russia built up before the start of the war. In the short term, fiscal largess will continue to support high consumer confidence, but as Russia runs down the remains of its National Wealth Fund, the government will face difficult fiscal choices between accepting higher inflation, cutting spending or raising taxes.”
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– Alex Isakov, Russia economist.
The flip side of the coin is that the elevated social and war spending has resulted in a yawning budget gap and the threat that an already overheating economy might continue to drive up prices.
Inflation remains above the Bank of Russia’s target, even after it has significantly tightened monetary policy, stifling credit activity in the country. Annual price growth accelerated in February to 7.7% from 7.4% in the previous month, despite policymakers’ hawkish efforts.
Meanwhile, this year’s federal budget gap was 1.5 trillion rubles by the end of February, while the Finance Ministry has planned for a deficit of 1.6 trillion rubles for the whole of 2024, and Russia’s available wealth fund reserves have been already halved. The government, seeing the start of a new presidential term as a window of opportunity for unpopular reforms, is considering raising taxes on higher-income earners.
Read more: Russia Weighs Post-Election Tax Hikes to Fund War in Ukraine
“The success story of 2023 is a story of recovery growth that will be difficult to repeat,” Donets said, adding that this year, fiscal stimulus should begin to taper as “the reserves that were the main source for it have already been largely used up.”
“Tax increases are inevitable, and quite large ones at that,” she said. Uncertainty remains the biggest challenge facing Russia’s economy and it “may cause us many more headaches,” she said.
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