00:00This is apropos. As Russian forces slowly but steadily gain ground in costly battles
00:09for largely devastated areas of eastern and southern Ukraine, back in Moscow, the economy
00:15too is slowing as the Kremlin spends vast sums on its war effort. While the economy
00:20did grow robustly at over 4% in 2023 and last year, far faster than G7 countries, despite
00:29multiple rounds of western sanctions, that growth has stalled sharply this year.
00:34With the details, here's Kami Nait.
00:37As the Russian president weighs up his options in Ukraine, the state of his country's economy
00:43could sway his decision. Russia's finance minister announced a downgrade in GDP outlook for this
00:49year, months after the economy minister warned that Russia was on the brink of a recession.
00:54This year, we've been seeing quite tough conditions for the implementation of monetary
00:59credit policy. We see that the rate of economic growth, however, will be no less than 1.5%,
01:05at least according to the assessment of the Ministry of Economic Development in the current
01:10year.
01:13It's not a recession yet, but it's far below the earlier 2.5% forecast. The IMF, meanwhile,
01:19only puts Russia's GDP growth outlook at 0.9% after two years of robust growth. Its war economy
01:27grew more than 4% in 2023 and 2024, despite multiple rounds of western sanctions,
01:33due to massive spending in defence and military industries and oil and gas exports to Asia.
01:40Labour shortages also pushed up wages, and government payouts to soldiers and their families
01:45boosted consumption.
01:46That influx of cash has even led to the emergence of a new middle class in Russia's poorest industrial
01:53regions.
01:54Inflation did soar due to supply shortages, but the central bank was able to bring it back
02:00under control by raising its key interest rate to 21% in October, the highest level since
02:06the early days of Putin's presidency.
02:08However, despite the central bank's slightly lowering interest rates to 18% in July, borrowing
02:14costs have been applying huge pressure on business investment, with many firms simply unable
02:20to access capital.
02:21It's becoming increasingly likely that Putin's war economy was a short-term boom, reliant on
02:26defence spending. And though it's already showing signs of slowing down, putting an end to the
02:31war could risk bursting the bubble altogether.
02:34Beneath the war effort, there's little attempt to diversify the economy, and as hundreds of
02:39thousands of men continue to die fighting in Ukraine, Russia's labour shortage will only
02:44worsen. Putin now faces a dilemma. Continue the war economy model, but risk slipping into
02:50a recession, or end the conflict and trigger an immediate economic shock.
02:55For more, we're joined now by Alexander Koliander, Senior Fellow with the Democratic Resilience
03:01Programme at the Centre for European Policy Analysis.
03:05Alexander, thanks so much for being with us. You are a specialist in the Russian economy and
03:10Russian politics also. So after experiencing such strong growth over the past two years, how
03:16significant is this economic slowdown? When exactly did it begin and why?
03:21So thank you very much for having me. Yes, you're absolutely right. There is a slowdown which started
03:32probably at the very end of the past year, but it became noticeable at the beginning of 25. And we see it not
03:40only in the GDP figures, but also in production volumes. So if you take Russian industrial production, you'll
03:51see that only those parts of the economy, which include production for the military, for the army and for the war
04:01effort, are growing at a significant pace. The rest of the civil part of the economy is not growing at all. And in some parts, it is actually contracting.
04:15So this is mostly the result of the high interest rate imposed by the central bank of Russia, which in turn was a result
04:26of unlimited, almost unlimited spending from the state coffers for the war needs and for the replacement of
04:36everything that Russia had imported before the invasion, uh, in 2022. However, uh, it cannot last forever. So such, um, uh, such a
04:48uh, such a stimuli coming from the, uh, from the budget cannot sustain a 4% growth, uh, forever. So sooner or later,
04:58the economy has it enough. Sooner or later, and that came in 25, Russian economy just realized that, uh, more money you
05:08pump into the economic machine, uh, less economic growth you have. More money does not, uh, translate into a higher
05:18growth, uh, higher production or higher consumption. We see in the past couple of months that, uh, real wages
05:26stopped, uh, their growth. So in other words, inflation is eating up, uh, people's income. We see a drop in, uh, consumer
05:37spending, which started with a drop with consumer loans and, uh, which is a result of the high rate, but then people
05:45started to spend less on everything, which is not essential. We see that the share of the food, uh,
05:53in consumption is growing again to the levels, uh, seen before the war and most probably the economic boom
06:02of, uh, 23, 24 is over at least for some time. Now, the main task of the Russian government is to, uh,
06:12deliver a soft landing, not, uh, not to see an economic collapse similar to what we saw, say,
06:20in the Soviet days. However, I think that, uh, uh, whatever are the economic, uh, headwinds,
06:29they would not stop at this stage, Putin, uh, from his political, geopolitical, and military aims in Ukraine.
06:37The economic, uh, problems in Russia are not enough for Putin and the Kremlin to stop what they see
06:46as, uh, war, as an existential war in Ukraine. Yeah. And you say that the Kremlin's preference
06:54for continued spending up until now to finance the war is creating tension between monetary and fiscal
07:01policy goals. How close is Russia technically to slipping into recession?
07:09Uh, Russia is pretty close to a technical recession, uh, only by, um, by minimal, uh,
07:19figures it, it managed to avoid it in the second quarter, but I don't think that it matters.
07:26The Kremlin, uh, doesn't care whether there is a very limited, um, uh, recession or a very slow
07:34growth. From the point of view of the Kremlin, it's all the same. It doesn't change, uh, anything at
07:40all. The main problem now is, uh, the budgetary problem. The budget is hit from, uh, from two sides.
07:50First of all, the price of oil is lower than, uh, what the government had expected last year. So, uh,
07:57the, uh, the oil revenue is below, uh, the plan. And on the other hand, the slowing economy delivers,
08:05uh, uh, lower tax receipts. So from both sides, from oil and non-oil revenues, uh, the budget is
08:14getting less. However, the budget and the government and the Kremlin, which is a political decision,
08:20is not going to cut a military spending, uh, this year. And I suspect they will not cut, uh,
08:29defense spending in a 2026 either. So they will try to increase taxes without increasing taxes.
08:39So they might increase VAT on some luxury goods. They might increase, uh, fines and payments for
08:48various government, um, services. They will also try to cut expenses on everything that is not needed
08:57for the war effort. And that is not needed for the social stability, but it, you know, it is
09:05mortgaging your future. So I don't think that, uh, Russia is, uh, is facing an economic collapse or
09:12economic crisis yet, uh, this year or beginning of the next, it will not, uh, be of the magnitude to
09:21change the political aims, but, uh, Russia is mortgaging its future and the problems it is trying to,
09:29uh, sweep onto the carpet will emerge in years to come. And Alexander, how's all of this affecting
09:36the Russian population? We hear reports that people are being hit by fuel shortages, but as
09:42we've been reporting, people are also gaining financially from the war, not just the families
09:47of soldiers, but people who are also working for the war effort at home.
09:52And not only the war effort, it's when you pump money into the economy, uh, companies increase
10:02production. So they start to compete for workers. And there is also a competition for the same workers,
10:10uh, from, uh, from the army, which needs those people on the frontline, not to mention about what
10:16700,000 people, uh, who left Russia in the past, uh, three years. So there is a constant
10:24shortage of, uh, of the workforce in Russia. The problem could have been sorted by importing
10:30workers from the former Soviet republics of the central Asia, but here the Russian government is afraid
10:37of, um, uh, popular discontent and is actually limiting this influx of migrants. So that leads
10:45to higher salaries. Uh, there was an enormous competition for the workers, uh, which resulted
10:53in, uh, uh, salaries rising by double digits, uh, in 2023 and 24. So, uh, people, uh, benefited from
11:03the war, not only on the frontline or at the, uh, tank production factory. They benefited from that
11:11everywhere. Uh, the cash, uh, to, uh, till the supermarkets or at the, uh, IT company. However,
11:19this, uh, party is almost over because salaries are not rising because demand for brokers is not
11:27growing because economy is slowing down. Now with the salary stagnating and inflation is still pretty
11:34high by historical or by Western standards. It is still at about 9%. Uh, inflation will be eating
11:44up, uh, people's savings and people's incomes. That's why, uh, people are pretty reluctant to spend
11:52on anything but food and they are tightening their belts, uh, expecting other times ahead.
11:59Alexander, we'll have to leave it there for now. Thanks so much for your analysis. That is Alexander
12:03Colander, Senior Fellow with the Democratic Resilience Programme at the Centre for European
12:08Policy Analysis. Well, that is it.
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