Russia’s economy flatters to deceive

Welcome back. The Russian rouble fell this week to its lowest level against the dollar since the early weeks of Vladimir Putin’s full-scale invasion of Ukraine in February 2022. At the same time, Russia’s armed forces continued to bombard Ukrainian cities, damage infrastructure and make incremental advances on the eastern battlefront.

For the US and its allies, this pattern of events raises two questions. Should they advise Ukraine in 2025 to accept a ceasefire in the war, probably leaving Putin in control of about a fifth of Ukraine’s territory, when Russia seems to be under increasing economic and financial pressure? More precisely, how resilient is the Russian economy? You can find me at tony.barber@ft.com.

Stresses and silver linings

The rouble’s slide (see the chart below) appears connected to a new round of US sanctions that targeted Gazprombank, the main conduit for Russian energy payments and hence a vital instrument for financing the Kremlin’s war effort.

Rouble weakness is a sign of stress in the economy, but in other respects recent events have given Russia something of a respite. In his latest monthly brief, Vladimir Milov, a prominent economist, exiled opposition activist and former government minister, makes two points:

The second point matters greatly because, of all countries that have refused to join the west’s sanctions regime, China is by far the largest supplier of sanctioned goods to Russia. The chart below illustrates the point:

Sinking or riding high?

The effectiveness of sanctions is a question that blends into the bigger topic of Russia’s economic resilience. On this there is a multitude of differing views.

At one end of the spectrum, William Pomeranz wrote a blog in September for the Washington-based Wilson Center contending that the economy is in deep trouble. He went so far as to suggest:

“Putin and the Russian state are sitting on top of a social explosion.”

At the other end, consider this article by Nicholas Larsen for International Banker magazine. Although he acknowledged some pressures on the economy, he wrote:

The world’s largest country by area has thus far defied widespread expectations that US- and EU-led sanctions would expose key vulnerabilities in the Russian economy.

A 3.6 per cent growth rate in GDP in 2023, for instance, positioned Russia as one of the world’s fastest-growing major economies outside of India and China, while the first six months of this year saw it extend those gains with growth for the first and second quarters recorded at 5.4 per cent and 4.1 per cent, respectively.

Lies, damned lies and Russian statistics

I confess to misgivings about such relatively upbeat descriptions of Russia’s economic performance.

The problem is that they rely, to some degree, on official Russian data, whereas the whole point about economic statistics since February 2022 is that the Kremlin has turned them into a weapon of war.

Hanna Anisimova and Cecilia Smitt Meyer, two researchers at the Stockholm Institute of Transition Economics, have published some valuable work on this subject.

In April 2023, they wrote a paper that explained how, soon after Russia’s invasion, the Kremlin stopped making public large amounts of previously available data on foreign trade, the state budget and financial matters.

They observed:

This reduced transparency affects any analysis of the state of the Russian economy and assessments of the effects of sanctions. The strategy is also part of a larger disinformation campaign that has become an integral part of Russia’s war on Ukraine.

In the west, a persistent problem has been that international financial institutions, private sector economists, news media and other commentators often cite official Russian statistics when they discuss the economy. Far too infrequently do they tackle the question of whether these statistics are deliberately misleading.

I might add that, in communist times, this over-reliance on fabricated data and official Kremlin pronouncements caused much misunderstanding in the west about the real condition of the Soviet economy.

In 1959 Soviet leader Nikita Khrushchev boasted that the USSR would overtake the US in per capita production by 1970. It was a ludicrous assertion but that didn’t stop some western economists from thinking that the Soviet Union was catching up fast with the capitalist world because of the supposed superiority of its system of state ownership and planning.

Manipulation of data

In a more comprehensive report, issued in September, the Stockholm institute took a close look at two of Russia’s most important economic indicators — inflation and GDP growth.

The Russian central bank estimates full-year inflation in 2024 will be about 8 to 8.5 per cent. But if this is so, we may ask why the bank felt it necessary to raise its benchmark interest rate last month to a punishingly high 21 per cent, with the possibility of another increase before the end of the year.

Maybe the central bank knows more than it’s letting on? The Stockholm institute calculated that inflation was, in fact, around 16 per cent at the time it published its report.

This is a crucial point, because an accurate inflation number is essential to arrive at an accurate estimate of real GDP growth. If inflation is much higher than Russia says, then real GDP growth is almost certainly lower.

The Stockholm institute calculated that GDP, far from growing by the official figure of 3.6 per cent in 2023, may actually have been negative.

War hawks versus economic professionals

So, what do we know with any certainty about the Russian economy?

In the first place, the central bank’s tight monetary policy is clearly intended to offset inflationary pressures driven by higher state spending, above all on the war.

This points to a clash of priorities between the professionals at the central bank, who are focused on domestic macroeconomic stability, and the war hawks for whom the overriding goal is the subjugation of Ukraine and the further undermining of the western-led world order.

Recently, these frictions have burst into the open, as explained in this article for Project Syndicate by Anders Åslund, a Swedish expert on Russia’s economy.

He recounts how Sergei Chemezov, the powerful chief executive of Rostec, the state-run armaments firm, attacked central bank governor Elvira Nabiullina for raising interest rates. Such hikes risked driving enterprises into bankruptcy and even forcing Rostec to stop exporting high-tech products, Chemezov said.

Squeezed budget and butter thefts

Secondly, we know that the vast increase in military expenditure is squeezing the Russian budget, even including areas related to the war effort.

For example, the government issued a decree on November 13 that reduced state payments for certain categories of wounded soldiers. Aleksandr Golts, a exiled Russian analyst, commented:

“This is the first serious signal of the exhaustion of resources for waging the aggressive war.”

Thirdly, there are pressures on the non-military side of Russia’s economy. This FT report on thefts of butter from shops — reflecting a sharp rise in the price of butter and other foodstuffs — illustrates the point.

Fourthly, the war effort and sanctions are disrupting Russia’s transport system. On the railways, acute shortages of staff and locomotives resulted this month in a temporary ban on container traffic destined for the Moscow region.

As regards air travel, the newspaper Kommersant reports that Russian airlines have grounded 34 out of 66 Airbus planes in their fleets, largely because of the difficulty in replacing engines made by the US company Pratt & Whitney.

Lastly, Russian firms are finding it hard to recruit enough workers, including migrants. This reflects the mobilisation of many civilians into the armed forces, and also tighter migration policies introduced after a terrorist attack in March on a concert hall outside Moscow.

To be clear, I’m not suggesting the Russian economy is in such dire straits that Putin will feel compelled to end the war soon. But it’s indisputable that the economy is under strain.

What do you think? Is the Russian economy close to breaking point?

Vote by clicking here.

More on this topic

Russia’s wartime ideology: radicalisation, rent-seeking and securing the dictator — an analysis by Jussi Lassila for the Finnish Institute of International Affairs

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Tony’s picks of the week

• Once the frontier of China’s incorporation into a global economic system, Shanghai is caught up in US-Chinese tensions and is increasingly disconnected from international finance, the FT’s Thomas Hale and Cheng Leng report

• Recent attacks on critical undersea infrastructure in the Baltic Sea region are likely to have come from Russia, but they are not intimidating or dividing European governments, Robin Quinville, Jason Moyer and Rickard Lindholm write for the Wilson Center