Russia's economy faces 'near-stagnation' with sanctions whittling down annual GDP growth, European economist says

 

Russia's economy is facing "near stagnation," as stated by Anders Åslund, a Swedish economist who believes that Western sanctions are significantly impacting economic growth. He warned that Moscow may soon struggle to sustain its invasion of Ukraine due to dwindling resources.

Åslund highlighted that contrary to Kremlin claims, time is not in Russia's favor. He estimates that current sanctions could reduce Russia's GDP by 2-3% annually, equating to approximately $56.4 billion, given the country’s GDP of $1.88 trillion in 2023. In an op-ed for Project Syndicate, Åslund wrote, "My own view is that the current sanctions regime shaves off 2-3% of GDP each year, condemning Russia to near-stagnation. Moreover, the situation will worsen for Putin, possibly hampering his aggressive campaign against Ukraine."

While Russia's GDP showed a technical growth of 3.6% last year, with a forecasted 3.2% growth for 2024, many economists argue that this growth is primarily driven by substantial government spending on the war, overshadowing longer-term economic indicators. For example, labor productivity fell by over 3% last year, exacerbated by a brain drain affecting the workforce.

Russia's energy sector, a crucial source of revenue, is also struggling. The country's oil and gas income plummeted by nearly 25% in 2023, impacted by falling oil prices and sanctions on its energy trade. Inflation is on the rise, with consumer prices increasing by 8.5% year-on-year as of mid-September, although Åslund suggests the actual inflation rate may be even higher due to a history of Russia underreporting such figures.

According to Åslund, "The only sectors of the Russian economy that are growing are the military and related infrastructure, where state-owned companies sell to the state at (probably inflated) administered prices. The rest of the economy is flat at best." Additionally, Russia faces challenges financing the war, having been largely cut off from borrowing due to exclusion from the SWIFT financial system, which limits its economic resources to tax revenues and reserves.

The National Wealth Fund has been significantly depleted, leaving around $56 billion in liquid assets at the beginning of June. Although Russia has increased personal and corporate taxes, Åslund argues this won’t significantly alleviate the Kremlin's financial situation, as there are few buyers for Russian bonds.

He estimates that Russia will spend about $190 billion—roughly 10% of its GDP—on the war this year, suggesting this amount likely represents a peak due to Western financial sanctions. "Whenever Russia can no longer finance a budget deficit, it will have to cut public expenditures, and its non-military outlays have already been pared to the bone."

Economists warn of a bleak and uncertain future for Russia, as the escalating costs of the war are undermining vital sectors of the economy. Currently, the Kremlin's military spending appears to be the primary factor preventing an immediate recession, according to insights shared with Business Insider.