The Russian economy is facing a stark divergence as businesses associated with President Vladimir Putin’s military actions in Ukraine flourish, while other sectors battle resource shortages. The significant investment in the conflict has led to a concentrated growth within the military-industrial complex, highlighting a concerning imbalance that underscores the Kremlin’s readiness to prolong the war. Even if hostilities cease, it could take years for normalcy to return.
According to Sofya Donets, chief economist at T-Investments,
“There remains only a narrow group of leading industries with high growth rates — all are related to government orders and defence.”
This concentration of growth presents challenges for businesses outside this sphere. The central bank’s decision to raise interest rates significantly to combat soaring inflation has further strained enterprises already grappling with sluggish domestic demand, falling export prices, and sanctions-induced costs.
The data from the Federal Statistics Service reveals a contraction in output across most civilian manufacturing industries in the initial months of this year. This trend has exacerbated the financial vulnerabilities of major companies, with an increasing number now teetering on the brink of insolvency. The economic distress is palpable as many sectors witness a decline in profitability and operational output.
Amid these challenges, Economy Minister Maxim Reshetnikov highlighted the necessity of monetary policy adjustments to stimulate growth. While some sectors face mounting pressures due to market dynamics, priority industries benefit from substantial state support and favorable credit terms that shield them from market fluctuations. Notably, production categories such as combat vehicles, aircraft, and ships have seen robust growth compared to previous periods.
Natalia Milchakova from Freedom Finance Global notes how the state defense order has acted as a stabilizing force preventing an overall collapse in production levels. Despite these efforts, achieving equilibrium across disparate sectors will likely be a prolonged process requiring extensive restructuring and recovery measures post-war.
Economist Alex Isakov underscores this sentiment by suggesting that realigning production capacities could take several years due to equipment rebuilding needs exceeding pre-war levels significantly. Meanwhile, President Putin continues to prioritize defense spending amidst declining oil revenues and ongoing geopolitical tensions. Despite fiscal uncertainties and depleting reserves during wartime expenses, Russia remains resilient against external pressures through strategic trade partnerships and economic adaptability.
Tatiana Orlova from Oxford Economics emphasizes how sanctions have strained Russian businesses but acknowledges their limited efficacy in curbing Russia’s resilience through innovative circumventions. These measures have helped mitigate some adverse impacts on trade operations despite escalating geopolitical tensions.
As Western restrictions persist without halting Russia’s military ambitions or disrupting its revenue streams substantially, defense-related industries continue spearheading economic activity while civilian sectors grapple with mounting challenges hindering growth prospects.
In summary, Russia’s current economic landscape reflects a tale of two extremes: one defined by flourishing war-related enterprises shielded by state patronage amid global pressures; another marked by struggling businesses grappling with internal strife compounded by external sanctions-induced hurdles.
