Despite the war in Ukraine and Western sanctions, the Russian economy returned to growth in 2023

Decades of recession were predicted in Russia after the first Western sanctions were announced following the Russian invasion. According to Rosstat, Russia’s GDP (gross domestic product) finally increased by 3.6% in 2023, driven by explosive growth in military orders for ammunition and weapons.

Russia’s GDP shrank 1.2% in 2022 due to Western sanctions imposed in response to Moscow’s attack on Ukraine, according to data revised by the national statistics agency. Data for 2023 show that the Russian economy has since been able to absorb the initial effects of sanctions, which, although numerous, Moscow managed to partially circumvent.

Activity was boosted by favorable energy prices, flexible credit terms and, above all, domestic demand driven by the priority defense sector, while real wages also increased to attract workers in sectors facing shortages, authorities said.

More than half a million Russians have already joined the defense industry since 2022, President Vladimir Putin said, a figure that illustrates the intensity of the military effort requested by authorities to support the attack on Ukraine despite its significant human and economic costs. And despite the increase in federal spending, the government deficit remained at 1.9% of GDP, according to the Ministry of Finance.

Automotive and banking sectors in better shape

Examples of the recovery of the Russian economy: the automobile sector – once a symbol of the opening of the market to Western capital, and now flooded with Chinese manufacturers – and the banking sector as a whole have recovered after the departure of European groups and heavy sanctions.

Another satisfaction for the Russian state: it was able to reduce its budgetary dependence on the sale of its hydrocarbons. According to the government, while before the conflict in Ukraine, oil and gas revenues accounted for about half of federal revenues, in 2023 they will make up only a third of the state budget.

For its part, the West is wondering whether its sanctions will cause more harm to the Russian economy and actually impede the production of ammunition and weapons, a process, however, greatly slowed by internal divisions in the United States and within European countries. Union.

But the future doesn’t look good

Despite these elements that are satisfactory for Russia, long-term problems remain numerous and their consequences are difficult to assess at this stage. In 2023, the Russian economy experienced what observers called an “overheating cycle,” which they said was indicative of the transition it has found itself in due to sanctions.

The increase in domestic demand is largely the result of a surge in military orders rather than a more favorable situation across major sectors of the economy.

This reliance on military-related investments risks increasing further in 2024, given that the government has seen defense spending rise nearly 70%, representing about 30% of federal spending and 6% of GDP, for the first time in history. modern history of Russia.

The economic recovery was also accompanied by a return of inflation to 7.4% at the end of 2023, which further reduced the purchasing power of Russians, also undermined by the weakening of the ruble. Faced with this delicate situation, the Russian Central Bank raised its key rate to 16%, despite the dissatisfaction of some entrepreneurs concerned about the rising cost of money in the country.

Labor shortage

Finally, the 3% unemployment rate reflects persistent labor shortages, which is driving up wages and increasing inflationary pressures.

In the long term, the exodus of several hundred thousand Russians abroad after the start of the offensive in Ukraine and after partial mobilization in September 2022 will continue to put pressure on many industries (banking, energy, telecommunications, etc.) lacking the skilled workers they need .

Some IT and aviation companies that previously depended on Western technology have also been forced to turn to third countries in recent months, but the process is time-consuming and puts pressure on their operations. Russian authorities expect economic activity to slow in 2024, despite modest growth.