Does Russia Thrive?

Wars bring destruction, suffering and death to both victim and aggressor countries. While it is clear that Ukraine is greatly suffering from the ongoing conflict, some still believe that the Russian economy is somehow flourishing despite the added costs of disrupted international trade and investment (BBC, 2024; The Economist, 2024). Is this narrative based on reality?

Things we know about the Russian economy

At first glance, key economic indicators suggest Russia is maintaining economic stability amid wartime chaos. Real GDP growth was projected to reach 3.6% in 2024, with per capita (PPP-adjusted) GDP above 47 thousand US dollars, while the unemployment rate remained low at 2.6% and inflation was projected to ease to 7.9% over the year (IMF, 2024). These indicators, taken in isolation, suggest a booming economy.

However, the high reliance on oil and gas revenue exacerbated by western sanctions and collapsed foreign investment raises questions about the sustainability of these economic indicators. The shift towards a ‘grey’ economy – in which many goods and services are imported via intermediaries and shell companies in neighbouring countries – complicates the narrative of prosperity. On top of this, the current state of the economy is driven by large state interventions, and market prices do not always reflect actual supply and demand.

Things we do not know about the Russian economy

Despite the appearance of stability, many aspects of the Russian economy remain veiled in mystery. Most of its financial sector consists of state-owned or politically connected commercial banks. Because of this structure, the sector’s balance sheet remains opaque, with banking business models characterised by poor market discipline. Such an environment is often accompanied by a rise in zombie lending practices that slow productivity improvements and economic growth. While banking supervisors have more information than outsiders, low accountability can still hamper effective supervisory oversight. Taken together, these factors raise concerns about risks to the overall stability of the financial system.

We also do not know the situation in many other dimensions. For example, Gorodnichenko et al. (2024) consider that the true level of public support for the government could be a mirage. This was shown by the Prigozhin mutiny in 2023, which exposed underlying discontent in elite circles. In general, the lack of transparency and the elimination of non-state-controlled media complicate efforts to ascertain the actual state of affairs, with official narratives spreading abroad distorting the reality of social discontent and economic hardship.

Things we should really look at

Utilising a mixture of migration data, social indicators and alternative GDP measures can provide a more comprehensive picture of the challenges facing the Russian economy. According to a recent study on Russian migration (The Bell, 2024), around 650,000 Russians have left since February 2022 and 80% of these have university degrees. This trend is exacerbating Russia’s growing labour shortages. Furthermore, Russia’s demographic crisis is expected to worsen, as the population aged 20-39 is projected to decline by 13 million between 2012 and 2032, a drop of nearly a third. In turn, the fact that Russia does not attract foreign labour is not surprising. Public investment in education, healthcare and social security is declining amid growing war expenses. In 2022 the crime rate  rose for the first time in 20 years (Kommersant, 2023) and numbers of cases of crimes committed by war veterans grow exponentially.

Last, alternative measures of GDP could offer a more nuanced view of economic numbers in Russia. Martinez (2022) demonstrates that satellite imagery and night-time light data can be used to proxy manipulated statistical data in autocracies. Using this approach for a back-of-the-envelope estimate of actual (vs. reported) GDP growth, we obtain a rate of 2.3% for 2024. This suggests that the real economic impact of isolation and sanctions is more severe than official reports indicate, leaving Russia behind other emerging markets, let alone global average growth.

References

1. Russia to grow faster than all advanced economies says IMF. BBC, April 2024. https://www.bbc.com/news/business-68823399
2. Russia’s economy once again defies the doomsayers. Economist, March 2024. https://www.economist.com/finance-and-economics/2024/03/10/russias-economy-once-again-defies-the-doomsayers
3. Global growth is expected to remain stable yet underwhelming. IMF, October 2024. https://www.imf.org/en/Publications/WEO/Issues/2024/10/22/world-economic-outlook-october-2024
4. The Russian economy on a war footing: A new reality financed by commodity exports. Y. Gorodnichenko, I. Korhonen and E. Ribakova, May 2024. https://cepr.org/voxeu/columns/russian-economy-war-footing-new-reality-financed-commodity-exports
5. Russia’s 650,000 wartime emigres. The Bell, July 2024. https://en.thebell.io/russias-650-000-wartime-emigres/
6. Stress-test. Kommersant, March 2023. https://www.kommersant.ru/doc/5900685
7. How Much Should We Trust the Dictator’s GDP Growth Estimates? L. R. Martínez. Journal of Political Economy, October 2022. DOI: 10.1086/720458