After the contraction in 2022, Russia’s GDP grew by 3.6% in 2023 thanks to the explosion in military orders for munitions and arms.
A rebound after contraction in 2022: Russia’s GDP (gross domestic product) increased by 3.6% in 2023 according to Rosstat, driven by the explosion in military orders for ammunition and weapons, without however answering questions longer term.
In 2022, Russian GDP contracted by 1.2%, according to a figure revised by the national statistics agency, weighed down by a barrage of Western sanctions put in place in retaliation for Moscow’s assault on Ukraine. . The figure for 2023 shows that the Russian economy has since been able to absorb the initial effects of Western sanctions which, although numerous, have been partly circumvented by Moscow.
Real wages on the rise in arms
Activity was driven by favorable energy prices, flexible credit conditions and above all domestic demand stimulated by the priority Defense sector, with real wages also increasing to attract workers in sectors affected by shortages, according to authorities.
More than half a million Russians have already joined the defense industry since 2022 according to President Vladimir Putin, a figure which illustrates the intensity of the war effort requested by the authorities to support the assault in Ukraine, despite its significant human and economic cost.
And despite the increase in federal spending, the public deficit was contained at 1.9% of GDP, according to the Ministry of Finance. Examples of the rebound of the Russian economy, the automotive sectors – once a symbol of the opening of the market to Western capital and today flooded by Chinese manufacturers – and banking sectors have generally recovered from 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. If oil and gas revenues represented around half of federal revenues before the conflict in Ukraine, in 2023 they would only form a third of the state budget, according to the government. For their part, the West is racking its brains so that their sanctions will do more harm to the Russian economy and really hinder the manufacture of munitions and weapons, a process however greatly slowed down by internal dissensions in the United States and within of the European Union.
Unemployment rate at 3%
Despite these satisfactory elements for Russia, longer-term challenges remain numerous and their effects difficult to assess at this stage. The Russian economy experienced in 2023 what observers described as an “overheating cycle”, indicative according to them of the transition period in which it finds itself due to sanctions.
The increase in domestic demand is largely the result of the explosion in military orders and not of a more favorable context common to the main sectors of the economy. This dependence on investments linked to the army risks increasing even more in 2024, knowing that the government has recorded the surge of nearly 70% of defense spending, which will represent around 30% of federal spending and 6% of the GDP, a first in the modern history of Russia.
The economic recovery was also accompanied by a return of inflation, to 7.4% at the end of 2023, further reducing 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 discontent shown by certain entrepreneurs, worried about the increasing cost of money in the country.
Finally, the 3% unemployment rate reflects persistent labor shortages, pushing wages up and accentuating inflationary pressures. In the long term, the exodus abroad of several hundred thousand Russians, following the launch of the offensive in Ukraine and after the partial mobilization of September 2022, will continue to weigh on many sectors (banks, energy, telecommunications, etc.), deprived of the qualified workers they need.
Certain IT and aeronautics companies, formerly dependent on Western technologies, have also been forced in recent months to turn to third countries, a process that is however time-consuming and which weighs on their activities. Russian authorities anticipate a deceleration in economic activity in 2024, despite slight growth.