Russia’s war economy on track to recover from sanctions hit

Moscow's International Business Centre: The Russian economy has defied predictions of a prolonged slump with expansion for four successive quarters in response to the sanctions.

Russia’s economy may return to its pre-war level as soon as next year as it adapts to the impact of international sanctions, though the Kremlin’s drive to expand military recruitment may yet undo this goal.

The economy expanded by an estimated 4.6% in the second quarter and by 1.5% in the first half of the year, prime minister Mikhail Mishustin said at a meeting with officials. Deepening staff shortages are adding to Russia’s difficulties as the Kremlin seeks to draw more volunteers into joining president Vladimir Putin’s faltering invasion of Ukraine that’s now in its 18th month. 

Mr Putin last week signed legislation that raises the draft age to 30 from 27 in January and bans men from leaving the country once they have received a digital conscription notice. 

The measures may permit “targeted mobilisation” that would boost short-term growth by reducing the impact of staff shortages and allow the economy to reach its pre-war size by mid-to-late 2024, soon after scheduled presidential elections, according to Bloomberg Economics Russia economist Alexander Isakov.

Still, “opting for conscript mobilisation is unlikely to reverse the decline in long-term growth”, he said. 

The GDP data means Russia’s economy has expanded for four successive quarters, following a decline of more than 4% a year ago, defying predictions of a prolonged slump in response to the sanctions imposed over the February 2022 invasion of Ukraine.

Increased defence spending has boosted industrial production while consumer demand is gaining momentum. 

Even so, the ruble is approaching 100 per dollar after weakening almost 25% since the start of the year. While flows of imports remain stable, restrictions on Russia’s energy sales, including an oil price ceiling imposed by Group of Seven nations, have led to a steady decline in export revenue.  

The economy may reach its pre-war size by the middle of next year, said Natalia Lavrova, chief economist at BCS Financial Group, who forecasts 2% growth in 2023. 

The Bank of Russia recently upgraded its full-year growth forecast to 1.5% to 2.5% for 2023, noting that output in most sectors focused on domestic demand had reached or even exceeded pre-war levels.

It sees growth next year at 0.5% to 2.5% and 1% to 2% in 2025. 

Bloomberg