The first months of Russia’s invasion of Ukraine last year drove up the price of oil and natural gas, generating big profits for Moscow. This made it possible to maintain economic balance, despite the sanctions of the West. But those days are gone.
The war is now in its second year, Western sanctions are intensifying, Russia’s government revenues are shrinking, and its economy has entered a lower growth trajectory and probably for a long time, writes The Wall Street Journal.
The country’s largest export products – gas and oil – have lost their former sales markets. Public money was in decline. Since November, the ruble has fallen more than 20% against the dollar. The labor force has dwindled, some young people are mobilizing for the front, others are fleeing the country, fearing the draft. Uncertainty is holding back investment.
Failed Energy Blackmail Bet
The dim prospects for the Russian economy stem from Putin’s unfortunate bet that he could use Russian energy to limit Western European support for Ukraine.
European governments, instead of reducing support for Kyiv, quickly began to look for new sources of natural gas and oil. Most Russian gas flows to Europe have ceased, and after an initial surge, world gas prices have plummeted. Moscow now says it will cut oil production by 5% from previous levels by June. It sells its oil at a discount at world prices.
As a result, the government’s energy revenue in the first two months of this year was nearly halved from last year, and the budget deficit widened to $34 billion in the first two months, the equivalent of more than 1.5% of the country’s gross domestic product. This forces Moscow to look into its National Wealth Fund, which is one of the main anti-crisis buffers.
Russia has found ways to sell its oil to China and India. In addition, China supplies Russia with many parts previously received from the West. Thus, Moscow is becoming increasingly dependent on China and risks becoming an economic colony of its southern neighbour.
According to the Gaidar Institute for Economic Policy in Moscow, the country’s industry has experienced the worst labor shortage since accounting began in 1993. The brain drain from the invasion and the military mobilization of 300,000 last fall has left about half of businesses facing labor shortages. Employers are looking for locksmiths, welders, mechanics.
During a recent visit to an aircraft factory, Putin said arms production was slowing down the labor shortage. According to him, the government has prepared a list of priority professions for deferment from service.
By the way, a significant increase in industrial production in Russia is now taking place at the expense of factories for the production of rockets, artillery shells and military clothing. Some factories are working multiple shifts to keep up with demand, Putin said. However, car production fell by about 45% compared to last year.
It’s not real productive growth because it doesn’t develop the economy, said Alexandra Prokopenko, a former Russian central banker who left Russia shortly after the invasion.
Import substitution attempts
Companies adjust to Western import bans. While Moscow has increased war-critical technology imports to Ukraine from other countries (including semiconductors and microchips from China), parts are hard to replace in many civilian sectors.
The central bank said the risk is growing in the air transport sector as shortages of new planes and spare parts could lead to maintenance problems. IT and financial companies are trying to avoid access to Western technologies such as software, database management systems, analytical tools and equipment.
What happens to private companies
Companies that are now surviving are no longer focused on technological innovation. And the entire Russian economy is becoming very dependent on the state.
The International Monetary Fund estimates that by 2027 Russian output will be about 7% less than pre-war forecasts.
The loss of human capital, isolation from global financial markets and limited access to advanced technologies will hinder the development of the Russian economy, the IMF said.
This is not about a multi-year crisis, but about the fact that the Russian economy, apparently, will go on a completely different trajectory.
I am David Wyatt, a professional writer and journalist for Buna Times. I specialize in the world section of news coverage, where I bring to light stories and issues that affect us globally. As a graduate of Journalism, I have always had the passion to spread knowledge through writing.