An economic catastrophe is lurking beneath Russia’s GDP growth as Putin ‘throws everything into the fireplace’
Jeffrey Sonnenfeld, Michal Wyrebkowski, Anders Aslund and Tymofiy Mylovanov | August 19, 2024 at 2:35 PM EDTEven as Ukrainian advances in the Kursk region pierce Russia’s aura of military invincibility, resurgent cynics have painted an unrealistically optimistic picture of a supposedly resilient Russian economy despite sanctions and the exit of over 1,000 global multinational corporations.
This misleading narrative attributes Russia’s apparent economic continuity to aggressive government spending and efforts to shield the population from restrictive monetary policies through extreme fiscal stimulus. However, this rosy outlook is fundamentally flawed, except for one crucial observation: Russia is indeed engaged in unsustainable spending practices.
The reality of Russia’s economic situation is far more complex and concerning than some would have you believe. The productive core of the Russian economy has been severely compromised, with the government’s spending spree bearing a striking resemblance to Keynes’ famous metaphor of digging trenches and filling them with dirt—a superficial attempt to prop up GDP figures without creating genuine economic value, improving the lives of the Russian people, or improving Russian productivity. Financial, production, and human resources have been redirected en masse to the defense sector, leaving the civilian sector struggling to meet growing consumer demand. This imbalance—cannibalizing the rest of the Russian economy to fund Putin’s war—has fueled inflation, further exacerbated by the depreciation of the ruble and rising import costs.
Simply put, Putin’s administration has prioritized military production over all else in the economy, at substantial cost. While the defense industry expands, Russian consumers are increasingly burdened with debt, potentially setting the stage for a looming crisis. The excessive focus on military spending is crowding out productive investments in other sectors of the economy, stifling long-term growth prospects and innovation.
It’s crucial to approach Russian economic data with skepticism. As we’ve repeatedly highlighted, the country’s statistical services have a documented history of distorting economic indicators, making it challenging to accurately assess . . .
https://fortune.com/europe/2024/08/19/an-economic-catastrophe-is-lurking-beneath-russias-gdp-growth-as-putin-throws-everything-into-the-fireplace/
