Russia’s economy has entered a dangerous new stage. It is reeling from an enormous federal budget deficit and a dramatic downturn especially in its manufacturing core. In this year’s first quarter the federal budget already collapsed into a shock 3.2 trillion ruble deficit. This enormous gap has raised legitimate alarms regarding the sustainability of the country’s economic model. The federal government is under growing fiscal attack. At the same time, key metrics indicate that Russia’s economy is not crumbling overnight, though it is reeling from the pressure of accumulating crises.
The National Wealth Fund, the country’s important fiscal cushion, has been mostly drained. The truth is, the federal government is totally maxed out of money. Yet today, it is under extreme duress to do so in an economy that is increasingly autarkic and militarized. The long-term growth potential implications are dire. The military-industrial complex experts have been warning Russia is fully entering a long-term war economy.
Budget Deficits and Resource Depletion
Third, in the first quarter Russia has announced a chronic 3.2 trillion rubles deficit. This untenable figure continues to expose the gaping fiscal wounds in the nation’s financial underpinning. The further use of the National Wealth Fund makes this even more fraught. This fund has historically served as a buffer during recessions.
Russian Central Bank Governor Elvira Nabiullina responded to this crisis by recognizing the totality of the threat with,
“We grew for two years at a fairly high pace because unused resources were activated. We need to understand that many of those resources have truly been exhausted.” – Elvira Nabiullina, as reported by the BBC.
No wonder lawmakers and economists alike are surprised by our addiction to shrinking resources. Today’s op-ed makes clear that in light of growing economic despair for many, structural reform can no longer wait.
As that deficit has increased, so has the toll on everyday Americans. To pay for their unnecessary spending, the government has already passed three rounds of tax increases. These measures are intended to raise more revenue in this difficult economic time. This heavy-handed approach, though, has raised fears that it will deep-dive into growth-squelching productivity-killers and creativity-crushers in civilian, non-defense sectors.
Declining Oil Revenue and Economic Stagnation
The new realities of the economic landscape in Russia present challenges both to the government and the Russian people. In May 2024, oil and gas revenues had fallen 35% from the same month in 2023. At the same time, the price of a barrel of Ural oil crashed below $50, worsening the fiscal catastrophe. This spike is thanks in part to secondary sanctions on Russian oil companies, which have just started to take effect.
These sanctions not only result in loss of revenue. In addition, they are contributing to a broader stagnation in civilian fields. So far in 2024, business bankruptcies are up 26%. This increase illustrates the significant pressure that businesses – the lifeblood of economic prosperity – continue to face.
Consumption patterns also paint a troubling picture. Even as incomes are reportedly rising, consumption growth in Russia is stalling dramatically. This phenomenon is an early indicator that consumers are starting to tighten their belts as they worry about the economy’s future trajectory.
Labor Shortages and Inflation Pressures
Compounding the economic challenges is a major workforce crisis, currently pegged at a staggering 2.7 to 3 million. This worker shortage presents tremendous obstacles for sectors struggling to rebound from recent catastrophes. Future growth is severely limited by an impending workforce decline. It also indicates a much deeper human capital collapse that may have longer lasting repercussions.
Inflation remains a pressing concern as well. In May of 1981, inflation was greater than 9% resulting in interest rates hitting the peak of 21%. In late July, the central bank began its first cut in two years, bringing rates down to 20%. Even so, the broader economic landscape remains tenuous.
President Vladimir Putin has publicly recognized these challenges, calling for stability and predictability above all else. He stated,
“It’s not an immediate collapse, but a slow, structural erosion, irreversible without a change of course.” – Alexandre Kolyandr, as reported by The Moscow Times.
President Vladimir Putin has acknowledged these challenges, emphasizing the need for economic stability. He stated,
“Our most important task is to ensure the economy’s transition to a balanced growth trajectory. At the same time, some specialists and experts point to the risks of stagnation and even recession. This should not be allowed under any circumstances.” – Vladimir Putin, according to the Kyiv Independent.