Russian economy has grown despite sanctions: Study
Posted on March 13th, 2024
By P.K.Balachandran/Daily Mirror
Colombo, March 13: Of the two countries that are at each other’s throats now – Russia and Ukraine – it is Ukraine which appears to be the underdog despite massive American and Western arms aid.
While the Russian economy is growing despite severe US and European sanctions, Ukraine is facing a severe arms and manpower shortage with dim of chances of being rectified.
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Given the possibility of Donald Trump coming back to power in the US, even the current level of Western support to Ukraine may not be forthcoming. And unlike Russia, Ukraine has no indigenous capability to sustain itself, whether economically or militarily.
On the other contrary, Russia, has been able to circumvent the sanctions and keep its economy humming, according the Vienna Institute of International Economic Studies (VIIEC). And there has also been no let-up in its military efforts.
Resilient Russian Economy
The VIIEC study done in 2023 and published in January 2024, says that Russian industry has in fact grown due to the war. War-related production has increased Russia’s GDP. Demand for domestic manufactures has also increased due to a fall in imports because of sanctions.
In the first eight months of 2023, real GDP and gross industrial production picked up by 2.5% and 3%, respectively. Capacity utilisation reached very high levels and unemployment plunged to an all-time low, the VIIIES study says.
And with no end in sight to the war, the current growth trajectory – based as it is largely on military fiscal stimulus – will likely continue for some time, despite the fact that the economy is suffering from increased labour shortages and is falling behind on the technological front, due to the Western sanctions,” the VIIES study says.
Despite sanctions, Russia has been able to import most of the products it desperately requires, including semiconductor chips, via third countries. A survey conducted in August 2023 by the Gaidar Institute for Economic Policy found that 77% of Russian industrial companies are planning to purchase equipment from such countries as China, India and Turkey, compared to 59% a year ago.
Other sectors of the Russian economy that recorded above-average growth included construction (plus 9.8% in the first half of 2023, in value-added terms) and hospitality and catering (plus 12.3%).
Construction benefited largely from the creation of military infrastructure in regions bordering Ukraine, as well as of transport and logistics infrastructure in the Far East. The Trans-Siberian Railway is being built in the wake of the foreign trade reorientation towards Asia.
The surge in hospitality and catering partly reflects the boom in domestic tourism, since travelling abroad has become so much more difficult for Russians.
The automobile industry – which was hit hard initially, as Western and Japanese car manufacturers left Russia en-masse, has been recovering strongly month by month, as Chinese companies have stepped in.
The level of capacity utilisation in the Russian economy has been generally rising and, according to various surveys, now stands at historically very high levels. For instance, a survey conducted by the Central Bank of Russia (CBR) has found that by Q2 2023, it had reached 80.9% – an all-time high.
On the downside, labour supply has been shrinking for several years now on account of long-term demographic decline; the ‘partial’ military mobilisation announced in September 2022 (of up to 500,000 men) and the recent emigration of many Russians fleeing mobilisation. According to recent estimates, 800,000 to 900,000 people have left Russia since the beginning of the war.
Labour and skill shortages are particularly acute in the IT sector, which has suffered from the recent exodus of many IT professionals. Workers laid off in sectors that are affected by sanctions and by the withdrawal of foreign firms often cannot be absorbed by those sectors that are booming, such as the arms industry.
Besides, because of sanctions, there is a foreign exchange shortage, which is a major drawback.
However, there is a welcome demand-side effect: with employers forced to compete for labour, real wages are being pushed up. Real earnings soared by 6.8%, becoming an important driver of private consumption.
Under these circumstances, the continuation of economic growth will crucially hinge on new (labour-saving) investments and their productivity.
Indeed, there is evidence of vibrant investment activity currently underway in Russia, the VIIS study says. Fixed capital investment was up 7.6% in the first quarter of 2023, partly on account of the above-mentioned construction boom, but also in the wake of the realignment of production and logistic value chains by private businesses in response to the recent shocks of the war and sanctions.
However, there are question marks hanging over the productivity of investments, given Russia’s reduced access to Western technology. The other fundamental drawback in the Russian economy is that it is fundamentally natural resource linked. Russia relies on extraction rather than manufacturing. Mining accounted for around 26% of gross industrial production in July 2023, and three industries – extraction of crude petroleum and natural gas, coke and refined petroleum products manufacturing and basic metals manufacturing – made up more than 40% of the total.
Ukraine’s Position
Ukraine faces greater challenges than Russia because it relies heavily on an outside power- the US. The US has poured in US 75 billion dollars as arms aid, but this has not resulted in Russia’s defeat even after two years of fighting. There is also manpower shortage of 500,000 in the Ukraine military.
Then there is the possibility of the US virtually walking out of the conflict if Donald Trump is voted to power in the next Presidential election. With Nikki Haley withdrawing from the race for the Republican party’s nomination for the US Presidential election, Donald Trump has emerged as the candidate of the Grand Old Party.
As Nikkei Asia points out, Halley lost 14 of the 15 contested State primaries to Trump, who gained more than 70% of the vote in nine of the States
And Trump’s chances of winning the Presidential election appear to be brighter than Joe Biden’s, given his catchy slogans like American First” and Make America Great Again.”
There needs to be a clear-cut, well-defined reason for America’s interest in foreign engagements, be it Ukraine, Gaza, North Korea or Taiwan,” Nikkei Asia quotes Marc Lotter, chief communication officer for the America First Policy Institute as saying.
If Trump wins the Presidency, the US might withdraw as much as possible from overseas conflicts which drain its resources with little or no gains to cite. He had shown this clearly when, as President, he withdrew from Afghanistan handing over that country to the Taliban.
Trump has also said many times, that America’s allies must learn to defend themselves and not expect America to do the job for them. At the very least, they should share the expenses. This was addressed to European countries which had left to the US the job of defending them against a resurgent and defiant Russia. If Trump does win the US election, Europe and Ukraine will have to face Russia with much less American help than now.
Ukrainian President Volodymyr Zelenskyy is already complaining bitterly that Europe and the US are not giving him enough military aid to blunt the Russians.
To add to Zelensky’s woes, the US has decided not to put its boots on the ground, when Zelenskyy is desperately looking to beef up his army.
On February 26, France’s Emmanuel Macron had suggested that Europe should send troops to Ukraine at a conference in Paris. But German Chancellor Olaf Scholz said that the conference discussed the matter, but the agreement was that there will be no ground troops, no soldiers on Ukrainian soil who are sent there by European states or NATO states”.
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