In times of war, it is difficult for economists to accurately assess the state of Russia’s economy. There are signs that the economy is not doing well – with one big exception.
Weapons and ammunition production may be the only sector of the Russian economy still growing these days. This assessment by experts is based on the latest July evaluation by the Russian statistical office. Accordingly, production in the “finished metal goods” sector grew by 30 percent, far more than in any other sector. Knives, forks and spoons fall into this classification, but also various types of weapons, bombs and ammunition, provided they are made of metal. The “Other vehicles and accessories” category, which includes ships, aircraft and armaments, is also one of the few sectors in which Russia increased its production compared to the previous year, with growth of only 2.4 percent. The others are medicines (17.5 percent), coking coal and refined oil (3.6 percent), and clothing (3.2 percent).
Although the increase in the areas mentioned could also come from goods other than military production, it is unlikely. At the end of June, Russian President Vladimir Putin signed a law that would allow the government to oblige companies to produce goods essential to the war effort. An increase in the production of just such goods was then to be expected. Local reports support this view. The tank factory of the Uralvagonzavod concern in Nizhny Tagil in the Urals resumed operations after months of standstill. Workers work 12 hours a day and sometimes eight hours on weekends. The factory attracts with a salary increase of 35 percent and double paid overtime.
Such insights into the Russian economy have become rare. International economists are finding it increasingly difficult to assess the exact situation. Official statistics on the monthly state of the economy and its sectors have not been issued by the Russian Statistical Office since the beginning of the war.
An exception to this rule is the Ministry of Finance, which still reports the state budget balance on a monthly basis. Until the summer, this was often a cause for celebration in Russia, as revenues from the sale of commodities, particularly oil and natural gas, were bubbling up. From January to June, Russia accumulated a surplus of 23 billion euros in the state budget. But the suspension of deliveries to Europe and the tough price war in India are now draining the state budget. In July, Russia already made a loss of 15 billion euros, in August it added another 5.7 billion euros. At this rate, the national budget should turn negative in September.
Bofit, a Finnish research institute specializing in the economies of Russia and China, reports that oil and gas revenues in July were down 20 percent year-on-year. But the profits from the sale of raw materials had only concealed the ailing state of the economy before that. Tax revenue from all other areas fell by as much as 30 percent, VAT revenue by 40 percent and revenue from import duties by as much as 60 percent. Lower revenues are offset by higher costs: Bofit estimates that government spending in July was 25 percent higher than a year ago. For the period from January to July, the economists expect 20 percent more.
The drop in import duties is a direct consequence of western sanctions, which have resulted in fewer goods being exported to Russia than in the previous year. In turn, falling domestic tax revenues indicate that Russian industry and consumption have also been hit. This has an impact on the entire economy.
Maxim Reshetnikov, Russia’s economic development minister, said last week that the government expects gross domestic product (GDP) to fall by 2.9 percent this year. That is significantly more optimistic than the minus of 4.2 percent that Russia was still assuming in August. International experts see it differently. In its July report, the International Monetary Fund (IMF) forecast Russia’s GDP to fall by 6 percent this year – although that too was an upgrade from the previously estimated minus 8 percent. The forecasts also differ significantly for the next year: while the Kremlin is only expecting a slight minus of 0.9 percent, the IMF is assuming minus 3.5 percent. In the latter case, the Ukraine war would have cost Russia almost ten percent of its economic power in two years.
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