9h00 ▪
5
min reading ▪ by
Luc Jose A.
The Russian economy is going through an unprecedented storm. While the rest of the world observes controlled fluctuations, Russia is hit by exponential inflation, reflecting an economic model entirely geared towards war. Prices are exploding, the job market is contracting, and social tensions are intensifying. This situation, far from being trivial, calls into question the economic future of the country.
An inflationary spiral fueled by war
Prices of essential goods, such as butter, meats and onions, have jumped 25% in just one year, according to official data. Faced with this surge, some large stores have been forced to lock down basic products to avoid theft, a scene that has gone viral on Russian social networks. With an inflation rate of around 10%, well beyond the central bank’s forecasts, the Kremlin sees its economy faltering under the pressures of a monetary and budgetary policy focused on the war effort. Indeed, Alexandra Prokopenko, analyst at the Carnegie Russia Eurasia Center, explains: “Prices are increasing due to the war. Demand in the economy is biased toward unproductive spending, while wages rise to compensate for a labor shortage.”
This shortage is largely due to massive military mobilization. The government is spending billions on the defense industry, causing wages in the sector to soar and forcing other industries to raise theirs to attract unemployed workers. This dynamic creates a vicious cycle, where rising wages fuel inflation, forcing companies to pass on these costs in the prices of their products. In response, the central bank raised its key rate to a record level of 21%, an effort welcomed, but considered weak by many economists who predict increased inflationary pressure in the months to come.
Social fractures and the limits of an economic model
While some benefit from this war economy, such as workers in the military industry or soldiers, a large part of the population suffers. Teachers, doctors and retirees are most exposed. Thus, their income stagnates, which does not allow them to keep up with the frenetic pace of price increases. At the same time, rural and peripheral regions, historically less favored, are struggling to absorb these economic shocks, with inequalities between large metropolises and the rest of the country. Prokopenko specifies that this crisis sheds light on “growth without development”, where money circulates, but without improvement of infrastructure or public services.
The outlook is equally mixed. As the working population continues to decline, with a projected reduction to 142 million inhabitants by 2030 according to the United Nations, Russia will have to find solutions to compensate for an aging and small workforce. The traditional reliance on Central Asian workers is being undermined by a rise in xenophobic sentiment and increased competition with other regions such as the Middle East and South Korea. Finally, international sanctions, although avoidable in the short term thanks to parallel circuits, threaten in the long term the stability of strategic sectors such as energy.
The Russian economy, buoyed by oil revenues and a model temporarily adapted to war, remains surprisingly resilient. However, this resilience could collapse under the weight of structural imbalances and risky economic choices. If international sanctions, a drop in raw material prices or a slowdown in Chinese demand were to intensify, Russia’s future would prove even more uncertain. The real test will come with the end of the war, when it will be a question of reorienting the economy, managing the return of soldiers and rebuilding a shaken social balance.
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Luc Jose A.
A graduate of Sciences Po Toulouse and holder of a blockchain consultant certification issued by Alyra, I joined the Cointribune adventure in 2019. Convinced of the potential of blockchain to transform many sectors of the economy, I took the commitment to raise awareness and inform the general public about this constantly evolving ecosystem. My goal is to enable everyone to better understand blockchain and seize the opportunities it offers. I strive every day to provide an objective analysis of current events, to decipher market trends, to relay the latest technological innovations and to put into perspective the economic and societal issues of this ongoing revolution.
