Don't Count on Putin's Russian Economy and Illusory Growth Rate

Despite his ongoing invasion of Ukraine, President Vladimir Putin is confident in his management of the Russian economy. In a late December press conference, he claimed Russia's 2024 gross domestic product was projected to show a solid 4% increase compared to 2023.

Putin also said that real wages for Russian workers were growing by 9% a year and unemployment was at a historic low of 2.3%. He even boasted that Russia's economy, if measured by purchasing power parity, had surpassed Japan to become the fourth largest in the world.

Don't be fooled by Putin's bombast.

Driven by military-related production, yes, Russia's economy is growing. But civilian businesses are being squeezed and the sustainability needed for real growth is being lost. That is what a wartime economy looks like. Sanctions must continue to be strengthened until the Putin regime finds its back up against the wall.

Russian Numbers Tell the Story

The Russian central bank has been raising interest rates sharply while attempting to curb inflation. Related to this, they have had a policy rate of 21% since last October. There is strong dissatisfaction in Russia's business world that sky-high interest rates are hindering their business activities.

Inflation in 2024 is estimated to have topped 9%, which has hit the average Russian hard in the pocket. The Russian currency, the ruble, fell 15% against the US dollar in November alone. It is now at its lowest level since the invasion of Ukraine.

*Donald Trump (Getty Images via Kyodo) and (©Vladimir Putin.)*

The main factor responsible for the weakening of the Russian economy is the labor shortage caused by Putin's war of aggression. Russia was already suffering from a demographic standpoint of its shortage of young workers. However, it has also suffered at least 750,000 casualties so far in its invasion of Ukraine. There are estimates that another 650,000 Russians, mostly young and highly educated, fled the country to avoid being sent to war.

Moscow's spending for the military continues to reach new heights, accounting for one-third of total expenditures in its current budget. Workers are being drawn into the armaments industry. Meanwhile, other sectors are plagued by rising wages and labor shortages.

Even public transport services have been disrupted in some areas. Most of the military investment goes to weapons and shells that are expended on the battlefield.

Sanctioning its Wartime Economy

A wartime economy that can create the appearance of economic prosperity may be to the liking of a dictator. Nevertheless, it is clear that as long as Putin's war of aggression continues, there is no prospect of Russia enjoying legitimate economic growth.

As things now stand, Russia is unable to secure high prices for its oil and natural gas exports. Furthermore, it is struggling to procure military supplies. But there are many loopholes in the sanctions and efforts to close them are essential.

Expanding the sanctions net is urgently needed. It should include the "shadow fleet" of tankers that Russia uses to export oil and third-country companies with ties to the Russian defense industry.

The increase in oil production advocated by President-elect Donald Trump should be an effective means of lowering international prices and thereby reducing Russia's oil revenues.

(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun