Global Econ-Insights #3: A Recessive Russia
Russia—what used to represent a thriving hub of financial activity and technological advancement during the Soviet Union’s reign in the Cold War—is now simply a mark of economic backsliding. Right now is not an era in which the country is just casually putting the world’s first-ever satellite and human into space or being one of the first nations to develop the atomic and hydrogen bombs. Rather, currently, all the Russian people are really getting to experience is an age of economic recession that is very reminiscent of the United States’ own period of the Great Depression during the 1920s. There are a few key reasons as to why Russia faces its current devastating economic recession.
Firstly, Russia’s Central Bank has just recently raised its interest rate to 21% as a monetary policy mechanism to fight inflation. This inflation, in conjunction with the pressure of economic sanctions being placed in Russia and record amounts of funding being diverted towards the defense sector are placing a new type of strain on the Russian economy that was never an issue for the country before. Because so much money that should be spent on investing in the population’s welfare and lifting ordinary citizens out of poverty is instead being poured into more arbitrary monetary policy instruments, the nation suffers from a significant misallocation of funds and therefore an entire economic recession.
Second, Russia’s invasion of Ukraine is another alternative money-sucking venture by the Russian government that takes funds away from investing in the lives of the nation’s actual people. Russia is so focused on asserting its own dominance over Ukraine that it resultantly fails to account for the wellbeing of its own native population. However, Russia is in this uncanny position where not only is continuing the conflict bad for its economic position, but ending it is too. It’s a lose-lose situation for the country. All of Russia’s military spending on the invasion of Ukraine has provided so many new riches to wealthy oligarchs and rejuvenated much of domestic demand, injecting a new type of energy into the Russian economy despite its current recession. Right now, to some it seems that the war is a reason for the recession, while to others it appears that the war is the solution to it. Ending the invasion would mean removing a huge fiscal stimulus, significantly tanking the average disposable income of Russian citizens and damaging the region’s overall economic resilience.
Third, Russia’s National Welfare Fund is being driven into the ground, with export revenues decreasing significantly due to even more economic sanctions being placed on Russia and a huge limiting of resource extraction. The result has been Russia’s unemployment rate plummeting to a ghastly 2.5%, indicating a gargantuan labor shortage in the Russian economy. Even Russian government entity Rosstat has recognized this labor shortage in conjunction with the massive inflation wave and reduced activity in certain economic sectors. The Russian Central Bank wants to reduce inflation to 4% in 2025 but has not outlined any sort of plan for making this goal actually practical or feasibly attainable.
Lastly, Russia isn’t just faced with typical inflation, but rather stagflation—“the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices.” Food has become 25% more expensive in 2024 as compared to 2023, the overall inflation rate is 10% and being driven by a huge wage raise, endless funds are being poured into military industries for financing the invasion in Ukraine, and so the spiral of economic recession and the resulting poverty in the local population continues indefinitely. The central bank’s monetary policy measures in response to this distress are inefficient and insubstantial in nature. The labor shortage—with construction requiring 600,000 people and manufacturing being 250,000 people short of what is needed—is only further exacerbating these already existing economic obstacles within the Russia economy. The military budget will rise by 25% in 2025, becoming a third of all government spending, 40% of the federal budget, and 6.3% of Russian GDP, taking even more money away from the people.
In conclusion, while Russia is suffering from a plethora of violent economic issues, I do believe that it has the tools available for remedying its economy. However, what the Russian Central bank is doing right now by raising the interest rate arbitrarily simply isn’t working. Rather, I believe that the Central Bank’s monetary policy should focus more on the actual allocation of funds in collaboration with sectors of the Russian government. Together, these entities must unite and devise policies which put more money into the hands of the people and cease to keep blindly throwing funds away towards invading Ukraine and keeping the war going via excessive military spending. Doing so will be the key to retaining Russian economic stability and going back to as close to Russia’s previous past era of successful innovation as possible.