Vladimir Putin spends big—and sends Russia’s economy soaring
How long can the party last?
A Ukrainian incursion into Russia represents an enormous embarrassment for Vladimir Putin and his military leadership. Tens of thousands of residents have been evacuated after Ukrainian troops stormed across the border. The Russian armed forces, caught off guard, are being slow to respond. The rouble is slumping, as worries mount about the future of the war. Yet on the home front, at least, things look better than ever for Mr Putin. Despite sanctions and pariah status, Russia’s economy is growing strongly. It turns out that bacchanalian spending, at a time of war, really gets things going.
Russian GDP will rise by over 3% in real terms this year, continuing its fastest growth spurt since the early 2010s. In May and June economic activity “significantly increased”, according to the central bank. Other “real time” measures of activity, including one published by Goldman Sachs, a bank, suggest the economy is accelerating (see chart 1). Unemployment is close to an all-time low. Inflation is too high—in July prices rose by 9.1% year on year, above the central bank’s target of 4%—but with cash incomes growing by 14% year on year, the purchasing power of Russians is rising fast. In contrast with people in almost every other country, Russians are feeling good about the economy.
Consumer confidence, as measured by Russia’s statistical agency, is well above its average since Mr Putin assumed power 24 years ago. You might expect him to be goosing the numbers. But the Levada Centre, an independent pollster, finds equally startling trends (see chart 2). Only once in the past three decades has sentiment been higher. Russians’ confidence in their own financial situation, according to official data, recently jumped to an all-time high. They are more inclined to make big purchases, such as a car or a sofa, and restaurants are bursting. Last year Russians imported 18% more cognac than they did in 2019, according to our estimate, while spending 80% more on imports of sparkling wine. Sberbank, the country’s largest financial institution, notes that in June overall consumer spending rose by 20% year on year in nominal terms.
The latest data are in sharp contrast to the 2010s. Back then, output and incomes grew slowly or not at all. By 2018 real wages were no higher than in 2012. People were fed up. A round of sanctions, which the West launched in 2014 following Mr Putin’s annexation of Crimea, contributed to the malaise. So did an unusually austere fiscal policy, involving increases in taxation and cuts to spending. The COVID-19 pandemic and another barrage of Western sanctions, imposed in 2022 in response to Mr Putin’s full-scale invasion of Ukraine, compounded Russians’ financial woes.
What explains the turnaround? It is tempting to credit Russian exports. Mr Putin has been able to divert hydrocarbons once destined for Europe to other parts of the world. Russian oligarchs, and the companies they run, are doing better than had been feared at the start of the war. In reality, however, Russia’s recent export performance is nothing to write home about. Oil prices are lower than a couple of years ago. In the first quarter of 2024 the total value of Russia’s physical exports was 4% lower in dollar terms than in the same period of 2023—and a third lower than in 2022.
To understand the accelerating economy, look to two aspects of macroeconomic policy. The first is fiscal policy. Mr Putin has abandoned austerity as he doubles down on war. He is sensitive to domestic opinion and recognises that he needs to buy public support for his invasion of Ukraine. This year Russia will run a budget deficit of 2% of GDP—hefty by its standards—which it is funding in large part by drawing on enormous financial reserves, accumulated during the 2010s. In effect, Russia saved yesterday in order to party today. Total government outlays rose by an average of 15% in both 2022 and 2023, and a slightly smaller rise is budgeted this year. Ministers are devoting much of this extra spending to the war in Ukraine. Data published by the Bank of Finland suggest that military spending will rise by about 60% this year, boosting production of weapons and ammunition, and also putting money in people’s pockets.
Patriots or mercenaries?
In July Mr Putin doubled the federal bonus for those signing up to fight from 195,000 roubles ($2,200) to 400,000 roubles, which regional authorities are supposed to top up. The government is committing vast sums to compensation for the families of those killed in action. And Russia’s splurge goes beyond war-related spending. Mr Putin is lavishing money on welfare payments: in June he raised pensions for some recipients by close to 10%. The government is also spending big on infrastructure, including a highway from Kazan to Yekaterinburg, two cities 450 miles (730km) apart. Indeed, it is spending on pretty much whatever takes its fancy. Mikhail Mishustin, Russia’s prime minister, recently boasted about a government scheme to pay for children to holiday in Crimea.
The second reason for Russia’s party economy relates to its unusual monetary policy. In order to deal with high inflation the central bank has raised interest rates from 7.5% to 18%. More increases may be on their way. This has the effect of strengthening the rouble by attracting foreign investment from “friendly” countries such as China and India, which in turn cuts the price of imports and thus inflation. It also encourages people to save, trimming consumer spending. In a normal economy higher rates would hurt indebted households and companies, as their cost of repaying debt rose. Yet the government has almost entirely shielded the real economy from tighter monetary policy.
There is a bewildering array of schemes. Earlier this year the government made it much easier for consumers to suspend repayments on loans, so long as they could prove that their income had fallen or they were “affected by an emergency”. Banks have offered loan holidays to soldiers in Ukraine. A mortgage scheme, recently closed, kept lending rates fixed at 8%, less than half the current policy rate. An “industrial mortgage” programme has channelled lending to companies at rates as low as 3% a year. Banks’ arms are also twisted so that they do not raise rates too far. When the financial sector loses income as a consequence, the state often steps in to make up the difference.
This meddling has easily observable effects. According to official data, in the first quarter of this year households spent 11% of their disposable income on servicing debt—about the same as three years ago, when the policy rate was considerably lower. In the past year the interest rate facing households and firms has risen, but by only about half as much as the policy rate (see chart 3). New borrowing remains healthy. Lending to companies is growing at more than 20% a year. Since Russia invaded Ukraine, unsecured consumer lending has grown about as fast as nominal wages, which is to say very fast indeed.
How long can the party last? Much depends on the war. A continued slump in the rouble would raise inflation; more military recruitment would worsen labour shortages. At some point, people may get angry about the cost of living. And Mr Putin cannot run budget deficits for ever: at current rates, Russia’s reserves will be gone in five years or so. But the economy has also shown its resilience in recent years. So, for now, the party continues.
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