Russian economy boosted by military orders

Russia’s economy grew 3.6% last year thanks to a boost in military spending because of the offensive in Ukraine although long-term economic challenges remain, official data showed on Wednesday.

The government Rosstat statistics agency published the figures in a statement.

In 2022, gross domestic product had contracted by 1.2% after the initial effects of Western sanctions imposed on Moscow after it sent troops into Ukraine.

The 2023 result shows the economy has largely absorbed the effect of the sanctions, finding ways around them by changes in supply lines and trade partners and through government intervention.

Economic activity was supported by favourable energy prices, easy credit conditions and strong domestic demand because of the defence sector, as well as rising salaries to attract workers in sectors experiencing labour shortfalls.

And, despite a major increase in federal spending, public deficit has remained contained at 1.9% of gross domestic product, the Finance Ministry said.

The auto sector – a symbol of Russia’s openness to foreign capital now dominated by Chinese manufacturers – and banking have recovered well from the exit of major European firms and heavy sanctions.

Another boost for the Russian government has been its ability to reduce its budget dependency on oil and gas revenues.

The sector represented around half of federal revenues in 2022.

That proportion dropped to just one third last year.

While Western powers are trying to come up with new sanctions to hamper the economy, particularly the arms industry, the process has been slowed down by divisions within the United States and the EU.

Despite Russia’s relatively positive economic situation, the economy still faces many long-term challenges whose effect is difficult to gauge at this stage.

The economy last year saw what observers have called a “cycle of overheating” due to the transition because of sanctions.

The rise in domestic demand is largely the result of an increase in military orders rather than a particularly favourable context for the economy’s main sectors.

More than half a million Russians have joined the defence industry since 2022, according to President Vladimir Putin, a number that shows the efforts required to sustain the campaign in Ukraine despite the human and economic toll.

This dependency on military investment will increase even more this year, with the government planning a 70% increase in defence spending which will make up 30% of federal spending and 6% of GDP – a first for modern Russia.