Russian officials claim that the national economy is flourishing, with a GDP growth rate of 4.6% in the first half of 2024. But a closer look at the numbers indicate that there might be trouble on Russia’s horizon as the ruble faces both inflation and devaluation.
Professor Steve Hanke, an economist at John Hopkins University, calculated earlier this year that real inflation in Russia is 27% – a stark contrast to the 9.1% claimed by the Russian Central Bank. Something that puts Russia’s plans, to increase 2025 military spending by 24% into perspective: It is actually less spending than in 2024 while representing a higher percent of the overall budget.
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Secondary signs support Hanke’s calculation: The unemployment rate in July 2024 was 2.4%, something that is a worrying sign according to an economic model called the Phillips curve, which suggests that as the unemployment rate decreases, the inflation rate increases, and vice versa.
For a normal, healthy economy, according to MoneyChimp, a target unemployment rate should be in the range of 4-6%, with percentages lower than that indicating that inflation may be teeming under the surface of the economy.
Russia’s route to high inflation can be largely traced to Vladimir Putin, who, following the full-scale invasion of Ukraine, launched efforts to help Russia survive the massive sanctions saddled on Russia by using a Keynesian model seeking to boost aggregate demand – that is, the demand for services and goods within the Russian national economy – which provided significant, short-term relief to Russia. However, after two-and-a-half years of what amounts to printing money to stimulate the economy, Russia has created an economic bubble that may soon burst.
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Aside from inflation, there is another monster looking to wreak havoc on Russia’s economy: ruble devaluation.
The Russian national budget is built around the precept that oil prices will maintain a price of around $72 dollars per barrel. Every cent below that value represents future deficits for the Russian Government.
Saudi Arabia’s recent decision to ignore the OPEC+ target of $100 per barrel, a power move by Riyadh to shake-up smaller oil producers who were selling their oil too cheaply, may drive oil prices to as low as $50 per barrel – something that would represent a disaster for the Russian budget, supported by what Mikhail Mishustin, the current prime minister, recently said: The Russian government should anticipate deficits during the 2025-27 fiscal years.
To patch these deficits, Russia would have few available options aside from devaluating the ruble.
The ruble, which traded at around 84 against the greenback, in early August 2024, recently passed 97 to the dollar, up from 96 the day before, for the first time since October 2023.
However, if oil prices were to fall as low as some predictions, of $50 per barrel, economists have projected that the ruble would need to be devalued to 122 to the dollar, or as low as 135, according to Russian economist Igor Lipsits.
In real terms, how does this change the situation on the ground for Russians?
This would mean that if the ruble were to lose another 30% of value, coupled with the already existent inflation, Russians could see half of their income disappear within just a few months, something that would be disastrous for normal Russians.
According to recent data, Russians typically spend nearly 50% of their income on food, in contrast to a European average of about 15%, thus buying food could become a challenge for many citizens, especially for pensioners whose pensions are indexed, but not at a rate representing real economic conditions.
So, what’s next?
According to a recent Intelligencer interview with Michael Kofman, a Russia specialist at the Carnegie Endowment for International Peace, current economic data indicates a “fairly problematic picture in terms of the rate of inflation in Russia’s overheating economy, the deficit of skilled labor – because the state is pulling workers into the defense industry and contracting them to fight in the war – the steady depletion of Russia’s liquid reserves, and the fact that much of the budget is tied to the current oil price.” He notes that attempts “to juggle several different parts of this equation may not be sustainable” and goes as far as asserting that the situation will “at some point weigh on the Russian leadership.”
As Russian Telegram reaches a feverish pitch and experts clash over what is to be done to salvage Russia’s economy, there is one thing that everyone seems to agree on: Russia’s war in Ukraine is a quagmire, causing problems that seem to worsen by the day.
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