Russia’s war of aggression in Ukraine gradually impacting the economy
The effects of the Russian war of aggression are gradually beginning to be seen more widely in the Russian economy.
Rapid inflation has eaten away the purchasing power of Russians and cut consumption. Industrial production has been supported by the military industry, while other production has developed more poorly, the Bank of Finland institute for Emerging Economies (BOFIT) said in its weekly update.
According to the Russian Ministry of Economy's preliminary estimate, the country's GDP shrank by 4% in May from a year earlier (chart). In the June survey by Consensus Economics, the average of Russia's GDP forecasts was -8% for this year and -2% for next year.
Consumption demand has decreased as uncertainty increases and purchasing power weakens. The amount of retail trade in May was 10% lower than a year earlier. Consumer prices rose in Russia in April-May by 17–18% y/y. In April, the average real (ie corrected for price increase) monthly salary of Russians was 7% lower than a year earlier. The unemployment rate has remained historically low and was 3.9% in May, reports BOFIT.
According to official statistics from the statistical office Rosstat, industrial production shrank by 2% in May from a year earlier. The production of the extractive industry was 1% and the production of the processing industry was 3% lower.
Within the processing industry, the development was again very variable. The production of passenger cars has almost completely stopped: in May, only barely 4,000 cars were manufactured in Russia, while a year earlier the production reached more than 112,000 cars. Also, e.g. the production of railcars and excavators has dropped rapidly. On the other hand, the production of e.g. certain turbines, radio-electronic devices and medicines increased several times in May compared to a year earlier.
“According to the estimate of the Russian economic research institute CMASF, Russian industrial production has contracted more strongly in recent months, if the production of the military industry is not taken into account. CMASF estimates a fall of 4% for May. In order to secure the operation of the military and the military industry, this week the Duma approved a law amendment, based on which the Russian government can, if necessary, target companies with special measures. Companies can be obliged, for example, to manufacture goods for the army, repair army equipment or manage the army's transport,” BOFIT said.
The latest GDP figures show that the eurozone contracted in the third quarter and looks like it will do the same in the last three months of the year, falling into a continent-wide recession.
Real wages are up in Russia, but thanks to inflation and subsidised mortgages, the middle classes are getting richer, while the poor are getting poorer.
Russia’s strong growth, driven by heavy military spending, has created growing inflationary pressure as the economy starts to overheat, the Bank of Finland institute for Emerging Economies (BOFIT) says in its weekly update.
In the most recent poll conducted by the Russian Public Opinion Research Center (VTsIOM), President Vladimir Putin's trust rating remained steady at 78.5%.
Ukraine’s leading investment bank Dragon Capital has cut its GDP forecast for Ukraine in 2024 in half to 4% y/y in anticipation of another year of war, The New Voice of Ukraine reported on December 7.
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