Russian economy review

Russian economy – Big changes – Why now?

Russian economy surprised everyone – including Russians themselves. Why is it happening, and how? View from a Russian provincial town

Evgeny Ogorodnikov

Russian economy surprised everyone – including Russians themselves. How can it be explained? This is the view from a Russian provincial town.

“There are more and more cars in the city. And they are getting better and better,” complains a friend conducting a car tour in Izhevsk.

When asked why people began to live worse, he answers: “I used to have two or three orders for the manufacture of kitchens, but for a million, and now for 150 thousand rubles, but there are a lot of them.”

When a Bentley SUV overtakes us, it is absolute kitsch for a city with a population under one million. My companion notices: there are already several of them in the town.

Izhevsk turned into a solid construction site. The city has never been built as rapidly as now. Even in that short period, from 1984 to 1987, when the capital of Udmurtia bore the proud name of Ustinov – this was the time of the most active development of Izhevsk under the USSR.

The old one-story quarters are being demolished, tower cranes are standing in their places, new roads are being laid, old ones are modernized, and an international airport terminal is being built.

Izhevsk is one of the beneficiary cities of the Northern Military District. It is here that small arms, air defence systems, and drones are manufactured. The city’s economy’s main problem is an acute personnel shortage. Salaries are growing. Factories are working in three shifts to fulfil the state defence orders. Sometimes they poach qualified specialists from each other. Others are ready to hire people without education and work experience and train them at their own expense for several months to fill vacancies.

Russian economy moving to the old industrial centres

The old industrial centres of the country, which lagged behind the extractive regions for three decades, felt the huge state demand: Udmurtia, Sverdlovsk, Kurgan, Tula regions, Perm Territory, St. Petersburg. The list can be continued for a long time. The trend, when giant factories lost space and personnel, suddenly turned around. Life boiled over. There is life outside Moscow, after all!

This growth is felt not only by industrial regions. Huge funds from the state budget allocated for the State Defense Order and the SVO eventually turn into salaries and consumer demand. At the same time, the inflation fears, which the country’s monetary authorities have been nurturing for many years, have not materialized. By the end of the year, it will not exceed five per cent. 

The economy, filled with budget money, demonstrates amazing things – ten-kilometre traffic jams on the Crimean bridge, 400 thousand rubles for a “square” of real estate in Sochi, a lack of places in the marinas of the Black and Baltic Seas for yacht parking. A boom in the production of consumer goods, in construction, in the field of entertainment and recreation.

Overnight, the Russian economy returned to rapid growth. It is based not on extractive industries but on labour-intensive manufacturing industries. This means that such growth is more uniform, stable and harmonious. The unemployment rate in the country is at a historical low, reaching 3.1‒3.2%. 

Record share of government consumption

GDP growth for five months amounted to 0.6%; by the end of the year, it will reach 2% (government forecast). Some believe that if the current industrial growth rates remain unchanged, it can reach 4%. And this is in the conditions of the most severe sanctions, frozen assets and an embargo from the West, collapsed gas exports, and low oil prices. Is this not an economic miracle? The secret of this miracle is simple: the share of government consumption in GDP reached a historic high of 24.

The most important result of the SVO is that it forced the Russian financial authorities to move away from the Kudrin dogmas of accumulating reserves, total savings and pumping money out of the economy with subsequent issuance of loans to Western states. The result of such a long-term policy is obvious today: the economy has stagnated, and reserves have been frozen. 

Money was not taken out of the economy but, on the contrary, pumped into it, creating an economic miracle. GDP is growing even in the face of a drop of almost 60% (in the first quarter, year on year) of net exports.

However, the Ministry of Finance is again trying to return to the old policy of “cash clamping”. The worst thing the state can do now is start saving money, sequestering the budget. This will immediately slow down the growth of the economy and will not solve the problems of the budget deficit.

Russia’s Government debt accounted for 13.4 % of the country’s Nominal GDP in Sep 2022. At the same time, the USA Government debt accounted for 118.08 of their Nominal GDP for the same period.

More news from Russia

Similar Posts