As the war on Ukraine nears the 30-month mark, with hundreds of thousands of deaths and colossal, mounting expenses—and now, Ukrainian forces in the Kursk region being the first to capture Russian territory since World War II—Russia’s economy continues to boom. This spring, the International Monetary Fund forecast that the country’s GDP would grow more in 2024 than any other advanced economy’s. Sure enough, in early August, Russia’s central bank announced that its GDP had grown by 4.4 percent in the second quarter, far outpacing the world’s wealthiest countries. The EU’s economy grew by only 0.3 percent. Germany’s contracted by 0.1 percent.
Europe has tried to wean itself from Moscow’s oil and natural gas exports, and the West has attempted to cap sales of Russian oil at US$60 a barrel—to little avail. Sales are still strong, and Russia often nets nearly the market rate—which has been between $75 and $85 a barrel for most of the year. In May, Russia surpassed the U.S. as the largest supplier of natural gas to Europe.
But beneath these GDP numbers, there’s a complicated dynamic. The Kremlin is pumping money into the economy through military spending: Defense now makes up about a third of the country’s budget. The United States, which spends more on its military than China and all European countries combined, dedicates only about 13 percent of its federal budget to defense. And all that state spending has pushed inflation up to 9 percent—and forced Moscow to raise taxes on the middle class to maintain the ballooning budget. Meanwhile, the country depends increasingly on China, both for exports of oil and gas and for imports of products it can no longer get from the West.
How long can Russia keep this up?
Dmitri Alperovitch is the co-founder and chairman of Silverado Policy Accelerator, a nonprofit working on geopolitical cybersecurity, and the author of World on the Brink. As Alperovitch sees it, the war in Ukraine and sanctions from the West have forced the Kremlin to transform the Russian economy: The state is now acting as its prime mover—through massive spending. This model is driving enormous GDP growth, but it’s also, Alperovitch says, leading the country into long-term decline through high inflation, a weak currency, deteriorating productivity, and the decay of every industrial sector—except Russia’s now-central industrial sector: war …
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