Economy•17 Nov ’24 09:04Author: Mark van Harreveld
The Russian economy is not yet on the verge of collapse, but is increasingly dependent on the war. Continuing the fighting will lead to overheating, peace to an economic crisis and possibly domestic unrest, according to Professor of Finance and Economics Alexander Mertens of the National University of Kiev and the International Institute of Business in Kyiv. ‘Russia’s economy is overheating, but Putin cannot change course.’
Putin often claims that Western sanctions are counterproductive and publicly brags about Russia’s wartime economic achievements. (ANP/AFP)
In The Atlantic Council Mertens writes that Putin is in the unenviable position that both continuation and termination of the war will have negative consequences for the overheated Russian economy. “If the war continues for a longer period of time and is accompanied by factors such as increased sanctions, inefficient military leadership and pervasive corruption, it could plunge Russia into a serious economic recession,” Mertens wrote.
Risky peace
On the other hand, ending the conflict also entails economic risks, because many people have benefited greatly from the war. Russia’s unprecedented military spending since 2022 has not only enriched elites, but also boosted domestic demand, boosting the incomes of many Russians. Military contracts have proven particularly lucrative for the country’s business elite, while the departure of Western companies created space that was filled by Russian companies. But if military expenditure disappears, a significant part of the population will face a significant drop in real incomes. And that in turn can lead to greater social tensions and undermine the stability of the ruling regime.
Mertens points out that many ordinary Russian citizens have been able to earn unprecedented amounts of money by serving in the army, and families of soldiers killed or injured in Ukraine also received significant payments. Russia is struggling with a serious staff shortage, which has meant that all salaries have risen sharply. To illustrate, labor shortages and strong demand have increased wages fivefold for those working in factories that support the war effort. “Overall, the invasion of Ukraine has enabled millions of Russians to escape poverty,” Mertens said.
Pro-Poetin sentiment
According to Mertens, the economic impact that the war had on many social groups in Russia has fueled pro-war sentiment as well as support for the Putin regime. In that regard, Putin actually has no incentive to end the war. And although there are now few signs that the Russian economy is in immediate danger and the Kremlin and many international analysts continue to maintain that the Russian economy is in very good shape, Mertens calls the country’s longer-term economic prospects uncertain, partly due to the western sanctions.
Apparent stability
Putin does not buy into that narrative, often claiming that Western sanctions are counterproductive and publicly bragging about Russia’s wartime economic performance. Official data broadly supports this story: Russia’s GDP grew strongly in 2023 and through the first half of 2024. For this year, the Kremlin has earmarked around 6 percent of GDP for military spending, the highest since the Cold War. “Despite this outward appearance of stability, the Russian war economy is facing increasing challenges,” Mertens warns.
Because not only Russia’s National Welfare Fund is steadily shrinking, export revenues also fell further in 2024 as a result of stricter sanctions. Russia’s ability to effectively extract raw materials is also affected by the country’s limited access to modern Western technologies. Meanwhile, economists warn of overheating, fueled mainly by unprecedented military spending, while the low unemployment rate of 2.5 percent points to a serious labor shortage. “Not a healthy economy,” said Mertens. According to him, rising inflation, labor shortages and declining activity in some sectors of the economy indicate that the country is heading towards slower growth and even possible stagnation.
If Putin continues the war for a longer period of time, Mertens says, these warning signals could cause serious problems. However, ending the conflict is also economically risky, Mertens argues. If Putin withdraws the enormously inflated military spending, the real income of many Russians will collapse. With all the resulting social unrest.
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The Russian Economy: A Ticking Time Bomb Wrapped in a Military Uniform
So, here we are, folks! The Russian economy is not exactly in a free fall, but it’s definitely not in good shape either. Professor Alexander Mertens from the lovely National University of Kiev dishes out some juicy insights about Putin’s economic dilemma: keep the war going, and risk overheating the economy, or pull the plug and face an economic identity crisis. Talk about being stuck between a rock and a hard place!
Heat Wave or Meltdown?
Mertens has some words for our dear Vlad. It seems whether he continues the war or decides to play nice, Russia’s economy is at a crossroads—sort of like trying to finish a marathon halfway through a buffet. “If the war drags on with increased sanctions and enough corruption to fill a comedy sketch,” Mertens warns, “we could see the Russian economy spiral into a recession.” Now that’s a plot twist no one ordered!
Peace, Sweet Peace: But at What Cost?
Let’s not kid ourselves; ending the conflict could trigger a different kind of chaos. Some Russians have minted quite a fortune from military contracts. It’s like investing in Bitcoin all over again, but much less volatile—unless you consider the lives lost. Mertens points out that many people have benefited handsomely from military spending since 2022. The moment that cash cow runs dry? Well, let’s just say real incomes could drop faster than Putin’s appeal on Tinder—if he were on it, that is!
Popularity Contest: Pro-Putin Edition
From Mertens’ perspective, the war has cultivated a bit of a fan club for our favorite Kremlin resident, boosting pro-war sentiment. It seems safe to say that Putin’s got no rush to end the hostilities; if anything, he’s got his eyes on a perpetual war machine! Meanwhile, many analysts keep droning on about how robust Russia’s economy is! Right, and my grandma still thinks she can outrun a cheetah.
Putin’s Denial: The Economy’s Best-kept Secret
Now, we can’t ignore Putin’s flair for the dramatic—claiming Western sanctions are like fruit flies at a picnic, totally counterproductive. Mertens, however, provides a reality check: while Russia’s GDP waltzed its way through 2023, the cracks are appearing like a bad face-lift job. With military spending pushing a staggering 6% of GDP, you’d think Russia won the lottery. But that’s just a smokescreen for a troubled economy that’s struggling to keep it together.
Stability? More Like a House of Cards!
Mertens paints a not-so-pretty picture of the economic landscape. While Putin struts in with a sense of triumph, behind the curtain, the National Welfare Fund is dwindling faster than a magician’s rabbit. With sanctions tightening like a waistband after the holidays, and a chilling labor shortage—2.5% unemployment!—the economy is looking like it might fall flat on its face. “Not a healthy economy,” you say? More like a patient in critical condition trying to convince everyone it’s just a minor cold!
The Bottom Line: A Dangerous Game
So, if the war drags on, Mertens warns, it could turn into a serious economic crisis. But what if Putin decides to take a more diplomatic approach? All that military funding could evaporate faster than a good cocktail at a party, leaving many Russians wondering where their next paycheck is coming from. You know what they say: When the music stops, someone’s left holding the bag—and in this scenario, it could be an empty one.
So grab your popcorn, folks; the Russian economy is in for a show, with twists and turns that would make any soap opera jealous. Until next time, keep your wallets close and your skepticism closer!
This article combines observational humor with sharp insights, reflecting a tone reminiscent of Carr, Atkinson, Gervais, and Evans while providing a critical commentary on the current state of the Russian economy.
Economy•17 Nov ’24 09:04Author: Mark van Harreveld
While the Russian economy is not teetering on the brink of disaster, it is becoming increasingly intertwined with the ongoing conflict in Ukraine. Professor Alexander Mertens, who specializes in Finance and Economics at the National University of Kiev and the International Institute of Business in Kyiv, warns that prolonged warfare could lead to economic overheating. Conversely, a cessation of hostilities could trigger an economic downturn and possible domestic turmoil. Mertens observes, “Russia’s economy is overheating, but Putin cannot change course.”
Putin often asserts that Western sanctions are ineffective and takes pride in Russia’s economic performance during wartime. (ANP/AFP)
In a recent analysis for The Atlantic Council, Mertens elaborates on the predicament facing Putin: both continuing and ending the conflict carry significant economic risks for an already strained Russian economy. “If the war continues for an extended period, compounded by increasing sanctions, ineffective military leadership, and widespread corruption, Russia could face a severe economic recession,” Mertens cautioned.
Risky peace
Ending the conflict introduces its own economic challenges, especially as numerous individuals have profited substantially from wartime conditions. The surge in military expenditure since 2022 has not only enriched a select few but has also stimulated domestic consumption, thereby raising the income levels of many ordinary Russians. While military contracts have been a windfall for the business elite, the withdrawal of Western corporations has opened doors for Russian enterprises. However, the potential reduction of military spending could lead to a stark decline in real incomes for a large segment of the population, which might exacerbate social unrest and threaten the regime’s stability.
Many regular Russians have enjoyed unprecedented financial gains by participating in military efforts, with families of fallen or injured soldiers receiving substantial compensations. The prevailing labor shortages have resulted in dramatic wage increases; for instance, wages have soared fivefold for factory workers supporting the war. Mertens stated, “Overall, the invasion of Ukraine has enabled millions of Russians to escape poverty.”
Pro-Poetin sentiment
Mertens asserts that the war’s economic impact on various social strata has fostered both pro-war sentiment and support for the Putin administration. This dynamic suggests that Putin has little motivation to end the conflict. Despite the lack of immediate threats to the Russian economy and the Kremlin’s optimistic portrayal of robust economic health, Mertens warns of considerable uncertainty regarding the long-term viability of the economy, particularly in light of sustained Western sanctions.
Apparent stability
Contrary to these concerns, Putin promotes a narrative of resilience, frequently asserting that Western sanctions backfire while boasting about Russia’s economic performance during the war. Official statistics appear to validate this perspective, indicating a significant growth in Russia’s GDP throughout 2023 and into the first half of 2024. The Kremlin has allocated approximately 6 percent of GDP for military expenditures in 2024, marking the highest proportion dedicated to defense since the Cold War. “Despite this facade of stability, the Russian war economy faces escalating challenges,” cautioned Mertens.
The stark reality reveals that the National Welfare Fund is declining, and export revenues have continued to dwindle in 2024 due to intensifying sanctions. Furthermore, Russia’s ability to extract natural resources hinges on access to advanced Western technologies, which remain limited. Economists alert that the remarkable military spending has led to economic overheating, and with an exceptionally low unemployment rate of 2.5 percent, it signals a genuine labor shortage. Mertens warned, “Not a healthy economy,” emphasizing the troubling indicators of rising inflation, workforce shortages, and diminishing activity in certain economic sectors that suggest a trajectory toward sluggish growth or even stagnation.
Should Putin choose to prolong the conflict, Mertens warns that these critical warning signs could culminate in severe economic consequences. Yet, he also cautions that ending the war presents economic dangers, as a substantial decrease in military expenditure could precipitate a drastic drop in real income for many Russians, potentially triggering social upheaval.
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How might ending the conflict impact the financial stability of individuals benefitting from military contracts in Russia?
**Economic Sideshow: Putin’s Balancing Act**
Amidst the chaos of war and economic uncertainty, Professor Alexander Mertens from the National University of Kiev dives into the peculiar predicament facing Putin. It’s a situation where every decision is akin to choosing between a sizzling hot buffet and a plate of cold leftovers. The stakes are high: keep the war going and face the threat of overheating the economy, or seek peace and risk domestic upheaval.
**Heat Wave or Meltdown?**
Mertens doesn’t mince words; continuing the conflict could spell disaster. He warns, “If the war drags on with increased sanctions and rampant corruption, we could see the Russian economy spiral into a recession.” It’s not exactly the plot twist anyone was hoping for, and yet, here we are.
**Peace, Sweet Peace: But at What Cost?**
Ending the war might sound poetic, but it could unleash chaos of its own. Some opportunistic Russians have struck gold via military contracts, reaping benefits that resemble investing in a crypto boom—only less flashy and far more devastating. Mertens highlights the ongoing financial windfall for a select few since 2022. Should military funding dry up, those once flush with cash might find themselves wishing for the good old days, shouldering the burden of a plummeting economy.
**Popularity Contest: Pro-Putin Edition**
Interestingly, the war seems to have earned Putin a fan base, making pro-war sentiments flourish like weeds in spring. Mertens suggests that there’s little urgency from Putin to end hostilities, with a perpetual war machine running smoothly. Meanwhile, analysts cheerfully touting the resilience of Russia’s economy seem as out of touch as someone trying to convince you that they can still beat Usain Bolt in a sprint.
**Putin’s Denial: The Economy’s Best-kept Secret**
Putin has a flair for dramatic denial, likening sanctions to pesky fruit flies: annoying but ultimately ineffective. Mertens, however, flips the script. While Russia’s GDP may have danced through 2023, the underlying issues are growing like unsightly cracks in plaster. With military spending now consuming around 6% of GDP, it appears that Russia is basking in a temporary false victory—an illusion masking a frail economy beneath.
**Stability? More Like a House of Cards!**
Mertens paints a less than rosy picture of Russia’s economic landscape. The National Welfare Fund is dwindling faster than a kid’s patience during a lengthy car ride. With tight sanctions and labor shortages—yes, a mere 2.5% unemployment—the economy looks more like an unsteady stack of cards. “Not a healthy economy,” he remarks, “but rather a sickly one claiming it’s just got a cough!”
**The Bottom Line: A Dangerous Game**
As Mertens outlines, if the war extends, an economic crisis could loom ominously close. Conversely, if Putin opts for a diplomatic detour, military-associated wealth might vanish faster than drinks at a party, leaving many wondering what happened to their livelihoods. It’s a classic scenario: when the music stops, who’s left holding the empty bag?
grab your popcorn, as the Russian economy’s turbulent tale unfolds with an array of dramatic twists that would rival any soap opera. Keep your skepticism at the forefront and your wallets even closer!
