<![CDATA[Russia’s war economy has problems—but is not about to crash]]>

Russia’s economy has demonstrated resilience despite Western sanctions, largely due to increased military spending and a shift towards a war footing. The International Monetary Fund (IMF) projected a 3.2% growth for Russia’s GDP in 2024, a significant upward revision from its previous forecast of 2.6%. This growth is primarily fueled by substantial government expenditure on defense, which has stimulated industrial production and employment. The Russian government has allocated an estimated 6.5% of its GDP to defense spending in 2024, a level not seen since the Soviet era. This surge in military outlays has created demand for manufactured goods, particularly in the arms and ammunition sectors, and has led to a tight labor market with unemployment falling to a record low of 2.9% in April 2024. The Kremlin has also implemented policies to support domestic production and reorient trade towards countries not participating in sanctions, such as China and India. Despite these efforts, underlying structural weaknesses persist. The reliance on state-driven investment, particularly in the military-industrial complex, crowds out private sector investment in other areas. Furthermore, the war economy has led to inflationary pressures, with the Central Bank of Russia raising its key interest rate to 16% in December 2023 to combat rising prices. The long-term sustainability of this growth model is questionable, as it diverts resources from productive civilian industries and may lead to future economic imbalances.