XPost: alt.fan.rush-limbaugh, alt.atheism

Russia�s Economy: Closer to the Edge Than it Looks



Vladimir Putin may be able to violate international law with relative
impunity. The laws of economics are less yielding.
Photo: Deputy Governor of the Bank of Russia Sergey Belov holds the newly designed Russian 5000-rouble banknote during a presentation in Moscow,
Russia October 16, 2023. Credit: REUTERS/Maxim Shemetov

The Russian economy is doing well. Vladimir Putin has repeatedly boasted
about all-time low unemployment, real wage growth, and stable inflation. Confronted by an economically near-stagnant Western Europe and the
failure of harsh predictions for Russia at the start of its all-out war
on Ukraine, this unexpected affluence has provided a bonus for Putin in
the hearts and wallets of the Russians. For now, at least.

The main driver of economic growth is gargantuan war-related state
expenditure. For the first time in modern history, the country is set to
spend 6% of gross domestic product (GDP) on the military this year, and
defense outlays will exceed social spending.

In addition, there are also substantial state disbursements on other war- related items � like construction in the occupied territories of Ukraine, mortgage subsidies to war veterans and defense sector workers, and
domestic production of hitherto imported goods. Overall, expenditure is
planned to reach 36.6 trillion rubles ($401bn) in 2024 (a 26.2% annual
rise.)

This spending frenzy is funded partly by oil revenue, which Western
sanctions failed to stanch. It�s also supported by increased tax
collection, driven by higher economic activity. While both are rising,
spending can be sustained, which aids the economy. Supported by fiscal
outlays, meanwhile, the war industry is at full throttle. But therein
lies the rub.

Military factories, barely working just five years ago, are running
around the clock and constantly need workers. In this, they must compete
with other industries and the army, which is constantly offering higher-
paying contracts. No wonder salaries are increasing not only in the
military sector but across the board.

A more granular analysis shows that the wages are rising above average in
those regions with a heavier bias toward military production and
construction, and with a higher share of contract soldiers. Growth is
highest in the lower-to-middle-income parts of society, reflecting a
constant competition for workers and soldiers.

However, rising demand for labor intersects with declining supply. Labor availability has been sapped by the military draft, emigration, and restrictions on Central Asian workers after the Crocus Concert Hall
terrorist attack in Moscow in March. As a result, unemployment is setting
new historic lows every month.

It is a basic tenet of economics that unemployment and inflation have an inverse relationship; higher inflation is associated with lower
unemployment and vice versa. The so-called Phillips curve shows that at a certain point, even a tiny drop in unemployment results in a sharp rise
in inflation.

Historically, the optimal level of unemployment for Russia, the level at
which the economy runs at full capacity without overheating and causing a
spike in inflation, is around 4%. In March, it was 2.7%, compared to the average of 5.1% in the decade up to 2022.

If productivity was rising, optimal unemployment would have declined, as
it did in the 2000s, when Putin was still in the business of pursuing
liberal economic reforms and sponsoring infrastructure projects. However,
the Kremlin now pours money not into new roads or cutting-edge machinery,
but into tanks and missiles.


https://cepa.org/article/russias-economy-closer-to-the-edge-than-it-
looks/

--- SoupGate-Win32 v1.05
* Origin: fsxNet Usenet Gateway (21:1/5)