(MOSCOW) – Russia’s war driven economy is displaying advanced symptoms of a terminal condition known as Dutch disease, with artificial state spending masking a structural collapse that is hollowing out traditional industries and leaving the country dependent on a conflict it cannot afford to end.
An economic analysis of conditions across the Russian Federation indicates that the nation’s overreliance on hydrocarbon exports, combined with massive military expenditure and compensation payments to the families of dead soldiers, has created a distorted economy in which some citizens experience unprecedented prosperity while others face ruin.
The phenomenon mirrors the economic affliction that contributed to the collapse of the Soviet Union, when a dependence on oil and natural gas revenues left the state vulnerable once energy prices fell.
Three contrasting experiences
The divided nature of the Russian economy is illustrated by the experiences of four ordinary citizens. A plumber, who previously struggled to find work, now reports being busier than at any point in his career, with a surge in demand for home renovations driven by war widows receiving large lump sum death benefits.
A farmer, meanwhile, faces the prospect of abandoning his crop next year because he cannot secure sufficient diesel to bring in the harvest, and the thin margins on which he operates have been further eroded by workers demanding higher wages to serve the newly wealthy.
A business owner reports being unable to find employees, despite widespread unemployment in certain sectors, because he cannot compete with the wages being offered by state funded arms manufacturers.
The fourth figure, an average Russian woman whose husband is fighting in Ukraine, finds herself with more disposable cash than at any previous point in her life. Her spending, however, is derived from what analysts describe as artificial sources of income.
Death benefits as economic stimulus
A significant portion of this artificial wealth is traced to military compensation. Death benefits now account for approximately 38 percent of all Russian military compensation, according to recent figures, meaning that a substantial share of the money entering local economies comes from payments made after soldiers are killed in combat.
The resulting spending by war widows has distorted local labour markets, with workers abandoning agriculture and other traditional sectors to provide services to those with sudden cash surpluses.
Arms manufacturing boom
A parallel distortion is occurring in towns and cities where arms manufacturing has expanded to support the war effort. The Russian government has incentivised these industries by offering above average wages, drawing workers away from established employers and undermining businesses that cannot compete with state backed salaries.
Russian banks have been compelled to lend to arms manufacturers on terms that are unlikely to be repaid, weakening the banking sector and reducing the capital available for lending to viable private enterprises.
Budget deficit concerns
The Russian government is reported to have already exceeded its annual budget deficit target by nearly double, with more than half the year remaining. The central bank recently paused sales of new bonds due to a lack of demand, signalling that the state is struggling to find lenders willing to finance its spending.
This fiscal strain suggests that the artificial stimulus currently sustaining parts of the Russian economy may soon be reduced, triggering the latent crisis that the distortions have created.
Structural damage
Economists assessing the situation suggest that even if the war in Ukraine were to end immediately, the structural damage inflicted on the Russian economy is likely to persist for a generation. The destruction of traditional industries, the weakening of the banking sector, and the dependence on military spending have created conditions from which recovery may not be possible.
The analysis indicates that the Russian economy was already afflicted by Dutch disease before the invasion of Ukraine, due to its overwhelming dependence on oil and natural gas exports. The war has accelerated the condition, adding additional layers of distortion that have now reached what analysts describe as a terminal stage.
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