Russia’s economy: boom times are a ‘last ray of growth’ before the slowdown

Despite extensive sanctions, Russia’s economy appeared resilient thanks to growth generated by wartime state spending on military activities and subsidies.

This increase mainly increases the income in Russia amid a severe labor crunch, partly due to a shrinking population.

Russian consumers are on a spending spree

Russia’s GDP grew by 4% in the second quarter of this year compared to a year ago. That’s a slowdown from the 5.4 percent increase seen in the first quarter, but it’s still robust growth. In contrast, the US economy grew by 2.8% in the second quarter of this year.

Russia’s booming economy has boosted consumer spending, particularly on culture, hotels, transportation and personal services, according to a Financial Times analysis of official data last month.

According to FT, per capita consumption in Russia increased by more than 20% from 2021 to 2023. In particular, travel spending increased by more than 90% due to the boost from domestic tourism.

Last year, Russia’s imports of cognac and sparkling wine rose by 18% and 80%, respectively, compared to 2019, according to an estimate by the Economist publication.

Broadly speaking, “consumption is booming due to a combination of massive budget spending and labor shortages leading to strong wage pressures,” fintech market analyst Bartosz Sawicki Conotoxia, he wrote in a note last month.

Economic growth could halve in the second half of 2024

The good times are unlikely to last.

Economists polled by Bloomberg expect growth to slow to about 2 percent in the second half of the year.

The current boom is “one last spurt of growth before Russia’s economy starts to cool significantly,” said Alex Isakov, an economist who covers Russia at Bloomberg Economics.

Russia’s central bank recently raised rates to 18% in a bid to curb inflation as the economy sees “considerable” overheating.

Such high rates mean that consumer spending could also decrease.

“‘Civilian’ industries are unlikely to be in a good place to serve as a substitute engine for growth as more consumers face the reality of borrowing at rates of 20% or more,” said Isakov.