- Vladimir Putin is trying to solve a “trilemma” in Russia’s economy, said a former Russian official.
- Putin needs to keep spending on the war to keep up growth, while appearing to deliver on the economy.
- He also has to keep macroeconomic stability, which is challenging amid extraordinary measures.
Russia’s economy appears to be booming even 21 months into the Ukraine war.
But behind the scenes, Russian President Vladimir Putin is trying to solve a tricky “trilemma” as the country’s economy heads into 2024, said Alexandra Prokopenko, a former central bank official.
“At the moment, the economy looks resilient. But it’s like Putin navigates it the way he navigates his yacht, as if it’s an icebreaker. But it’s not,” Alexandra Prokopenko, a former advisor to the Bank of Russia, told the Carnegie Russia Eurasia Center think tank in a podcast last week.
This is because Putin needs to negotiate three key issues, explained Prokopenko, who is now a non-resident scholar at Carnegie Russia Eurasia Center.
First, the Russian leader has to keep spending on the war in Ukraine to keep up economic growth. Russia reported 5.5% GDP growth in the third quarter of this year — reversing a 3.5% decline in the same period last year.
“The current pace of GDP growth is mostly because of these war expenditures, which basically means that once the Russian state stops spending on the war, the growth will stop or slow significantly,” added Prokopenko.
Since economic growth causes inflation, the country’s central bank needs to keep interest rates high to tame war-time price raises. On Friday, Russia’s central bank raised its key interest rate to 16% in its fifth straight hike.
Putin also has to keep up the appearance that he is still delivering because he has a social contract with the people that “everything is going according to plan,” said Prokopenko. Putin is seeking a fifth term in Russia’s March presidential election, when he is almost certain to win.
“War is not a global war, but it’s still a ‘special military operation,’ and people can continue their lives as usual, business as usual,” said Prokopenko.
Putin also needs to maintain macroeconomic stability after imposing extraordinary measures like capital controls and breaking the country’s budget rule to support the flagging ruble.
“Abandoning these institutions means that in the future it will be more complicated for the financial leadership, for the Kremlin, and for Putin to deal with future shocks,” said Prokopenko.
While Putin’s administration has managed to keep up a rosy facade for Russia’s economy, the country’s official economic statistics are nearly impossible to verify, and reports suggest that much of the country’s growth is due to massive military and government spending.
Igor Lipsits, a prominent Russian economist, told Reuters last month that “the real situation is bad” for the country’s economy.
Prokopenko also cited a key quantitative signal that the Russian economy isn’t quite all it’s hyped up to be.
“Next year, the key rate will be in double digits. It’s also a sign that the economy is not healthy,” said Prokopenko. “If you have a healthy economy and moderate, sustainable growth, you don’t need a double-digit key rate. You don’t need such costly money within the economy.”
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