Russia is spending so much money and manpower on defense that it’s draining the rest of the economy

Russia is spending so much on its war in Ukraine that the effort is draining resources from the rest of the economy, according to Alexandra Prokopenko, a former Russian central bank official.

“Russian industry has been transformed, with defense sectors now overshadowing civilian industries,” Prokopenko wrote in Foreign Affairs on Monday.

Moscow’s current military spending has overshadowed social spending for the first time since the fall of the Soviet Union, wrote Prokopenko, who is a scholar at the Carnegie Russia Eurasia Center and a researcher at the Center of Eastern European and International Studies.

Russia has allocated nearly one-third of its 2024 budget to defense spending. Social spending including salaries, pensions, and benefits will make up for about one-fifth of the budget, according to Russia’s federal budget.

“This pivot toward a militarized economy threatens social and developmental needs,” wrote Prokopenko.

But it’s not just about money. The military sector is also “siphoning off” labor from the civilian workforce, leading to an “abnormally low” unemployment rate of 2.9% — down from around 4% to 5% before the war, Prokopenko wrote in Foreign Policy.

Russia has been facing a labor crunch due to the war and a massive brain drain.

Last month, Prokopenko said Russian President Vladimir Putin is trying to solve a “trilemma” in navigating the country’s economy.

“His challenges are threefold: he must fund his ongoing war against Ukraine, maintain his populace’s living standards, and safeguard macroeconomic stability,” she repeated in Foreign Policy on Monday.

“Achieving the first and second goals will require higher spending, which will fuel inflation and thus prevent the achievement of the third goal,” she added.

Prokopenko isn’t the only one who thinks Russia’s sanctions-hit economy — which appears unusually resilient 22 months into its war with Ukraine — is at risk of overheating.

Elvira Nabiullina, Russia’s central bank governor, said the same last month.

“The economy is expanding so rapidly because it is using almost all the resources available,” said Nabiullina.

Source: I N S I D E R