- Russia's economy is growing but headed for big trouble, researchers wrote in a recent article.
- They pointed to Russia's outsized military spending, which has come at the cost of its private sector.
- Russia's finances look rocky in other areas as well, thanks partly to Western sanctions.
Russia's wartime economic boom is masking much deeper problems, according to a group of researchers.
The authors of a recent article, who hail from institutions including the Yale School of Management, the Wharton School, the Carnegie Endowment, and the Kyiv School of Economics, cast a stark warning for Russia's economic situation despite the nation posting strong growth numbers since its invasion of Ukraine in 2022.
Russia's economy is expected to expand another 2.4% this year, according to figures from the International Monetary Fund. However, much of that growth stems from the Kremlin's wild spending spree, and Russia's economy is hindered by a number of problems that could set it up for trouble in the long run, the researchers said.
"The reality of Russia's economic situation is far more complex and concerning than some would have you believe. The productive core of the Russian economy has been severely compromised," the group wrote in an op-ed for Fortune this week.
Russia has been spending heavily on its military and defense sectors, setting a record military budget for 2024. But that spending has come at a cost to Russia's private sector, some economists say, with other areas of its economy being slammed by a severe shortage of workers as resources get funneled into Russia's invasion of Ukraine.
Private firms are showing signs they're unable to keep up with consumer demand. That imbalance has caused wages and inflation to spiral in the nation, prompting central bankers in Russia to hike interest rates to 18% in July.
"Simply put, Putin's administration has prioritized military production over all else in the economy, at substantial cost," the researchers wrote.
Higher borrowing costs could spell trouble for Russian consumers, who are increasingly burdened by debt. Household debt accounted for 20% of Russia's total GDP at the end of the first quarter, according to CEIC data. Higher interest rates, in that backdrop, could set the nation up for a "looming crisis," the researchers added.
Meanwhile, Russia's finances aren't squaring, partly because the nation is taking in less money from its oil and gas trade. The nation is running a 2% budget deficit — which is "significant" by Russia's standards, the researchers added.
"In conclusion, the apparent resilience of the Russian economy is largely illusory, built on a precarious foundation of unsustainable government spending and short-term market factors," the researchers wrote.
"A looming economic catastrophe driven by the fundamental flaws in Russia's current strategy will likely set the stage for severe long-term consequences that will play out in the years ahead," they added.
Experts have warned of a dire future for Russia as it drags its economy through a third year of war. On the extreme end, forecasters are calling for the nation to enter a severe recession, with most experts agreeing that the nation has poor prospects for long-term growth.