What the West hoped for Putin’s Russia after its invasion of Ukraine did neither appear to come nor it succeeded to bring to heel in these so many months. Following its invasion of Ukraine and the imposition of U.S. and partners’ sanctions and other economic measures, Russia’s economy in the year 2022 contracted by 2.1% with record-high energy exports cushioning what would have been a far deeper contraction.
There are surely persisting the views that last year the Russian economy grew by 3.6 percent, far far faster than most countries in Europe last year. Where was then the economic pressure taking its grip? What on earth has reportedly happened? What’s more, Russia is said to have been possibly on path to grow by another mark.
Why do economists pointedly hint that extra expenditure unleashed by a war can give a boost to the economy? This was what had happened to Germany in the 1930s. There was also a huge increase in war production at least in America. Though it was initially aimed to meet export orders including even from the United Kingdom. However, the key point was that it subsequently equipped its massively expanded armed forces, as the comments continued.
The economists believe if an economy enters a war with unemployed resources, including labour, then the extra production of war materiel remains effectively free. It also appears to employ resources which would otherwise be unused. This sort of expenditure was a key factor in lifting those economies out of the Great Depression.
Moreover, such a boost to demand can deliver an increase in non-war production as the recipients of extra income from war production spend their money. But these gains are limited. They can only occur in economies with unemployed resources and they end when the unemployed resources are exhausted, as has been expressed.
One way of escaping from this constraint is to draw in extra resources by importing more from abroad or exporting less, thereby causing the current account of the balance of payments to deteriorate. Once they are reached, extra production for war purposes must come at the expense of reduced production for something else – ordinary consumption or investment.
When the Ukraine war began, Russia did have a margin of unemployed productive capacity, including labour. Extra demand was therefore able to draw forth increased production. But this margin of unemployed resources was quickly used up.
It is estimated that in 2022, Russia’s gross domestic product dropped by 2.1 percent. Russia’s economy may continue to shrink in 2023. Its GDP is forecast to decline by 2.5% in the worst-case scenario or by 0.2 percent according to the World Bank. The IMF expects growth in 2023 (0.7%). Despite the sanctions, Russia’s economy outpaced both the U.S. and Europe in terms of growth in the last year of 2023.