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military industry, but it will not enhance the wellbeing of the country’s citizens,” says Simola.
The really difficult one to value is the long-term stagnation that the Western sanctions on technology will bring about. Russia’s growth potential before the war was an estimated 1.5% as Putin was diverting so many resources away from investment and into building up his financial fortress, but sanctions have reduced that potential further.
“The war and the consequent economic sanctions imposed on Russia have added enormously to uncertainty in the Russian economy. For a long time to come it will be very difficult for Russia to obtain finance from international markets, and especially to attract foreign investment. The economic sanctions imposed on Russia by many countries place powerful restrictions on the opportunities for it to access high technology and also many other key imported goods,” says Simola. “Productivity is diminishing. As a consequence of the war, hundreds of thousands of citizens have already fled Russia. This could mean that the more highly educated section of the workforce, in particular, will also shrink in the longer run.” BOFIT estimates that the long-term growth potential of Russia may now only be 0.5%-1%, which means that Russia will not return to its pre-war size even by the end of the decade.
The World Bank expects global growth to moderate from 5.9% in 2021 to 2.9% in 2023 and growth will be hobbled going forward by the unfolding polycrisis. However, even at these low rates Russia will now steadily fall behind the rest of the world and fall down the rankings in terms of the size of its GDP. Prior to the annexation of Crimea in 2014 it was on course to overtake Germany’s economy in dollar GDP terms to become the richest country in Europe.
Russia is the most prosperous country of all the Former Soviet states that didn’t join the EU in GDP per capita thanks to its oil production and in purchasing power parity terms it is on a par with the lower end of the EU.
That’s going to change. The total cost of the missing GDP growth over the next two years plus the defence spending comes to a total of $380bn, but taking into account the lost opportunity costs, that number should be almost ten times higher if you read across from Ukraine’s experience.
On the ground, what that means in practice is a steady fall in the quality of life for Russians. The range of products and services available to the public has already been truncated by sanctions and the domestic substitutes are mostly of inferior quality and more expensive. The fall in real incomes is expected to accelerate in the second half of this year as the changes start to become more visible. The final irony is that eventually Ukraine, which can expect an investment boom should peace return, will overtake Russia in terms of growth, income and quality of life.
23 RUSSIA Country Report November 2022 www.intellinews.com