Page 29 - RusRPTJul23

2.12 Russia’s economy is enjoying a military-driven Keynesian bump
Russia's economy continues to show modest growth despite facing over 13,000 sanctions. The imposition of sanctions has isolated Russia from the global financial system, providing a certain level of protection against external shocks. However, this so-called "success" is not attributed to Russian business but rather connected to Ukraine's refusal to surrender, ongoing fighting, and the principles of renowned British economist John Maynard Keynes, The Bell reports.
In the first quarter of this year, Russian GDP contracted by 1.9% compared to the same period last year. However, seasonally-adjusted disposable income for Russians experienced a slight increase of 0.1%. This divergence between economic contraction and income growth is reminiscent of previous periods in the post-Soviet economy, particularly in the 2000s and between 2010 and 2013. The reason behind this unusual situation appears to be what can be termed "military Keynesianism" resulting from the war in Ukraine.
Military spending plays a significant role in Russia's economy this year, with expenditures on "national defence" and "national security" set to exceed 9 trillion rubles (6.2% of GDP), nearly a third of total spending.
Despite the substantial military expenditure, it is important to note that Russia's spending on the war is relatively low compared to historical precedents. For example, during the Vietnam War, US military spending reached 9.7% of total spending, while the peak of the arms race in the mid-80s saw military spending at 6.8%. Even during the military operations in Iraq and Afghanistan, US military spending was comparable to the current level in Russia.
Russia's allocated funds for military purposes are being rapidly utilized, with nearly 60% of defence spending and almost 40% of security spending carried out in the first five months of the year. Additionally, substantial construction projects in the Russian-occupied areas of Ukraine, heavily subsidized by Moscow, are contributing to the country's economic growth. According to Ilya Tsypkin, an expert at Russian credit rating group ACRA, up to 88% of the spending by the Russian-installed administrations in the four Ukrainian regions annexed by Russia is financed by Moscow.
Further evidence of the significant role of defence spending in Russia's growing economy can be seen in industrial output and greenhouse gas emissions. The defence sector has witnessed a 25% growth between January and April, while various sectors related to military electronics and optics have experienced substantial production increases.
“ Production of electrical equipment in the same period was up 29%, motor vehicles by 27%, computers by 23% and optics and electronics by 23% (this includes military electronics and optics). Some product groups showed explosive growth: navigation devices were up 60% and specialized workwear rose 47%. Compared with the first four months of 2022, production of leather
29 RUSSIA Country Report July 2023 www.intellinews.com