The ruble is down, the price of potatoes is up. But is Russia's economy really in trouble?
Russia set to spend more than 6% of GDP on the military in 2025
The lead story on the front page of Tuesday's edition of Moskovskij Komsomolets, a major state-run newspaper in Moscow, is the uproar over the rising price of potatoes.
One lawmaker is calling on the country's prosecutor general to investigate the surging cost of this household staple, which is nearly as essential to Russian diets as bread.
According to Russia's statistics agency, Rosstat, the price of potatoes has gone up 74 per cent since the beginning of the year. Butter has risen by more than 25 per cent, leading to reports of a string of thefts, forcing some grocery stores to put the blocks under plastic cases.
Kitchen commodities are becoming more expensive, as the Russian ruble is at its lowest level since the early days of the war in Ukraine.
But Dmitry Nekrasov, an exiled Russian economist who once served in the presidential administration of Dmitry Medvedev before becoming an opposition politician, told CBC News it would be a mistake to think the Russian economy is on the brink of collapse.
A recently released report co-authored by Nekrasov examined the state of Russia's economy and how it has managed to weather the sanctions.
"At the moment, everything seems to be in favour of the Putin regime. It's hard to say it, and it's a pity, but it is so," Nekrasov said in an interview with CBC News over Zoom from Cyprus, where he now lives.
"How long that will be is another question."
Steering through sanctions
When Russia launched its full-scale invasion of Ukraine on Feb. 24, 2022, many companies pulled out of Russia, while Western countries rolled out sanctions targeting Russian banks, companies and individuals in an effort to stunt the country's ability to fund its war machine.
Since then, successive rounds of sanctions have been introduced — as recently as last week, when the U.S. decided to include Gazprombank, the last of Russia's largest big banks to be sanctioned by Washington, along with dozens of smaller financial institutions.
Speaking on Thursday, Russian President Vladimir Putin said the fluctuations in the ruble's price "is connected not only with inflationary processes, but also with budget payments, oil prices. There are many seasonal factors. So, generally, in my opinion, the situation is under control. There is no reason to panic for sure."
Alexandra Prokopenko, a former employee of Russia's Central Bank who now lives outside the country and works for the Carnegie Russia Eurasia Center, wrote in June that additional rounds of sanctions will be "extremely painful" for the Russian economy, as they will ultimately reduce productivity and profit. But she also noted that that the Russian government and businesses have been in "survival mode" since the start of the war.
"Devising various ways to keep doing business under ever stricter sanctions has become part of everyday life," she wrote in a paper published in July.
Neskrasov agrees, saying while the sanctions are having an impact on the economy, so far they have been nowhere near "catastrophic."
Russia is not only poised to spend more than six per cent of its GDP on defence next year — the highest level since the Cold War — but real wages, which have been adjusted for the country's soaring inflation, were up 8.4 per cent in September year-over-year.
"If we look at countries with a market economy in a war situation ... if bombs are not falling on your cities and plants, the economy is always growing during the war," said Nekrasov, who is the co-founder and director of the Center for Analysis and Strategies, a think-tank focused on post-Soviet states and the Russian diaspora.
"But the situation where the disposable income of the population is also growing during the war is quite unusual."
More military spending
Even as Russia's inflation rate sits around eight per cent, residents are seeing a surge in purchasing power due to rising wages driven by a labour crunch. Meanwhile, Russia is continually ramping up military pay in an effort to entice soldiers to the front.
Nekrasov said prior to the war, Russia's economic policy was conservative, and public spending was curtailed. Since 2000, he says the state has had a budgetary surplus of about one per cent each year.
In next year's budget, Russia is allocating $145 billion US to defence spending, which will account for more than six per cent of the country's GDP. Nekrasov says while it is a huge commitment compared to some countries in the NATO alliance — which are being urged to meet the target of two per cent of GDP — he says historically, it is not unreasonable for Russia.
As a comparison, between 1955 and 1975, the U.S. was spending more than eight per cent a year on average on defence, while Israel was spending on average around 19 per cent between 1967 and 1993.
But as Russia funnels more money into the military, running factories around the clock to churn out weapons and ammunition, it has fuelled the inflation rate, which Russian financial authorities are trying to bring down by raising the key interest rate to 21 per cent.
Recruiting with rubles
Nekrasov says that the Western sanctions and travel restrictions introduced after the onset of the war might have negatively affected the upper middle class in cities like Moscow and St. Petersburg. But for Russia's more remote, poorer regions, the war has been something of an economic boom.
In a desperate effort to recruit soldiers, Russia's defence ministry and regions across the country are offering large salaries and incentives to enlist.
In Buryatia, one of Russia's poorest regions, which has seen a disproportionate number of men killed in the war, soldiers receive $4,400 US from the local government for enlisting.
The signing bonus is much higher in the city of Moscow, which gives recruits $21,000, on top of their salary and payouts from regional and federal authorities. Taken together, a soldier's pay there would be five times higher than the country's average wage.
In Belgorod, a region that borders Ukraine, the down payment is even higher at $25,000.
Several regions are also offering finders' fees — in some cases more than $1,000 — if someone refers a person who ends up signing a military contract.
And across Russia starting Dec. 1, those who enlist can also have up to $100,000 of their debt written off if they serve in Ukraine for a year.
Western intelligence officials estimate hundreds of thousands of Russian soldiers have been killed or injured throughout the war. If a soldier is killed, the payout to his family is around $125,000.
"In the lower class, they have increasing standards of living right now," said Nekrasov.
"This money comes to the region. People began to buy and construct houses. People began to walk to restaurants, which they didn't used to go to before."
Higher wages across the country
The lucrative defence contracts, combined with the large salaries offered by the state at military factories, have created a competitive labour market, where unemployment sits at 2.3 per cent.
The labour crunch is such that Russia estimates it is short millions of workers.
"I believe that the salaries will increase this year, at least by 20 per cent," said Dmitri Borovkov, 46, who runs a logistics company in Murmansk, a Russian port city that lies above the Arctic Circle.
Speaking to CBC News via Zoom, he said as a private company, it can be difficult to compete with state enterprises, which often pay better.
While hundreds of thousands of Russians have enlisted or been conscripted into the military, a large wave, including many young men, left the country during the early days of the invasion, and the partial mobilization that followed.
Borovkov believes what Russia calls its "special military operation" isn't the only explanation for the labour shortage, saying the country lost many foreign workers from Central Asia who returned home during the COVID-19 pandemic and never came back.
Thousands of others reportedly left or were deported after an attack on a concert hall in Moscow in March, where Russian authorities said gunmen from Tajikistan killed more than 130 people.
Russia has recently expanded its efforts to attract workers from Africa, but Russia's Central Bank is forecasting the economy may find itself on the verge of stagflation next year, with more than 70 per cent of companies experiencing labour shortages.
Nekrasov says he expects persistent high wages will bankrupt some companies, and that in the long run, Russian businesses, including its entire technology sector, will be stunted by its isolation from the West. So will the standard of living for Russian residents, he says.
But he doesn't think the strain will be enough to shake Russia's economy in the short term.
On Wednesday, after the ruble slid further, Russia's Central Bank announced it would not buy foreign currency on the domestic market from Nov. 28 until the end of year. By Thursday morning, the ruble had rebounded slightly.
Nekrasov doesn't see anything on the horizon that will shake Putin's grip on power or "crash the Russian economy."
"Some things in the economy will not be so good... but the effect doesn't equal a catastrophe."
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Reuters