German media 'takes the pulse' of the Russian economy, fears the possibility of collapse, unable to untangle itself. (Source: The Economist)

"A cessation of military conflict could push Russia into a deep economic crisis that the country cannot solve on its own," said an analysis by the German newspaper Welt .

Russia's economy has proven it can perform better than expected despite sanctions as the military campaign in Ukraine enters its third year, but its current growth is largely driven by the arms industry.

The Welt newspaper said that the economists they interviewed all believed that Russian President Vladimir Putin would have to maintain current defense output even after the military conflict ended, otherwise the economy would face a deep crisis.

Russia’s GDP growth is currently driven by two factors: the first is a steady increase in domestic consumption and the other is government-mandated spending. However, both of these factors are based on needs arising from the ongoing Russia-Ukraine military conflict.

“But how will Russia maintain its peacetime economy after the military campaign with Ukraine ends? How will the economy get out of trouble when the defense budget is only a trickle? And will the Kremlin find a new direction for the economy, when the current model seems convenient and creates a class of economically satisfied citizens?” the article asks.

The German newspaper writes that some Russian economic researchers believe that the Kremlin will try to maintain its current wartime economy as long as possible, even after the end of the military conflict with Ukraine. With the number of tanks and ammunition destroyed, the defense industry will need years to replenish its reserves. And most of those who have benefited from the wartime economy and do not expect the West to lift sanctions soon may not respond to the process of re-establishing a peacetime economic model.

According to information from the Russian government, at the beginning of this year, the Russian defense industry (in the narrow sense) included 6,000 companies with 3.5 million employees. There are also 10 large defense-related companies.

In the first half of 2024, Russia's gross domestic product grew by 4.7 percent compared to 3.6 percent recorded last year, according to Russian statistics. By the end of this year, the Central Bank of Russia (CBR) expects Russian economic growth to be 3.5-4 percent, while the previous forecast was only 2.5-3.5 percent.

In fact, the Russian federal budget has increased by almost 50% over the past three years, rising to 36.6 trillion rubles (about $427 billion) in 2024, from 24.8 trillion rubles in 2021, before the outbreak of military conflict in Ukraine.

Moscow’s increased defense spending has helped boost economic growth, avoiding a recession that was initially forecast for 2022 amid Western sanctions. But the spending spree has also fueled domestic inflation, forcing the CBR to raise interest rates. The CBR raised its key interest rate to 18% last month, the highest since an emergency hike to 20% in February 2022, in an effort to cool an economy that is growing at an unsustainable pace.

However, at a recent meeting on economic issues in July 2024, Russian Prime Minister Mikhail Mishustin said that the growth momentum of the Russian economy remains high. He said that the figures in the real economy are also quite positive. In the period from January to May 2024, Russia's manufacturing sector grew by nearly 9%. Mechanical engineering is considered one of the key drivers in this sector with a double-digit growth rate.

The Russian Prime Minister stressed that it is very important that investment continues to increase, laying a good foundation for the future. By the end of the first quarter of 2024, investment increased by nearly 15%, mainly in the fields of machinery, equipment, and intellectual property. Prime Minister Mikhail Mishustin added that consumer activity is at a very high level, mainly due to increased incomes of the people. However, this also leads to increased inflation. Specifically, from the beginning of the year to July 1, Russia's inflation increased to 4.5%.

He stressed that the inflation issue needs to be addressed as people's living standards depend on it. He called for close monitoring of the macro situation and, if necessary, immediate adjustment of the action plan on inflation in coordination with the CBR.

The IMF noted a fairly strong growth in the Russian economy, thanks to positive economic activity due to strong oil exports amid high prices, recovering consumption, a stable labor market and rising real wages, said Alfred Kammer, director of the European Department of the International Monetary Fund (IMF).