Russian economy sliding towards deindustrialization, Finland says

3 April, 11:27 PM
Russia expects economic recession to deepen this year (Photo:REUTERS/Maxim Zmeyev/File Photo)

Russia expects economic recession to deepen this year (Photo:REUTERS/Maxim Zmeyev/File Photo)

Western sanctions continue to degrade the Russian economy, which is now moving firmly towards deindustrialization and reduced complexity, the National Bank of Finland said in a report on March 27.

The report notes that effective countermeasures by the Russian central bank, strong export earnings, and increased government spending softened the effects of a full-blown crisis on Russia’s economy in 2022. In 2023, however, sanctions continue to hurt the country.

Many businesses had to adjust to using lower quality components or spending more money. Russian financial markets and many sectors of the real economy must now operate without foreign partners. Some companies are switching from high-tech to low-tech production chains.

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Sanctions against the Russian oil sector are in full force. It is expected that exports will no longer be able to support GDP growth. In addition, as the war drags on, government spending and investment will rise. The budget deficit in 2023 will be much higher than the current official forecast of 2% of GDP. This year Russia expects a deepening economic recession.

In the future, the potential for economic recovery will be shaped by two very volatile factors: the war in Ukraine and Russia's fiscal stability.

The Central Bank of Finland notes that at first glance it may seem that the Russian economy has not suffered much from the war. However, analysts say that in the current situation, the main indicators of GDP aren’t important, since they mask a significant restructuring of the Russian economy.

During the first year of the war, Russian authorities pushed the economy onto the path of structural transformation towards autarky. Import substitution and secession from "unfriendly countries" were high on Moscow’s political agenda. This type of policy can be successful if huge investments are made in domestic production to replace lost imports, coupled with establishing new transport links.

Since resources are limited, the investment in other sectors will fall. Some economists quite illustratively call this reverse industrialization, or deindustrialization.

Developed Western economies, which Russia calls "unfriendly", make up more than 50% of the world economy and account for an even larger share of global research and innovation activity. As of the end of 2021, more than 90% of Russian FDI came from “unfriendly countries.” The severing of these ties is a huge shock and drag on Russia's growth potential.

In addition, it is noted that while there is a war of attrition, Russia will need to invest heavily in the development of its military potential, which has become the main goal of the country's economic policy. This applies not only to the military-industrial complex, but also to textiles, food, and medicine.

“Russia is stuck ineluctably on a path to lower potential growth and a bleak economic future,” the report concludes.

On March 14, Bloomberg reported that in 2022, despite the imposition of sanctions, Russia was able to stash around $80 billion abroad – which is about a third of all additional income Moscow received due to high energy prices.

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