**Russia’s Economy Slows Down: Sanctions Take a Toll**
Russia’s economy, which was initially resilient to sanctions and grew due to massive military spending and strong oil exports, is now showing significant signs of decline. According to recent economic indicators, manufacturing activity has slowed down, consumer spending is tightening, and inflation remains stubbornly high, straining the national budget.
**Warning Signs Flashing Red**
The Wall Street Journal reported on July 4 that Russian officials are openly acknowledging the risks of a recession. Economy Minister Maxim Reshetnikov warned last month that Russia was on the “verge of a recession,” while Finance Minister Anton Siluanov described the situation as a “perfect storm.” Companies, from agricultural machinery producers to furniture makers, are reducing output.
**Impact of Western Sanctions**
While analysts suggest that this economic slowdown is unlikely to immediately alter President Vladimir Putin’s war objectives, it exposes the limits of his war economy. The slowdown indicates that Western sanctions, though not a knockout blow, are increasingly taking a toll. If sanctions intensify further or global oil prices fall, Russia’s economy could face more severe instability.
**Sustainable Growth Model in Question**
Experts warn that Russia’s economic growth model, overly reliant on military spending, is unsustainable and necessitates a contraction of civilian economic capacities to free up workers for the war machine, which is not a viable long-term strategy. Putin recently dismissed suggestions that the war is stifling the economy, echoing Mark Twain by stating reports of its death “are greatly exaggerated.” However, he also cautioned that a recession or stagflation “should not be allowed under any circumstances.”
**GDP Growth Slows Down**
Official data shows Russian GDP growth slowed to 1.4% in the first quarter compared to a year earlier, down significantly from 4.5% in the fourth quarter of last year. S&P Global’s purchasing managers’ index indicated Russia’s manufacturing sector contracted at its sharpest rate in over three years in June.
**Businesses Feel the Effects**
Businesses across Russia are feeling the effects of the economic slowdown. Rostselmash, the country’s largest producer of agricultural machinery, announced in May it would cut production and investment, and pull forward mandatory annual leave for its 15,000 employees due to a lack of demand.
**Banking System Instability**
While some analysts argue the Russian banking system remains stable, others warn of increasing instability. A recent report by the Center for Strategic and International Studies highlighted risks from a government decision to control war-related lending at major Russian banks.
**Pressure on the Kremlin**
The economic challenges intensify pressure on the Kremlin by reducing its financial capacity to fund its war in Ukraine. The government has operated with a budget deficit throughout the war and projects this will continue for at least two more years. This fiscal strain could provide an opening for Western nations to implement more powerful sanctions.
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