Russia's war spending and labor exodus are bringing back a Soviet Union economy, IMF official says

• Economic conditions in Russia are similar to those of the Soviet Union, IMF’s deputy manager said.
• The country is spending heavily while consumption has seen a considerable pullback.

The International Monetary Fund’s upgraded forecast for Russia’s growth isn’t an endorsement of good times ahead for Moscow, the institution’s managing director told CNBC.

In fact, Russian economic conditions are starting to look more and more like the country’s 20th-century predecessor, where high production levels clashed with weak demand.

“That is pretty much what the Soviet Union used to look like,” Kristalina Georgieva said at the World Governments Summit in Dubai. “High level of production, low level of consumption. I actually think that the Russian economy is [in] for very tough times, because of the outflow of people and because of the reduced access to technology that comes with the sanctions.”

It’s a bearish take that’s not outright clear in the IMF’s figures. The organization doubled its forecast for Russian growth in 2024, boosting its prediction from 1.1% to 2.6% in January. That marks the biggest jump for any country.

But heavy wartime spending is the central driver of this growth, and not necessarily a reflection of a robust economy. The country’s defense and security spending is estimated to account for roughly 40% of Russia’s entire budget this year, as the Kremlin works to keep pressure up in its war on Ukraine.

“This pivot toward a militarized economy threatens social and developmental needs,” Carnegie Russia Eurasia Center scholar Alexandra Prokopenko wrote in Foreign Affairs last month. To meet its expenditures, the state has depleted the liquid assets in Russia’s national wealth fund by over 44% since the February 2022 invasion.

At the same time, the two-year conflict has significantly reduced Russia’s labor supply, with the country 5 million workers short in 2203, a December report calculated. While some workers were pulled to fight in Ukraine, over 800,000 are estimated to have fled the country.

This has weighed heavily on Russia’s economy, with workforce vacancies hitting 6.8% in mid-2023. The fact that many of those leaving are highly-skilled and educated may end up reducing Russian living standards to on-par with former Soviet republics, the Atlantic Council projected in August.

While the Ukraine war keeps Russian spending up, a recent intelligence update from the UK Ministry of Defence expects the regime to miss its revenue targets for 2024. While oil and gas revenue traditionally keep the country afloat, MOD expects that the Kremlin will have to impose austerity measures to stay funded, raising taxes and increasing debt.