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Two and a half years after invading Ukraine, Russia is grappling with severe Western sanctions. According to the IMF, Russia’s GDP is currently about 7% below pre-war forecasts. However, the economy has not collapsed as some experts had predicted.
Dan Bucsa, Chief Economist for Central and Eastern Europe at UniCredit, notes that Russia’s economy has undergone significant changes. The country has mobilized enormous resources to support its military apparatus, leading to wage increases in the defense sector and a labor shortage in the private sector.
Increased military spending and rising consumption have fueled inflation, which Russia’s Central Bank is attempting to curb through higher interest rates. However, effectively restraining consumption remains a challenge.
Russians are increasingly turning to Chinese goods as substitutes for European products, though these are often of lower quality. Additionally, defense expenditures and payments to soldiers and their families are creating economic imbalances across different regions of the country.
Experts predict that Russia’s economy will not return to pre-war growth rates, and reliance on currencies from developing countries limits its ability to import valuable goods. The shift towards a military-focused economy is already having a noticeable impact on social services and infrastructure.
