Game of Numbers: The Russian economy is worse than it seems

The Russian economy is increasingly fragile as a result of its crossing military rails and sanctions imposed on it for the war in Ukraine. This is said in a report from the Stockholm Institute of Transition Economics (Site).

The report prepared for EU financial ministers states that, although still relatively stable, the Russian economy is only superficially resilient and that the main imbalances and structural weaknesses are increasing.

The EU has introduced 16 packets of sanctions against Russia since the beginning of the war aimed at the main sources of Moscow’s revenue – oil exports, gas and coal. Other Western powers, including the United States, Canada, the United Kingdom and Japan, have also imposed sanctions.

Do the sanctions work

Desiring to show that Western sanctions are pointless, Russia claims that its gross domestic product increased by 4.3% in 2024 after a 3.6% increase in 2023.

Reuters

But Torbörn Becker, who presented the Site report to EU financial ministers, said that Russian GDP data could not be trusted because Moscow was most likely to underestimate inflation, which affects real GDP calculations.

« This is a very clear indicator that inflation can actually be undervalued, and if the undervalued inflation, you will overestimate the real GDP data, » he explained.

Prediction of crisis

He also indicated Russia’s budget restrictions caused by declining revenue from oil, gas and coal and increasing military spending. Since the beginning of the invasion and despite its military efforts, Russia has reported a budget deficit of 2% of GDP each year.

According to him, much of the financing of the military machine goes through the banking system. « So if you add this to the fiscal numbers, their fiscal deficits would be approximately twice as high as what they show in official statistics, » he said.

This, in turn, accumulates financial risks in the banking system, Becker said because banks report high growth of lending.

« These are all indicators we usually look at when we predict the banking crisis, » Becker noted.

European Economic Commissioner Valdis Dombrovskis said the European Commission agreed with the Site report.

« The Commission generally agrees with this analysis and the growing fragility of the Russian economy as a whole.