The meaning of Russia’s spending boom

When the war in Ukraine broke out, the western imperialists were confident they would rapidly snuff out the Russians. Supplied with weapons and intelligence from NATO and choked by economic sanctions, they reasoned, the Russian army would crumble, possibly bringing down the Putin regime.

The opposite happened, in fact. The military situation is becoming increasingly gloomy for the Ukrainian army. More remarkably, however, western sanctions failed spectacularly. Not only has the Russian economy not capsized, it is booming.

Circumventing the sanctions

At the beginning of the war, western commentators foretold the collapse of the Russian economy, which would be reduced to the status of North Korea. Now, citing Russian sources, an article in the Financial Times reports that real wages in Russia have grown by almost 14 percent and the consumption of goods and services by around 25 percent.

A further bump in real wages of up to 3.5 percent is expected this year, alongside an expected 3 percent jump in real disposable income. In turn, the unemployment rate is at 2.6 percent, a record post-Soviet low. 

And this prosperity is being felt across society. The Financial Times gives the example of weavers who earned $250-350 a month in December 2021 who can now earn as much as $1,400 a month. What is the secret to this growth?

Russia has been able to compensate for the loss of its western trading partners through new alliances with countries such as Turkey, India, Brazil, Indonesia, North Korea, and, most importantly, China. It continues to import western goods through third-party countries such as Kazakhstan and Turkey, while China’s colossal export machine has filled the gap left by the West. At the same time, oligarchs targeted by sanctions have repatriated their wealth back to Russia, hiking demand for luxury goods and internal tourism.

Moreover, from one day to the next, Russian capitalists found themselves without western competition. They often bought up American and European subsidiaries for a pittance. Rostic, for instance, inherited the fast-food chain KFC. It now plans to open 100 new stores this year.

Russia’s exports, in turn, remain robust, especially in key sectors such as energy and fertilisers. Higher energy prices after the start of the war increased its overall income. It continued to export oil and gas to Europe, often indirectly, through countries such as India. Russian crude accounted for 43 percent of India’s oil imports in June, making it the second-biggest buyer after China. This has come at the expense of the dollar and the euro, as Russia and its partners promote domestic payment systems based on the rupee, the rouble, or the yuan.

Europeans taking the hit

Europeans took the hit for the hike in prices. In fact, sanctions have boomeranged against Europe. Severed from its traditional energy provider, inflation in Europe went through the roof. Its commodities have become more expensive, to the benefit of Chinese, US, and, indeed, Russian competitors.

For instance, the slowdown in cheap Russian gas imports to Europe drove up the cost of fertiliser production. But Russia continued to use its gas to produce, and export, cheap nitrogen-based fertiliser to Europe, which has driven many European producers to the verge of bankruptcy. This has serious consequences for European agriculture. The European imperialists not only face military defeat in Ukraine; the war has also accelerated their economic decline.  

Military industry

There is, however, an internal explanation for the uncanny boom of the Russian economy, which is the regime’s unprecedented increase in military spending that is tugging the rest of the economy forwards.

Compared with 2021, budget expenditures have increased by 20 percent, according to the Financial Times. Hundreds of thousands are employed in Russia’s expanding military industry, with similar numbers recruited as contract soldiers earning over 2,000 dollars per month. 

Russian military spending has important political repercussions / Image: Володимир Зеленський, Twitter

This is indirectly propping up the economy, creating labour shortages and driving up wages. Yet unlike traditional Keynesianism, which called for the government to “pay people to dig holes in the ground and then fill them up”, this state-driven growth is based on the production of deadly weapons for the Ukrainian front, and thus, as the Financial Times notes, can keep on going for some time as the war continues.

Russian military spending has important political repercussions. It cements popular support, or at least tolerance, for the Bonapartist Putin regime. Thanks to the West’s aggressive stance, Putin was able to rally the nation behind himself as the crusader against NATO imperialism (conveniently concealing the reactionary nature of the Putin regime itself).

This struck a chord with many ordinary Russians, who might not be enthusiastic about the corrupt regime of Putin and his cronies, but who detest western imperialism. The regime’s ability to stave off economic crisis (for the time being) further solidified its base of support.

In truth, both pillars of support – the crusade against the West and military  Keynesianism – are shaky. Putin can win a victory in Ukraine, but only the conquest of power by the Russian workers, who would arouse the sympathy and solidarity of the European and the American working class, can deliver a decisive blow against NATO. At some point, Putin and the western imperialists will try to come to some sort of temporary agreement, especially if Trump returns to the White House. 

In turn, the boom in military spending will turn into its opposite once the war comes to an end, which will happen sooner or later. The end of the war effort will generate big imbalances in the Russian economy. In reality, these imbalances are already being felt. While formally the economy is booming, non-military public expenditure has declined, with many public services crumbling, while the war has created new regional inequalities.

In any case, this peculiar Keynesianism cannot go on indefinitely, as the Financial Times observes. These measures will eventually overheat the Russian economy, provoking inflation, for this boom is not sustained by productive investment, but rather investment in the production of shells and cannons – in effect, expensive scrap metal.

Ultimately, this will have consequences for the class struggle in Russia, but this will take some time. While the European and American bourgeoisie predicted an impending revolution against Putin in February 2022, their madcap policies have created a situation where the big social explosions will start in the West.