Tag: General government gross debt

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The Russian economy after four years of war

At the fourth anniversary of Russia’s invasion of Ukraine, we look at the effect of the war on the Russian economy. Two years ago, in the blog The Russian economy after two years of war, we argued that the Russian economy had seemingly weathered the war successfully.

Unlike Ukraine, very little of its infrastructure had been destroyed; it had started the war with a current account balance of payments surplus, a budget surplus and a low general government debt-to-GDP ratio; it had achieved a lot of success in diverting its exports, including oil, away from countries imposing sanctions to countries such as China and India; it was the same with imports, with China especially becoming a major suppliers of machinery, components and vehicles; it has a strong central bank, which engenders a high level of confidence in managing inflation; the military expenditure provided a Keynesian boost to the economy, with production and employment rising.

The situation today

But two years further on, the Russian economy is looking a lot weaker and on the verge of recession. GDP growth fell to 0.6 per cent in 2025 and is forecast to be no more than 1 per cent for the next two years. (Click here for a PowerPoint of the chart.) And despite growth still being positive (just), this is largely because of the growth in military expenditure. Retail and wholesale trade fell by 1.1% in 2025, reflecting supply chain problems and high inflation dampening consumer demand.

With labour being diverted into the armaments and allied industries or into the armed forces, this has led to labour shortages. This has been compounded by the emigration of up to 1 million people by 2025 – often young, educated and skilled professionals.

Official CPI inflation averaged 8.7 per cent in 2025, although the prices of food and other consumer essentials rose by more, especially in recent months. At the beginning of 2026, supermarket prices rose by 2.3% in just one month, made worse by a rise in VAT from 20% to 22%. The central bank has responded to the high inflation with high interest rates, which averaged 19.2% in 2025, giving a real rate of 10.5%. With such a high real rate, the response of households has been to save. This has masked the constraints on production, or imports, of consumer goods. Savings have also been boosted by large payments to soldiers and bereaved families, with the money saved by the recipients being used in part to fund future such payments. So far there has been trust in the banking system, but if that trust waned and people starting making large withdrawals of savings, it could be seriously destabilising.

Whilst the high real interest rates have helped to mask shortages of consumer goods, they have had a seriously dampening effect on investment by domestic companies. Gross capital formation fell by 3% in 2025, not helped by an increase in the corporation tax from 20% to 25%. At the same time, foreign direct investment remains subdued due to high perceived risks. The lack of investment, plus the labour shortages, will have profound effects on the supply side of the economy, with potential output in the non-military sector likely to decline over the medium term.

The balance of payments and government finances are turning less favourable. The balance of trade surplus has declined from US$173bn in 2021 to US$67bn in 2025. This could decline further, or even become a deficit, if oil prices continue to be weak, if Western sanctions are tightened (such as stopping the flow of Russian oil exports in the ‘shadow’ fleet of tankers) or if major importing countries stop buying Russian oil. Indian refiners have announced that they are not taking Russian crude in March/April as India seeks to finalise a trade deal with the USA.

The budget balance has moved from a small surplus of 0.8% of GDP in 2021 to a deficit of 2.9% in 2025. Although the government debt-to-GDP ratio remains low by international standards at 23.1% of GDP in 2025, this was up from 16.5% in 2021 and is set to rise further as budget deficits deepen. Nevertheless, as long as the saving rate remains high, the debt can be serviced by domestic bond purchase.

Russia’s economy is definitely weakening and labour shortages and low investment will create major problems for the future. But whether this deterioration will be enough to change Russia’s stance on the war in Ukraine remains to be seen.

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Questions

  1. What constraints are there currently on the supply side of the Russian economy?
  2. Some economists have argued that the economic effects of a stalemate in the Ukraine war would suit the Russian leadership more than peace or victory. Why might this be so?
  3. Under what circumstances might a deep recession in Russia be more likely than stagnation?
  4. In what ways does Russia’s current financial system resemble a pyramid scheme?
  5. What cannot a Keynesian boost contunue to support the Russian economy indefinitely?
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The Russian economy after two years of war

It’s two years since Russia invaded Ukraine. Western countries responded by imposing large-scale sanctions. These targeted a range of businesses, banks and other financial institutions, payments systems and Russian exports and imports. Some $1 trillion of Russian assets were frozen. Many Western businesses withdrew from Russia or cut off commercial ties. In addition, oil and gas imports from Russia have been banned by most developed countries and some developing countries, and a price cap of $60 per barrel has been imposed on Russian oil. What is more, sanctions have been progressively tightened over the past two years. For example, on the second anniversary of the invasion, President Biden announced more than 500 new sanctions against individuals and companies involved in military production and supply chains and in financing Russia’s war effort.

The economy in Russia has also been affected by large-scale emigration of skilled workers, the diversion of workers to the armed forces and the diversion of capital and workers to the armaments industry.

So has the economy of Russia been badly affected by sanctions and these other factors? The IMF in its World Economic Forecast of April 2022 predicted that the Russian economy would experience a steep, two-year recession. But, the Russian economy has fared much better than first predicted and the steep recession never materialised.

In this blog we look at Russia’s economic performance. First, we examine why the Russian economy seems stronger today than forecast two years ago. Then we look at its economic weaknesses directly attributable to the war.

Apparent resilience of the Russian economy

GDP forecasts have proved wrong. In April 2022, just after the start of the war, the IMF was forecasting that the Russian economy would decline by 8.5% in 2022 and by 2.3% in 2023 and grow by just 1.5% in 2024. In practice, the economy declined by only 1.2% in 2022 and grew by 3.0% in 2023. It is forecast by the IMF to grow by 2.6% in 2024. This is illustrated in the chart (click here for a PowerPoint).

Similarly, inflation forecasts have proved wrong. In April 2022, Russian consumer price inflation was forecast to be 21.3% in 2022 and 14.3% in 2023. In practice, inflation was 13.8% in 2022 and 7.4% in 2023. What is more, consumer spending in Russia has remained buoyant. In 2023, retail sales rose by 10.2% in nominal terms – a real rise of 2.8%. Wage growth has been strong and unemployment has remained low, falling from just over 4% in February 2022 to just under 3% today.

So why has the Russian economy seemingly weathered the war so successfully?

The first reason is that, unlike Ukraine, very little of its infrastructure has been destroyed. Even though it has lost a lot of its military capital, including 1120 main battle tanks and some 2000 other armoured vehicles, virtually all of its production capacity remains intact. What is more, military production is replacing much of the destroyed vehicles and equipment.

The second is that its economy started the war in a strong position economically. In 2021, it had a surplus on the current account of its balance of payments of 6.7% of GDP, reflecting large revenues from oil, gas and mineral exports. This compares with a G7 average deficit of 0.7%. It had fiscal surplus (net general government lending) of 0.8% of GDP. The G7 countries had an average deficit of 9.1% of GDP. Its gross general government debt was 16% of GDP. The G7’s was an average of 134%. This put Russia in a position to finance the war and gave it a considerable buffer against economic sanctions.

The third reason is that Russia has been effective in switching the destinations of exports and sources of imports. Trade with the West, Japan and South Korea has declined, but trade with China and various neutral countries, such as India have rapidly increased. Take the case of oil: in 2021, Russia exported 4.4 billion barrels of oil per day to the USA, the EU, the UK, Japan and South Korea. By 2023, this had fallen to just 0.6 billion barrels. By contrast, in 2021, it exported 1.9 billion barrels per day to China, India and Turkey. By 2023, this had risen to 4.9 billion. Although exports of natural gas have fallen by around 42% since 2021, Russian oil exports have remained much the same at around 7.4 million barrels per day (until a voluntary cut of 0.5 billion barrels per day in 2024 Q1 as part of an OPEC+ agreement to prop up the price of oil).

China is now a major supplier to Russia of components (some with military uses), commercial vehicles and consumer products (such as cars and electrical goods). Total trade with China (both imports and exports) was worth $147 billion in 2021. By 2023, this had risen to $240 billion.

The use of both the Chinese yuan and the Russian rouble (or ruble) has risen dramatically as a means of payment for Russian imports. Their share has risen from around 5% in 2021 (mainly roubles) to nearly 75% in 2023 (just over 37% in each currency). Switching trade and payment methods has helped Russia to circumvent many of the sanctions.

The fourth reason is that Russia has a strong and effective central bank. It has successfully used interest rates to control inflation, which is expected to fall from 7.4% in 2023 to under 5% this year and then to its target of 4% in subsequent years. The central bank policy rate was raised from 8.5% to 20% in February 2022. It then fell in steps to 7.5% in September 2022, where it remained until August 2023. It was then raised in steps to peak at 16% in December 2023, where it remains. There is a high level of confidence that the Russian central bank will succeed in bringing inflation back to target.

The fifth reason is that the war has provided a Keynesian stimulus to the economy. Military expenditure has doubled as a share of GDP – from 3.7% of GDP in 2021 to 7.5% in 2024. It now accounts for around 40% of government expenditure. The boost that this has given to production and employment has helped achieve the 3% growth rate in 2023, despite the dampening effect of a tight monetary policy.

Longer-term weaknesses

Despite the apparent resilience of the economy, there are serious weaknesses that are likely to have serious long-term effects.

There has been a huge decline in the labour supply as many skilled and professional workers have move abroad to escape the draft and as many people have been killed in battle. The shortage of workers has led to a rise in wages. This has been accompanied by a decline in labour productivity, which is estimated to have been around 3.6% in 2023.

Higher wages and lower productivity is putting a squeeze on firms’ profits. This is being exacerbated by higher taxes on firms to help fund the war. Lower profit reduces investment and is likely to have further detrimental effects on labour productivity.

Although Russia has managed to circumvent many of the sanctions, they have still had a significant effect on the supply of goods and components from the West. As sanctions are tightened further, so this is likely to have a direct effect on production and living standards. Although GDP is growing, non-military production is declining.

The public finances at the start of the war, as we saw above, were strong. But the war effort has turned a budget surplus of 0.8% of GDP in 2021 to a deficit of 3.7% in 2023 – a deficit that will be difficult to fund with limited access to foreign finance and with domestic interest rates at 16%. As public expenditure on the military has increased, civilian expenditure has decreased. Benefits and expenditure on infrastructure are being squeezed. For example, public utilities and apartment blocks are deteriorating badly. This has a direct on living standards.

In terms of exports, although by diverting oil exports to China, India and other neutral countries Russia has manage to maintain the volume of its oil exports, revenue from them is declining. Oil prices have fallen from a peak of $125 per barrel in June 2022 to around $80 today. Production from the Arabian Gulf is likely to increase over the coming months, which will further depress oil prices.

Conclusions

With the war sustaining the Russian economy, it would be a problem for Russia if the war ended. If Russia won by taking more territory in Ukraine and forcing Ukraine to accept Russia’s terms for peace, the cost to Russia of rebuilding the occupied territories would be huge. If Russia lost territory and negotiated a settlement on Ukraine’s terms, the political cost would be huge, with a disillusioned Russian people facing reduced living standards that could lead to the overthrow of Putin. As The Conversation article linked below states:

A protracted stalemate might be the only solution for Russia to avoid total economic collapse. Having transformed the little industry it had to focus on the war effort, and with a labour shortage problem worsened by hundreds of thousands of war casualties and a massive brain drain, the country would struggle to find a new direction.

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Questions

  1. Argue the case for and against including military production in GDP.
  2. How successful has the freezing of Russian assets been?
  3. How could Western sanctions against Russia be made more effective?
  4. What are the dangers to Western economies of further tightening financial sanctions against Russia?
  5. Would it be a desirable policy for a Western economy to divert large amounts of resources to building public infrastructure?
  6. Has the Ukraine war hastened the rise of the Chinese yuan as a reserve currency?
  7. How would you summarise Russia’s current public finances?
  8. How would you set about estimating the cost to Russia of its war with Ukraine?
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Getting to grips with government deficits and debt: How does the UK compare?

The issue of the state of the public finances has dominated much economic-thinking in 2010. This is not just a UK issue, it is a global issue; deteriorating public finances have led to governments around the world making some often very difficult fiscal policy choices. For instance, here in the UK we are continuing to debate the issues arising from the Comprehensive Spending Review which presents the government’s spending plans for the next few financial years. Over in Ireland concerns have resurfaced about the ability of the Irish to finance its burgeoning stock of public debt (see articles below). The fragility of the Irish banking system has meant that interventions by government have been needed to support financial institutions which, some estimate, will see net borrowing by the Irish government this year rise to the equivalent of over 30% of Ireland’s Gross Domestic Product.

The International Monetary Fund’s World Economic Outlook Database is a rich source of information for anybody looking to make international comparisons of public finances. Being able to extract key messages from data and to make economic sense of them is a crucial skill for an economist. But, in doing so it is important that we have an understanding of some of the terms being used by those presenting the data. In this case, to help you undertake your own study of the size of government expenditures, revenues, deficits and debt for countries around the world, we provide a short overview of some of the terms relevant to understanding public finances and illustrate them with reference to a sample of countries.

The IMF’s public finance figures relate not to the whole of the public sector but to general government and thereby exclude public corporations. The general government’s budget balance is presented in both national currency and relative to its Gross Domestic Product. The latter is very useful when making comparisons across countries. A negative figure indicates net borrowing, i.e. expenditures exceed receipts, while a positive figure means that government is a net lender, i.e. receipts exceed expenditures. Forecasts are available for 2010, but, naturally, can be rather unreliable, given that the fluidity of economic events means that they are subject to sizeable revision – Ireland being a case in point.

If we look at the period from 1995–2009 as a whole, the UK was a net borrower with a deficit equivalent to around 2¾ of GDP. Ireland, in contrast, averaged close to a balanced budget with some sizeable surpluses, such as in 2006 when it ran a budget surplus equivalent to 5.2% of GDP. Some countries, such as Australia (0.5% of GDP), averaged budget surpluses over this period. But, the UK’s deficit was not especially large by international standards. From 1995–1999, the USA ran a deficit equivalent to 4.5% of GDP, Greece 5.7% of GDP and in Japan, where several fiscal stimuli have been attempted to reinvigorate the economy, 5.9% of GDP. Nonetheless, the UK’s predicted deficit for 2010 of in excess of 10% of GDP does place it towards the higher end of the deficit-scale, though by no means at the very top!

Another budget balance measure is the structural balance. This attempts to model government expenditures and receipts so as to be able to predict what the budget balance would be if the economy was at its potential output, i.e. that output level when the economy’s resources are being used at normal levels of capacity utilisation. At the moment, for instance, many countries are experiencing a negative output gap, with output below its potential. This puts upward pressure on expenditures, largely welfare expenditures, but also depresses receipts, such as those from taxes on income or spending. The UK is estimated to have run a structural budget deficit equivalent to 2.6% of potential GDP from 1995–2009. With the fiscal measures to support the economy this is forecast to be as high as 7.9% in 2010. Japan is estimated to have run a structural deficit over the period from 1995–2009 equivalent to 5.4% of potential GDP, while in Greece it is estimated at 6.1%.

Another commonly referred to budget balance measure is the primary balance. The primary balance excludes any interest received on financial assets held by government, and, more significantly, interest payments made by the government on its stock of debt. This measure gives us a sense of whether governments are able to afford today’s spending programmes. The UK ran a primary deficit between 1995 and 2009 equivalent to 1% of GDP, while in America and Japan respectively the primary deficit averaged 2.6% and 4.8% of GDP. Interestingly, because of the size of debt stocks in many countries the exclusion of interest makes a notable difference to this fiscal indicator. For instance, Greece typically ran a primary surplus equivalent to 0.9% of GDP.

Budget balances are flows, whereas debt is a stock concept. In other words, budget deficits and surpluses can add to or reduce the stock of debt. Figures are available both on gross debt and net debt. The latter is net of financial assets, including gold and currency reserves. The UK’s average stock of gross debt to GDP between 1995 and 2009 was 45.2% of GDP, but this has risen to over 75% in 2010. In fact, by international standards our public-debt to GDP ratio remains favourable. In Greece, gross public-debt to GDP is predicted to be around 130% of GDP this year, but as high as 225% in Japan.

Finally, consider an interesting case: Sweden. By international standards its public expenditure to GDP share is high, averaging 54% between 1995 and 2009. But, it ‘balances the books’ with a small average budget surplus of 0.2% of GDP and a primary surplus of 0.8% of GDP. Its stock of debt has been falling even in recent times and stands at only a little over 40% of GDP. In 2010, despite the prediction of a small overall budget deficit of 2.2% of GDP, it will continue to run a structural surplus of 0.4% of potential GDP. Hence, Sweden demonstrates nicely the danger of assuming that, in some way, public expenditure necessarily translates into government deficits and, in turn, stocks of public debt.

IMF World Economic Outlook Database
World Economic Outlook Database International Monetary Fund

Articles

Ireland warns jump in borrowing costs very serious Telegraph (12/11/10)
Ireland’s cost of borrowing soars after dramatic sell-off Telegraph, James Hall, (11/11/10)
Imperative Budget is passed – Lenihan RTE News (12/11/10)
Lenihan welcomes EU move to calm markets RTE News (12/11/10)
Irish crisis demands new EU response Financial Times , Mohamed El-Erian (12/11/10)
Britain backs EU rescue missions for debt-ridden Ireland Guardian , Phillip Inman and Patrick Wintour (12/11/10)

Questions

  1. The IMF’s figures relate to general government. What do you understand by the term general government and how does this differ from the public sector?
  2. What does net borrowing indicate about the government’s budget balance? What if it was described as a net lender?
  3. What do you understand by the term structural budget balance? How is this concept related to the business cycle?
  4. What is measured by the primary balance? Would you expect this to be higher or lower than its budget balance? Explain your answer.
  5. How does gross debt differ from net debt?
  6. What factors do you think affect investor confidence in buying government debt?
  7. Japan’s stock of gross debt is about 225% of GDP while that in Greece is 130%. Does this mean that Japan should have greater problems in financing its debt? Explain your answer.