The Russian Economy: How War Impacts the Nation's Economy

In recent years, Russia's economic situation has become a subject of extensive discussion and analytical study, as the country not only undergoes internal transformations but also faces external challenges related to the ongoing conflict with Ukraine. This article pays special attention to how the war affects key aspects of the Russian economy, including mortgage lending, the exchange rate of the ruble, inflation, but also considers a broader range of economic indicators and trends.

Mortgage Lending

Changes in Mortgage Rates: In the context of increased military spending and the need to finance budget deficits, the Bank of Russia was forced to raise the key rate to a level that, at the time of writing, stands at 16%. This has reflected in mortgage rates, which have reached 30-35%, making home purchases significantly more expensive for citizens.

Impact on the Real Estate Market: High mortgage rates led to a decrease in housing demand, exerting pressure on property prices. However, on the other hand, limited investment opportunities in other assets have led to real estate remaining one of the few instruments for capital preservation, creating certain paradoxical effects in the market.

Ruble Exchange Rate

Volatility and Sanctions: The ruble's exchange rate experienced significant pressure due to the imposition of new sanctions, which limit Russian companies' capabilities in international markets, as well as due to decreased income from energy exports. In 2024, the ruble saw sharp fluctuations, reaching lows against the dollar and the euro.

Measures to Control the Exchange Rate: The government introduced measures obligating exporters to convert foreign currency earnings and sell them on the domestic market, which temporarily stabilized the exchange rate. However, these measures do not eliminate the fundamental reasons for the ruble's weakening, such as the decreased trust in the Russian currency and economy as a whole.

Inflation

Price Increase: Inflation in Russia in 2024 reached double-digit figures, as a result of both military spending and sanctions that restrict imports and increase production costs.

Causes of Inflation:

Military Expenditures: The increase in military orders and expenditures stimulates some sectors of the economy but also increases the money supply, which can lead to inflationary pressure.

Logistical Difficulties: Sanctions have created logistical problems, increasing the cost of transporting goods.

Labor Shortage: Mobilization and the emigration of skilled workers have led to a labor shortage, causing an increase in wages and consequently, prices for goods and services.

Broad Economic Context

Economic Growth and Structure: The war and associated sanctions forced Russia to redistribute resources, impacting the structure of the economy. Military orders led to increased production in the defense industry, however, many civil sectors suffer from a lack of investment and skilled personnel.

State Regulation: Russia's economy is increasingly shifting towards a model with enhanced state intervention. This includes not only direct funding for military needs but also support for key industries through state orders and subsidies.

Budget and State Debt: The war has increased the budget deficit, requiring the government to seek new revenue sources, including tax rises, cutting non-priority expenditures, and incurring state debt, which, despite current stability, could become problematic in the future.

Economic Isolation: The imposed sanctions have contributed to Russia's economic isolation, limiting access to technology, financial markets, and international credit, potentially hindering innovative development and industrial modernization.

Social Consequences: Rising prices, decreased purchasing power, and increased social inequality have been the consequences of economic changes. The government responds by increasing social benefits and support programs, which, however, also contribute to inflation.

International Economic Ties: In search of new markets and partners, Russia has intensified cooperation with China, BRICS countries, and others, trying to diversify economic ties and reduce dependence on Western economies.

Long-term Prospects: Economists warn of the risk of stagflation - a situation where high inflation is combined with economic stagnation. This could lead to a decline in living standards, reduced investment, and increased social tension.

Thus, the war exerts a complex and profound impact on the Russian economy, affecting all areas from finance to the social sphere, necessitating new approaches in economic management and adaptation to the new realities of the global economic landscape.