A third of Russia’s economic growth in 2023 could be provided by the defense industry

Current estimates from Rosstat suggest that in January-September 2023 the economy grew above expectations – by 3%, and not by 2.9%, as the department previously believed. Statisticians published data on GDP production in the third quarter, and analysts estimated that about a third of its growth was provided by the military-industrial complex and related industries, but this growth model is unsustainable and may carry risks of a rapid slowdown.

Data published by Rosstat on GDP growth for three quarters by 3% turned out to be higher than previous estimates, which raised questions from analysts about the sources of such dynamics. According to Dmitry Polevoy from Astra Asset Management JSC, the hospitality industry (plus 18%), construction (13%), public administration and military security grew faster in the Russian Federation than in the fourth quarter of 2021, before the start of the Russian military operation in Ukraine (7%), agro-industrial complex, finance and insurance (5.5–6%) and processing (3.7%), “where it was possible to substitute imports or where budget money flows went.” The expert estimates GDP growth in the third quarter compared to the second, taking into account seasonality, at 0.89% versus 0.93% in the previous period. Within this growth, commodity sectors (agribusiness, industry and construction) slowed down from 1.8% to 0.84% ​​amid acceleration in services (1.33% versus 0.9%) and the public sector (0.9% versus 0. 5%). Analysts of the Telegram channel “Hard Figures” record that the main contribution (about a third) to the quarterly GDP growth, taking into account seasonality, in the third quarter was provided by processing (after that – net taxes and finance), where output grows faster than potential. In a fresh analytical note on the dynamics of the Russian economy (it became the object of regular monitoring by the regulator after the start of the Russian military operation in Ukraine), experts from the Central Bank of Finland, relying on official figures from Rosstat, also record a trend previously noted by TsMAKP analysts (see “Kommersant”, for example, from December 29, 2022, February 1 or October 25)—a significant contribution of the military-industrial complex and related industries to accelerating the economic growth of the Russian Federation.

The authors warn that the statistics department data does not allow an accurate assessment of the shares of military products in industries, but note the presence in the economy of processing sub-sectors that are “most likely associated” with the military-industrial complex and demonstrating the fastest growth: for example, the production of computers, electronics, optics, batteries, as well as “other” metalworking and transport equipment by the third quarter of 2023 increased by one and a half to two times in comparison with the third quarter of peaceful 2021, and their dynamics significantly diverged from industries that do not allow one to assume that they included military production (see graph).

High growth rates are also observed in the agricultural-oriented production of agrochemicals with its records and in the mining of coal, but the production of “civilian” products requiring complex technological processing is stagnating, like woodworking, or falling, like the production of the automobile industry and auto parts (minus 30% year on year) and consumer electronics (minus 24%). As a result, the military-industrial complex and related industries in the third quarter added about 50% of total growth to industrial production and provided about a third of the growth of the Russian Federation’s GDP, but a significant part of this production is immediately destroyed due to its specifics, and further growth of the sector is limited by a personnel shortage that outpaces the growth of wages and salaries. technological restrictions, which will ultimately cause output to plateau and return the Russian Federation’s GDP growth rate closer to the potential 1.5-2% per year. The assessment, we note, is shared by both “unfriendly” and “friendly” analysts.

Oleg Sapozhkov