ANALYSIS-Putin grows war economy but incomes suffer 'lost decade'

Putin said AI would be a key driver of productivity, but did not give any new numerical target. Since 2012, Russia has striven to increase capital investment to 25% of GDP, with Putin repeating that goal in 2018.

When President Vladimir Putin ran for re-election in 2018, he promised a "decisive breakthrough" in living standards. Six years later, as Russians go to the polls again, he is recycling old promises with new deadlines.

In a major speech last month, Putin pledged more than 11.5 trillion roubles ($125 billion) of spending on areas ranging from mortgage subsidies and tax breaks for young parents to sweeping upgrades to public infrastructure. He played up the fact that Russia's economy expanded faster last year - with 3.6% growth in GDP - than any of the Group of Seven nations that have hit Moscow with waves of sanctions over its invasion of Ukraine.

But other data paint a gloomier picture. Russia's war-focused economy, where arms factories are working in three shifts round the clock, is faced with labour shortages, population decline and low productivity and investment. The breakthrough in living standards has not materialised. Real incomes have risen 7.6% since Putin made his 2018 promise but are still fractionally lower than they were in 2013.

"With regard to our income, 2014-2023 can safely be called a lost decade," wrote Yevgeny Suvorov, an economist at CentroCreditBank. In a February survey commissioned by the central bank, 28% of people said they don't have enough money for food or they can buy food but can't afford clothes and shoes.

Inflation has accelerated well above the central bank's 4% target in recent years - hitting 8.4% in 2021, 11.9% in 2022 and 7.4% in 2023 - and interest rates are at 16%. Soaring prices for eggs forced Putin into a rare apology in December. State statistics service Rosstat, in its releases this year, has started saying that prices "changed" rather than "rose".

BUDGET STRAINS The cost of the war is straining the state budget, where a third of spending is now going on defence, and has forced the government to drain almost 6.5 trillion roubles in the past two years from its rainy-day savings pot, the National Welfare Fund.

In the past two weeks Putin has signalled that taxes on companies and wealthier individuals will rise, even though his finance minister said as recently as October that basic taxes would not change for the next three years. A senior lawmaker, Anatoly Aksakov, said on Thursday that income taxes might rise to 17% and 20% for people earning over 5 million and 10 million roubles respectively, compared with a current top rate of 15%.

The promises outlined by Putin in his Feb. 29 state of the nation speech will cost up to around 2 trillion roubles a year. But in several key areas he pushed back the dates for meeting previous targets or omitted to mention past pledges that have not been met.

"All the new stuff is well-forgotten old stuff," said Dmitry Polevoy, investments director at Astra Asset Management. For example, the number of Russians living below the poverty line of 14,339 roubles ($156.57) per month in 2023 dropped to 9.3% from 12.9% at the end of 2017 - a reduction that fell far short of Putin's 2018 pledge to halve the poverty rate. Last month he set a new target of 7% by 2030.

Economists say key drivers of a fall in poverty last year were higher wages - a reflection of labour shortages - together with increased benefits for families with children, higher salaries to attract contract soldiers, and compensation payments to the families of those killed and wounded in Ukraine. They said wages grew fastest in parts of the country with high concentrations of defence industry work.

Putin said a shortage of workers was one of the main risks facing the economy, but did not set specific targets. Hundreds of thousands of people have fled the country or been called up to fight in Ukraine since the war began. Having set a target in 2018 to raise life expectancy to 78 by 2024, Putin reset the deadline two years later to 2030. Last month he repeated that goal, although Rosstat says average life expectancy was 73.1 years at the end of 2023 and is only expected to reach 78 in 2037.

Another unmet target is labour productivity, which Putin said in 2018 needed to grow by at least 5% each year in the core sectors of industry, construction, transport, agriculture and trade. Rosstat's measure of labour productivity dropped by 3.6% in 2022, the first year of the war, and data for 2023 will not be published until the end of this year. Putin said AI would be a key driver of productivity, but did not give any new numerical target.

Since 2012, Russia has striven to increase capital investment to 25% of GDP, with Putin repeating that goal in 2018. But capital investment dropped to 19.7% of GDP in 2022 from 21.4% in 2017. Putin did not mention the 25% target this time around. In his speech, he also ordered an increase of at least two-thirds in the volume of Russian non-energy exports such as food, metals, fertilisers, machinery and equipment.

Back in 2018, he had said these exports should double to $250 billion by 2024. If his latest target is achieved, they would reach $243.5 billion by 2030. Putin said Russia's economy, now number five in the world by purchasing power parity, would soon move into the top four. But Polevoy said that ranked by GDP per capita - a more relevant measure of living standards - Russia was not far above the median of all countries.

"There's likely to be a growing tension in the coming years between President Putin's twin goals of military success in Ukraine and achieving macroeconomic stability at home," Capital Economics said in a report, with Russia's loose fiscal stance to support the war causing the economy to overheat. "The economy can withstand a long war, but not necessarily a more intense one." ($1 = 91.5800 roubles)

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