According to preliminary estimates, Russia had higher GDP growth last year than any of the seven most advanced countries in the world, known as the G7. As INESS analyst Martin Vlachynský says, GDP growth measures with money how much more the economy produced goods and services compared to last year.
Russian President Vladimir Putin
It does not tell us what the goods and services are. It can be cars, shoes and healthcare, but also tanks, drones and defense services. “Every shell fired, every soldier recruited contributes to the GDP. Even a completely meaningless activity can generate GDP growth, such as when the state pays builders to dig and rebury a pit. Here we know it under the name Rázsochy hospital,” states Vlachynský.
According to him, this is exactly what happens in war economies. War is a fiscal stimulus, when the state creates a large demand for weapons and soldiers. This can also be seen in the data. According to the analyst, Russia directly spends a third of its budget on war, and indirectly through subsidies to industry a little more. “However, such expenses are only consumption, the sustainability of which depends on the state’s ability to finance such consumption. It is not growth that begets more growth. Such growth requires capital investments, not consumption,” says Vlachynský. According to him, GDP growth does not tell us anything about the state of capital in the country. It won’t show us destroyed houses, pipelines, or refineries. It will not show us the “consumed” stockpile of weapons that have been accumulating in warehouses for the past 70 years.
Vlachynský illustrated it with a few examples. The burning Russian refinery will show up in the national accounts on the one hand as a minus item, because there was a drop in GDP due to interrupted production, on the other hand, as a plus item, because GDP increased due to the repair of the refinery. The result can be either an increase or a decrease in GDP. A destroyed Ukrainian block of flats represents an increase in GDP for the disposal of debris, but no decrease, because the national accounts do not capture the interruption of the “production” of housing services in that block of flats. According to Vlachynský, the destroyed, unapproved Nord Stream pipe means neither an increase in GDP, because it is not being repaired, nor a decrease in GDP, because it has not yet produced anything.
Thus, according to the analyst, Russia experienced an outflow of foreign capital and know-how, lost important markets, especially in the energy sector, and redirected a large part of resources to the production and import of military equipment, which in turn ends in intended and unintended explosions. “Such a cocktail cannot achieve anything other than long-term poisoning of the economy. The economy of Europe is currently 12 times larger than the economy of Russia. Without much effort, he can counter economically,” says the analyst.
At the same time, according to him, it is true that such poisoning will have a slow and long-term effect. It will affect the ability to produce weapons and maintain an army in the form of a lower quantity and quality of weapons, which may be useful in terms of Europe’s ability to defend itself in a potential future conflict, but it will certainly not be a decisive effect for the ability to wage a current or future war. “After all, the related Iran has been living in economic misery for 50 years, because the current GDP per capita there is the same as it was in the late 1980s. But it didn’t take away from his war ambitions,” concluded Vlachynský.