‘Structural transformation’ A new study reveals the winners and losers of Russia’s wartime economy
Russia’s economy has changed dramatically over the last three years. Much has been written about the country’s wartime growth and its impact on ordinary people, but a new report from the Russian rating agency ACRA breaks it down in a new way, identifying which sectors have expanded or contracted. The study finds that public administration, construction, and military production have surged, while the healthcare and retail industries have suffered. Meduza shares a translation of Radio Svoboda’s summary of the report.
Earlier this month, Russia’s largest credit rating agency, ACRA, published a new study titled “Structural Changes in the Russian Economy in 2022–2024.” Taking the fourth quarter of 2021 as its baseline, the report provides a clear illustration of the process set in motion by Moscow’s full-scale invasion of Ukraine and the international sanctions that followed — what the Kremlin and the Bank of Russia refer to as “structural transformation.”
Which sectors have grown? 📈
The biggest increase — 18.5 percent — was in the public administration sector, which began expanding in the first quarter of 2022 and has continued to grow, with the pace accelerating in 2024. This trend was entirely predictable: a look at the country’s consolidated budget, which includes federal, regional, and local spending, shows how it’s evolved since the war began. Overall expenditures have surged by nearly 50 percent, while spending on government administration has jumped almost 2.5-fold.
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However, one detail stands out. Even as public administration grows at an increasing rate, Russia’s economy as a whole is slowing significantly. This suggests that higher government spending is yielding diminishing returns. According to the country’s Center for Macroeconomic Analysis and Short-Term Forecasting, by the second half of 2024, government spending will no longer be enough to sustain industrial growth.
The second sector that’s grown significantly since the war began is construction, which has expanded by nearly 15 percent over three years. However, unlike public administration, construction has seen a shift in 2024, passing its peak and beginning a slow decline. The reasons for this are clear:
- A housing boom fueled by subsidized mortgages coincided with the need to rebuild occupied Ukrainian territories;
- The construction of industrial facilities to support expanded military production and import substitution, and
- Infrastructure projects aimed at easing bottlenecks in Russia’s “pivot to the East.”
But in 2024, subsidized mortgages came to an end, the number of towns and villages Russia occupies in Ukraine remained largely unchanged, and the construction industry is now facing a sharp drop in demand.
Rounding out the top three fastest-growing sectors is manufacturing, which includes military production. The sector initially saw a downturn in early 2022 due to the withdrawal of Western investors from civilian projects, with assembly plants for global car brands being hit the hardest. However, by 2023, rapid military production growth had pushed the sector back into positive territory compared to pre-war levels. However, in the current circumstances, arms manufacturing is creating more economic challenges than benefits for both the economy and ordinary Russians. Rising inflation, labor shortages, and prohibitively high interest rates are, to a large extent, consequences of increased weapons production.
Another sector that’s seen significant growth — nearly 10 percent over the course of the war — is the combined category of transportation, communications, and IT. This is a predictable outcome given the large-scale shifts in trade flows following Russia’s pivot to new foreign trade partners.
Interestingly, after peaking at the end of 2022 on the back of a record harvest, agriculture has since lost nearly all its gains. The most recent decline in 2024 coincided with surging food inflation, which ultimately rose 1.5 times faster than overall consumer prices.
Which sectors have shrunk? 📉
Healthcare has taken the biggest hit, contracting by 5.1 percent — despite the fact that demand for medical services has increased due to the war. This kind of decline could only have happened due to a deterioration in healthcare quality and a reduction in paid medical services. Russians are cutting back on healthcare expenses, a clear sign of declining living standards.
In second place are the extractive industries, which have contracted by just under five percent. The explanation is fairly straightforward: by late 2021, Europe was already in the grip of an energy crisis — one that Gazprom’s leadership played a role in exacerbating. While the commodity’s prices are now significantly higher, the sector has been hit by the combined effects of a high base and sanctions against Russia’s energy industry. The bulk of the losses have fallen on Gazprom, which lost most of its most profitable European market and posted record losses for 2023.
Finally, trade has also declined, shrinking by 2.2 percent. The sector’s contraction compared to pre-war levels indicates that Russians have been forced to cut back on consumption — after all, before people can consume anything, they first have to be able to buy it.
The ACRA study not only reinforces the idea that the structural distortions in Russia’s economy have created statistical growth while eroding living standards, but also highlights the biggest beneficiaries of the war — those connected to the expanding public administration sector.
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