The Last Staple Of The Russian Economy Has Burst

Production at military factories began to decline.

The military-industrial complex, which has become the main engine of the Russian economy thanks to trillion-dollar spending on state defense contracts from the budget, has unexpectedly failed, writes The Moscow Times.

The military-industrial complex-related industries have stagnated or shrunk in production for the first time since the start of the war after double-digit growth rates for almost three years in a row, according to data from Rosstat.

"Production in the military-industrial complex "soared by 34 percent last year, while in 2023 it rose by 2023, with a growth rate of 2.5 percent," the newspaper said. Last year, production in this category soared by 34.2%, and in 2023 - by 29%.

The data on the military industry "looks shocking," MMI analysts wrote: the military-industrial complex industries, which previously pulled the economy up, this time dragged the manufacturing index down: in September it added only 0.4% in annual terms - 8 times less than in August (2.4%).

Processing is the largest sector of the economy, and its growth last month was the lowest since the beginning of 2023, states the chief analyst of PSB Denis Popov. In general, industry, which forms about 30% of Russia's GDP, has practically stopped growing, he continues: 0.3% year-on-year in September against 5.6% last year.

As compared to December, industrial output in the country has shrunk by 3.6%, analysts at CMACP estimate. Civilian industries have been falling continuously all year, and as of September had gone into recession by 1.1%, their calculations show. In the manufacturing sector, the recession has affected 18 of the 24 types of activities tracked by Rosstat - and together they provide almost 80% of goods in the economy, the IPN RAS experts wrote.

It appears that industry's problems are linked to budget constraints, does not rule out Nataliya Orlova, chief economist at Alfa Bank. The state-order-dependent machine-building complex fell 0.1 percent in September, although it was booming as recently as August, thanks to the military-industrial complex, up 15.7 percent year-on-year. "This could be a signal that plans to tighten fiscal policy will have an impact on industrial growth in the near future," Orlova warns.

To keep up with the budget plan, which is facing a 21% drop in raw material revenues and a deficit 5 times higher than ischal projections, the Finance Ministry will have to cut spending in the fourth quarter - and this promises very high risks of overcooling the economy, believes Popov of PSB. According to IPN RAS estimates, Russian GDP shrank by 0.6% between January and August. And its annual growth practically went to zero: 0.4% in August and the same amount in July.

New US sanctions, under which Rosneft and Lukoil have fallen and which promise Russia problems with oil sales to India, will also hit the economy, says Peter Matys, a senior analyst at Touch Capital Markets. The risks of a "hard landing" of the economy are increasing, he points out.

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