Putin’s war machine may be secret weapon helping prop up economy

President Vladimir Putin’s expanding war effort appears to be lifting Russian industrial production, helping his economy outperform many of the worst forecasts amid sanctions.

The secrecy surrounding the manufacture of military hardware hasn’t fully obscured the impact it’s starting to have on output. Production of “finished metal goods” — a statistical line that besides items like cutlery includes weapons, bombs and various types of ammunition — surged almost 30% in July from a year earlier after steep declines in the previous months.

A separate category called “other vehicles and equipment,” which alongside bicycles and similar products counts ships, planes and armor, is also among the biggest outperformers.

“Manufacturing would have performed much worse if not for the war,” said Tatiana Orlova at Oxford Economics.

Dramatic setbacks this month in the face of of Ukraine’s northern counteroffensive are set to add urgency to efforts by Russia to mobilize resources for what increasingly looks like a campaign that will stretch well beyond this year.

The economic uplift from the defense industry is likely to prove short-lived, however, especially if it diverts manpower while sanctions degrade the Russian war machine by depriving it of components and technology. The standoff over energy shipments to Europe also threatens to sap revenues, with Russia already suspending most of its gas supplies to its main market and selling crude at a discount.

Bulking up

Russia was quick to erect financial defenses to deflect the shock to its economy after the invasion of Ukraine in February, but shifting the industrial base to a war footing likely took longer. By July, Putin signed into law a bill giving the government extraordinary control over businesses to support the army by compelling them, if necessary, to direct production toward military needs or work extra hours.

“The July data confirm that the increase in state orders placed with the military-industrial complex supports Russia’s manufacturing,” Orlova said. “Industrial production numbers have seemed almost too good to be true in the last few months.”

The emerging evidence may suggest that Russia is starting to cope better with the crippling disruptions caused by sanctions. In May, the US said its export controls had halted work at two major Russian tank plants.

But recent local reports indicate that one of them — Uralvagonzavod — is revving up. People engaged in defense manufacturing there switched to a 12-hour work day and can volunteer for an eight-hour shift on Saturdays.

Russia’s statistics service didn’t respond to a query about data on the defense industry, but said it compiles statistics on “finished metal goods” in accordance with an official system for classifying economic activity. The category doesn’t include “end products” of the military industry, it said, without elaborating what that meant.

The nomenclature for the grouping, last amended in July 2022, contains a large number of metal products, including weapons, ammunition, bombs, rockets, cartridges and others.

Getting an accurate read on the economy has become more tricky after the government stopped publishing some key statistics and no longer discloses monthly figures breaking down how much is spent on various budget items including defense.

In the dark

The industrial rebound is the latest case in point, and the role of the military only adds complexity.

Factory output, previously a proxy for the performance of the economy as a whole, barely shrank in July, the same month that gross domestic product contracted an annual 4.3%.

By contrast, the Center for Macroeconomic Analysis and Short-term Forecasting sifted through official data to find that industrial production declined 3.1% in July from a year earlier. The researchers attributed the difference with the statistics agency’s more upbeat figure in part to their exclusion of classified items in calculating output.

Other gauges of Russian industry also signal a downswing, from a measure of business confidence in manufacturing to an index compiled by the Bank of Russia. A purchasing managers’ survey by S&P Global indicated manufacturers experienced a six-month slump in output that only ended in August.

Yet official data showed that in seasonally and working-day adjusted terms, factory output hasn’t dropped since April and actually started growing in July.

Military orders probably contributed to July’s recovery in manufacturing, according to Evgeny Suvorov, lead Russia economist at CentroCredit Bank. The stimulus was also likely behind an unexpected surge in construction the same month, when it surprised economists by growing more than an annual 6%, he said.

Creaking war machine

Still, it’s not a given that Russia can sustain its own needs, especially if battles in Ukraine devolve into a war of attrition. The US has said that it already imported Iranian drones and wants to buy millions of rockets and artillery shells from North Korea to use against Ukraine.

The budget can also come under strain. Janis Kluge, an analyst of the Russian economy with the German Institute for International and Security Affairs in Berlin, estimates defense spending in the first seven months of the year was about $20 billion higher than in the same period in 2021.

A top official has said the defense procurement budget was set to rise by as much as 700 billion rubles ($11 billion) this year. In 2021, Russia’s entire military spending reached an estimated $65.9 billion. At 8.4% of monthly GDP, the government already ran its widest budget deficit in July since the summer of 2020 and its surplus shrank sharply in August.

“It is difficult to calculate how long military spending can support industrial growth, because the data is closed,” said Alexandra Osmolovskaya-Suslina, an independent Russian economist. “Maybe a year, or maybe longer.”

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