Hilgenstock says big shifts in government spending mean the war in Ukraine is quickly becoming one of the main drivers of Russian growth.
While spending 6pc of GDP on defence is still far less than the 17pc spent by the Soviet Union at the height of the Cold War, it is still much bigger than the average between 2019 and 2021 and is comparable to US military expenditure in the 1980s, according to the Carnegie Endowment for International Peace think-tank.
While Hilgenstock believes Ukrainians and their allies should prepare for a long and drawn-out fight, he adds: “This war will end at some point. And military spending will come down again.
“Then we’ll see what the underlying fundamentals of the Russian economy actually look like if you withdraw the stimulus, and what is left of an economy that is basically now geared towards one major objective.”
The answer, he adds, is not much.
“It’s not like Russia’s oil and gas industry is in a particularly great state,” he says. “New investments have been under sanctions for a long time.”
The number of so-called greenfield foreign direct investment projects, where facilities are built from the ground up, has fallen from 330 in 2019 to just nine this year, according to GlobalData.
This could starve the country of investment that drives productivity and improvements in living standards.
Hilgenstock adds that while barrels of oil can be easily diverted to other countries, you can’t build a new gas pipeline overnight.
“The weaponisation of gas flows has essentially destroyed one of the key cash cows of the system, which is Gazprom,” he says. “And there’s no easy fix on the horizon. You can’t export the same amount of gas via a different means because if you want to step up gas exports for instance to China, you have to build a lot of new infrastructure. That costs money. And it takes time, leaving Russia to become even more of a one-trick pony.”
Weafer at Macro Advisory says that the short-term resilience of the economy is not sustainable.
“The big problem is this is all at the expense of previously planned economic development before 2022,” he says.
Originally delayed by the pandemic, Russia’s “national projects programme” was a $400bn plan aimed at improving living standards in Russia. It included spending billions of dollars over six years on infrastructure and creating new industries designed to diversify its economy away from oil and gas.
“All of that money has now been sidetracked to fund the military,” says Weafer. “So it means that the government has suspended long-term planning in order to support current stability. The longer the situation remains, then the more the economy will deteriorate.
Analysis of Putin’s latest budget by the Stockholm International Peace Research Institute reveals deep cuts in key areas of spending.
Education is expected to decline from 4.8pc of total government spending in 2023 to 4.2pc in 2024, while healthcare spending is expected to fall from 5.2pc of Russia’s budget to 4.4pc in 2024.
