Russia's Air Force Strength Reveals Weakness of Sanctions

Despite economic restrictions, Russia's air force strength remains robust, thanks to the country's ample resources, both human and financial. The Kremlin has committed to record-breaking war expenditure of 6% of GDP and combined defense and national security expenditures exceeding 8% in 2024.

Why this matters: The resilience of Russia's air force despite sanctions has significant implications for global security and the ongoing offensive, campaign, assessment, may in Ukraine. It also highlights the need for the West to reassess and strengthen its sanctions strategy to effectively counter Russia's military capabilities.

Russia's economy is experiencing an upswing, propelled by a fiscal impulse of 10% of GDP in 2022-2023 and import substitution, which has spurred heightened demand for goods and services. The country's GDP grew by 5.1% in Q3 2023 and 4.9% in Q4 2023. The IMF predicts a growth rate of 3.2% in 2024, indicating continued overheating.

Russia's revenues are swelling, with both primary components of the budget seeing impressive growth in Q1 2024. Oil and gas revenues surged by 79% compared to the same period last year, totaling $32 billion. Non-oil and gas revenues reached $35 billion, a 24% increase. The total budget deficit for the three-month period stood at $6.5 billion, equivalent to 0.3% of Russia's GDP.

The surge in oil and gas revenues can be attributed to three main factors: high oil prices, windfall taxes, and a new taxation formula on mineral extraction, which means that the tax is now levied at the well, irrespective of the volume of oil actually exported. The increase in non-energy revenues stems from Russia's overall economic growth, leading to higher income for the state primarily through VAT and imports, thousands, components, fighter.

Government spending will continue to bolster domestic demand, with the Finance Ministry allocating 11.7 trillion rubles out of a planned 37.3 trillion by mid-April. The current account surplus surged by 43% year on year to $22 billion in the first quarter, despite a decline in both imports and exports.

A significant structural obstacle is looming: the scarcity of available manpower in the economy. This has led to rising salaries, outpacing labor productivity, which is further hampered by technology sanctions. The growth in domestic demand and non-oil and gas budget revenues in nominal terms also contributes to an acceleration in inflation.

Russia's economy has become a function of what is happening on the front line. The current favorable budgetary situation and Russia's adeptness at circumventing sanctions have postponed Putin's need to make tough decisions. However, the solution to this trilemma already looks impossible and lies beyond the Kremlin'splanning horizon. The West's continued support to Ukraine beyond 2025 will remain essential, and efforts to reduce Russia's ability to circumvent sanctions must be redoubled.

"The Russian economy increasingly resembles a marathon runner battling the flu yet bolstered by steroids propelling them forward in the race. Currently, around the 15th kilometer, the runner faces slim odds of winning but persists, sustained by the performance-enhancing effects of the steroids."

Key Takeaways

• Russia's air force remains strong despite sanctions, thanks to 6% GDP war expenditure.
• Russia's economy is growing, with 5.1% GDP growth in Q3 2023 and 4.9% in Q4 2023.
• Oil and gas revenues surged 79% in Q1 2024, totaling $32 billion.
• Russia's budget deficit is low, at 0.3% of GDP, with a current account surplus of $22 billion.
• Despite growth, Russia faces structural obstacles, including manpower scarcity and inflation.