Earlier this month, the World Bank upgraded Russia's status from upper-middle income to high income. This news might come as a surprise to many, considering Russia is embroiled in a war and faces a wide range of Western sanctions. So, how did Russia manage to achieve this upgrade? What exactly does Russia have in its economic arsenal?
According to the World Bank, Russia saw significant boosts in trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%). These factors pushed Real and Nominal GDP upwards by 3.6% and 10.9% respectively, while Russia’s Atlas GNI per capita grew by 11.2%.
How Does the World Bank Classify High-Income Nations?
Every July 1st, the World Bank updates its classifications based on the GNI per capita of the previous calendar year.
The world’s economies are classified into four income groups:
Low income
Lower-middle
Upper-middle
High income
GNI per capita is the dollar value of a country’s final income in a year divided by its population.
For upper-middle-income economies, the GNI per capita ranges between $4,466 and $13,845,
While
for high-income economies, it is $13,846 or more. In 2023, Russia’s GNI per capita was $14,250, making it eligible for high-income status.
What Fueled Russia's Economic Growth During Wartime?
Military spending, credit expansion, a low unemployment rate, and mitigating the impacts of sanctions played crucial roles. Since 2014, Russia has faced sanctions due to the annexation of Crimea. Over time, it has learned to protect itself from these economic blows.
Despite trade and financing restrictions from G7 countries, Russia's economy has shown resilience. The share of Russia’s external trade transactions in the currencies of sanction-imposing countries fell from about 80% in 2021 to less than 30% in 2023. Trade has diverted to growing economies in the Asian region, including India, China, Central Asia, Turkey, and South Caucasus.
As it stands, Russia's economy is essentially a wartime economy. However, this has not impeded its growth. In May 2024, Russia recorded an all-time low unemployment rate of 2.6%, along with rising wages. This boost in employment and income has led to increased consumer spending. Private consumption has recovered strongly, contributing 2.9% to GDP, driven by credit and a robust labor market.
Russia’s voluntary military recruitment model, which uses monetary incentives, has supported the economy by filling pockets and encouraging consumer spending. Additionally, government spending, particularly on defense, which now accounts for nearly 7% of GDP, has been pivotal. Although the government has increased spending in other sectors, defense and military remain top priorities.
Investment has also flowed into the defence and manufacturing sectors, including from corporate sources. The IMF highlights that Russia is substituting domestic goods for imports, leading to investment in new production facilities and keeping investment money within the country. This self-reliance is reminiscent of India's strategy, which has helped it reach the global stage.
In conclusion, despite the sanctions and wartime situations, Russia's economy has shown remarkable resilience and growth. By relying on self-sufficiency and strategic economic adjustments, Russia continues to stabilize and even thrive economically.