Russia has experienced an investment boom during the two years of the war, with an average investment growth rate of 8.3% per year, despite sanctions, the breakdown of economic relations with the West and the departure of many Western companies. Budget funds played a key role here, although in 2023 their importance decreased due to an increase in the share of investments from enterprises' own funds. Sector-wise, the largest contributions came from investments in the construction of logistics infrastructure and several military-industrial hubs. The second most significant factor was investments from mining enterprises in the Tyumen region. In 2023, a significant portion of investments went towards the acquisition of machinery and equipment, but in reality, about half of this growth was related to the rise in prices for imported investment goods, essentially a result of increased costs. In industry, the main contributors were chemical, metallurgical and oil refining enterprises, as well as military-industrial complex enterprises. In other words, the oil industry, the military-industrial complex and the construction of replacement infrastructure became the main areas of investment due to the reorientation of trade flows. Former Deputy Prime Minister Andrei Belousov admitted that 70% of investments were ‘forced’, meaning they were related not to the natural growth needs of the economy, but to compensating for the damage caused by the sanctions and increasing production for the needs of the war. This means that the investment boom of 2022-2023 (as well as the economic growth associated with it) is, in fact, mobilisational in nature and has a low return, i.e. it practically does not lead to an increase in national wealth in relation to the state in which the Russian economy was before the war.
The key factor in the accelerated growth of Russia's GDP in 2023 was the active growth of investment. In 2022, growth in comparable prices, i.e. in real terms, was 6.7%, and in 2023 it was 9.8%. From 2011 to 2020, the average annual growth was 1.7%. This low result was primarily due to a more than 10% decline in investments in 2015. After Russia's invasion of Ukraine, it was expected that investments would decrease again, as had happened in other crisis periods. Even in September 2022, the Ministry of Economic Development forecasted a decline of at least 2%.
Under normal circumstances, investment-driven growth is good news. Investment growth was the dream of Andrei Belousov, the government's economic strategist who was recently transferred to the Ministry of Defence. The share of gross accumulation in the GDP structure has risen to 26.1% compared to 22.7% in the previous 10 years. However, this structural shift does not indicate a change in the growth profile of the Russian economy, but rather is situational, according to a review of investment trends in the Russian economy prepared by the Bank of Finland (BOFIT).
The sectoral and regional structure of investment growth has changed significantly over the two years of the war. In 2022, the main driver was budgetary injections. In addition, borrowing from non-financial organisations increased significantly, while bank lending, in contrast, declined. In 2023, the role of the budget was smaller, and the main contribution to overall growth came from enterprises' own funds. Their ability to increase investments was enabled by a strong growth in income. According to Rosstat, the net financial result of Russian businesses (profit minus losses) increased by 35% compared to the previous year. The largest increase occurred in administrative activities — by 7.3 times, to 1.1 trillion rubles. The profitability of defence-related manufacturing enterprises grew several times. For example, financial results in the production of finished metal products grew 2.3 times, up to 477 billion rubles. In construction, growth was 79% (835 billion rubles). The profitability of these industries could have been affected by huge budgetary injections, Vladimir Bessonov, head of the Development Centre at the Higher School of Economics, explained to RBC. It can also be assumed that the increased investment activity of enterprises in 2023 was partly due to the repatriation of funds or profits that had not been withdrawn from the country.
In 2022, the largest contribution to overall growth came from investments in the construction of logistics infrastructure in the Moscow region and several military-industrial hubs, particularly in the Nizhny Novgorod region and Tatarstan, according to the BOFIT review. Investments in logistics (transportation and storage) increased by 19%. In road and rail construction, investment growth was close to 50%. Overall, however, investment by companies from different sectors in infrastructure construction (non-residential buildings and structures) increased by a third in 2022. These figures reflect the effect of the construction of new industrial enterprises and facilities. For example, one of the largest investment projects of the year was launched in the town of Vyksa in the Nizhny Novgorod Region — the Ecolant electric steel smelting plant, with investments estimated at 150 billion rubles.
The second most significant factor was investment by oil and gas producers in the Tyumen Region. In total, investments in the region totalled 357.8 billion rubles, which is one and a half times more than in 2021. Besides investments directly related to extraction, new logistics infrastructure was actively built for these enterprises in the Khanty-Mansiysk and Yamalo-Nenets Autonomous Districts. For example, another major investment project in 2022 (worth 43 billion rubles) was the construction of a 109-kilometre-long railway section from Nadym to Pangody in the Yamalo-Nenets Autonomous District, which will connect the Northern and Sverdlovsk railways. The reason for this is the need to reorient trade to new directions. As we have noted repeatedly, such investments generally have low returns for the economy because they essentially replace previously made investments. Finally, the third most significant factor was the construction of infrastructure in regions bordering Ukraine (Krasnodar Krai and Rostov Oblast), which is necessary for supplying the frontline. It is possible that these also include investments in the construction of infrastructure facilities in occupied territories.
In 2023, the main drivers of overall growth have shifted. Growth in logistics (transportation and storage) slowed to 4%. The main contribution came from several manufacturing industries: chemical (+22%), metallurgical (+9.7%), and oil refining enterprises (+11%), as well as military-industrial complex companies. The largest growth among the enterprises related to the defence order was demonstrated by the producers of finished metal products (+85.5% in comparable prices), computers, electronic and optical products (+72%) and electrical equipment (+68%). Investments in machinery and equipment, after growing by 8% in 2022, surged by 19% last year. Growth in investments in the extraction sector slowed (+5% last year after +9% in 2022). Accordingly, the Tyumen Region's contribution declined, while the Amur Region, Khabarovsk Krai and the Sakha Republic became the new leaders. This is due to the construction of the so-called eastern transport corridor to expand trade in the East-Pacific direction. Overall, the increase in investments in the Far Eastern Federal District was 31%.
However, as we have previously written (→ Re:Russia: The Boom Has Reached Prices), the 2023 investment boom reflected two other situational factors. First, a Central Bank survey of more than 500 Russian companies from various industries showed that some of the investment involved the completion of projects started before the war and suspended in 2022, when the economic situation was highly uncertain, the Central Bank rate was prohibitive, and budgetary spending had not yet been started. Second, the increase in investments in machinery and equipment, as the same survey demonstrated, was related to the growth in physical volumes of purchases for only half of the enterprises. For the other half, it reflected the growth of prices for the necessary items. In other words, this is not an increase in investments, but an increase in costs.
The most pronounced growth of investments in physical terms was noted in metallurgy and the production of finished metal products, electrical equipment, as well as machinery and equipment. Using the Eurostat classification, the authors of the BOFIT review conclude that investment growth in industry was predominantly concentrated in low-tech and medium-low-tech industries. According to Eurostat's classification, military production is included within medium-high-tech industries. At the same time, BOFIT analysts classify Russian chemical production as medium-low-tech.
In many civilian sectors, the growth in 2023 does not offset the decline in 2022. For example, in agriculture, the index of physical volume of investments in fixed capital was 99.3% in 2022 and 100.6% in 2023. In food production, the figures were 86.2% and 101%, in clothing production 87% and 102.9%, and in pharmaceuticals 84.8% and 101.9%, respectively. Already in the fourth quarter of 2023, investment activity had begun to slow down, and in early 2024 it fell to the level of 2019, according to the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF).The centre's experts attribute this to the ‘exhaustion of growth ideas’, the main ones being infrastructure and the military-industrial complex, tighter credit conditions, and lower profitability in a number of sectors.
In a December interview with Kommersant, Andrei Belousov acknowledged that 70% of the investments made in 2023 were ‘forced’. That is, they were not related to the needs of economic development, but to compensating for the damage caused by the sanctions and increasing production for wartime needs. This means that the investment boom of 2022-2023 (as well as the economic growth associated with it) is, in fact, mobilisational in nature and has a low return, that is it practically does not lead to an increase in national wealth in relation to the state in which the Russian economy was before the war. However, it certainly leads to its structural reorganisation; but the growth potential associated with the new structure of the economy is something we have yet to see and will evaluate in the future.