Russian Overheating

Recent data has come out regarding the Russian economy, its GDP growth has been surprising to many international observers, for many this fact goes in contradiction to what most people thought would happen once western sanctions started to go into effect. The Russian GDP expanded by 5.4% annually in the first quarter of 2024, in line with the flash estimate and slightly ahead of earlier market expectations of 5.3%, following the 4.9% increase in the final quarter of 2023. 

Despite external pressures, Russia has demonstrated a degree of economic resilience. The government has implemented measures to stabilize the economy, including the use of its substantial foreign reserves to support the ruble and manage inflation. Additionally, there has been a push towards import substitution policies to reduce reliance on foreign goods and services, especially those from countries imposing sanctions. These policies have had mixed results, fostering growth in some domestic industries while highlighting the limitations of a more insular economic approach.

This enormous growth to a country that has since become an international pariah and has increasingly become the target of missile and drone strikes of its critical oil infrastructure has vexed many. The enormous amount of government expenditure with the war has started to overheat the russian economy, 

An overheated economy occurs when economic growth is unsustainable, leading to high inflation and a potential collapse. This situation typically happens when there is a prolonged period of rapid economic expansion, resulting in increased demand that outpaces supply. Some characteristics of an overheated economy include:

High Inflation: Excess demand drives prices up, leading to inflation.

Low Unemployment: Employment levels may be unsustainably high, with companies struggling to find workers, driving up wages.

Asset Bubbles: Overheating can lead to speculative investments and asset bubbles, where prices of assets like real estate or stocks are driven beyond their true value.

Interest Rate Hikes: Central banks may increase interest rates to cool down the economy, which can lead to a slowdown or even a recession if the measures are too aggressive.

An overheated economy poses risks of economic instability, as sudden corrections or policy interventions can lead to economic downturns or recessions.

Driven by the sudden war demand, Russian wages have grown significantly creating a big glut in the increasingly shrinking Russian job market. The government is competing with itself on the job market, private industry is growing to accommodate the Armed Forces demands and the exit of many western companies but also for recruitment to the Armed Forces themselves, creating wage inflation that itself will translate to higher prices of consumer goods. The Central Bank of Russia has responded with a combination of interest rate adjustments and other monetary policies to curb inflation and stabilize the currency, but these measures have had varying levels of success, although big the Russian government's cash reserves are not endless and should this war continue for longer the damage to the economy may necessitate a great correction that might be extraordinarily painful to the average Russian citizen.

Summarizing, the Russian GDP growth is instigated by war demand, import substitution and inflation, although these facts create a lot of growth really fast the economic realities can lead to what economists call Overheating. Should this continue the Russian economy may encounter very difficult times regardless of what happens in Ukraine.