Russia is growing faster than expected, Ukraine is increasingly suffering from war

The Vienna Institute for International Economic Studies (wiiw) has again revised upwards its growth forecast for the Russian economy, which is subject to Western sanctions. Russia’s economy is growing more strongly this year than that of the Central and Eastern European EU countries and much more strongly than the almost stagnating Eurozone. The outlook for Ukraine, on the other hand, has become more cloudy.

For 2024, wiiw forecasts average growth of 2.6 percent for the EU members among the 23 countries examined in Central, Eastern and Southeastern Europe, which should increase to 3 percent in 2025. This means that they should once again significantly outperform the Eurozone, which has almost stagnated this year (0.6 percent), and grow almost twice as fast as the Eurozone (1.6 percent) next year.

The Viennese economic researchers have again revised their forecast for Russia upwards by 0.4 percentage points for this year. This means that the country, which is increasingly geared towards a war economy, is likely to grow at a similar rate of 3.2 percent this year as in 2023 (3.6 percent). However, the acute labor shortage and high interest rates will limit the growth of the Russian economy to around 2.5 percent in the coming years, according to wiiw.

Around a third of Russia’s federal budget – 6 percent of GDP – flows into the war economy. This also benefits many other sectors. High wages for front-line soldiers and payments to war-disabled soldiers and their dependents would lead to a redistribution from top to bottom, “which unfortunately also increases sympathy for the war among the population,” says Astrov, who is also a Russia expert at wiiw.

The prospects for Ukraine, which has been attacked by Russia, are not very encouraging. The country’s budget deficit amounts to 18 percent of GDP this year and must be covered largely by foreign financial aid. Ukraine’s economy, which collapsed by almost a third in 2022, is recovering even more slowly than previously expected – compared to its spring forecast, the wiiw has lowered growth expectations by 0.5 percentage points to 2.7 percent for 2024. The destruction of Ukraine’s energy infrastructure by Russian air strikes will weigh heavily on the economy this year and next. “This makes sufficient deliveries of Western anti-aircraft missiles all the more important,” says Olga Pindyk, Ukraine expert at the wiiw.