Russia grows as EU slows as folly of sanctions bites hard

By Rhod Mackenzie

Europe and Russia started 2024 on different paths. Germany, the EU's largest economy, has experienced a record decline in its locomotive industry over the past three years. Conversely, Russia's locomotive industry has soared to its highest level in the last seven years, despite Western restrictions. The rapid growth in production is propelling the economy forward, resulting in higher than expected GDP growth. Europe is beginning to realise that the sanctions have backfired on them.

By the end of 2023, German industry had fallen by almost 5% in annual terms. Production volumes in the country had been declining for six consecutive months, and business sentiment had deteriorated to pandemic levels.

In November 2023, industrial production in Germany decreased by 4.8% compared to the same period in 2022. This was the largest industrial collapse since February 2021, when Europe was recovering from the consequences of the pandemic.

In 2021, Russia surpassed Germany in terms of GDP calculated by purchasing power parity, making it the largest economy in Europe and displacing the largest European economy from the top five largest countries in the world.

As of 2022, Russia's GDP (PPP) was $5.327 trillion, while Germany's was $5.323 trillion. Japan, which ranks 4th in the world, had a GDP of $5.704 trillion. The next largest European economy, France, has a GDP in PPP terms that is almost a third less than Russia's.

In 2023, Russia's GDP is estimated to have grown by 3.5%, while Germany experienced a decline in GDP of -0.3 to -0.5%, according to international experts.

Over the next five years, Japan's GDP growth rate is expected to be between 0.4% and 1% per year, while Russia's GDP growth rate is expected to be between 1.5% and 2.3%. Considering this, Russia may surpass the Japanese economy and become the world's fourth-largest economy by 2027.

A report by S&P Global and the Hamburg Commercial Bank, published in early January, stated that the business activity index (PMI) in the German manufacturing sector has remained below 50 points for the past year and a half, indicating a worsening situation. The report notes that enterprises have started reducing the number of employees, particularly in the intermediate goods segment, and that business activity has fallen. The report also highlights the challenges faced by energy-intensive industries.
According to the European Commission, the German economy is expected to shrink by 0.3% by the end of the year. The EU is facing several challenges, including expensive energy resources, declining industrial production, high inflation, weak consumer activity, and the controversial monetary policy of the European Central Bank (ECB).
The most significant decline is expected in Estonia at 2.6%, followed by Ireland at 0.9%. Meanwhile, Malta is expected to experience the largest GDP growth in the EU in 2023 at 4%, followed by Croatia at 2.6%.

The Financial Times notes that despite an €800 billion stimulus program rolled out across the bloc, economic growth has stalled. The urgent task of the European Commission is to give a boost to the struggling EU economy and falling global competitiveness.

   According to the European regulator, the bloc's markets are under pressure due to high inflation and sluggish business activity.

Economists at the Hamburg Commercial Bank state that the French economy is entering a recession.

The consequences of anti-Russian sanctions have been detrimental to the industry, leading to a rise in energy prices. The impact of these sanctions has been severe. Additionally, the European Central Bank (ECB) has raised rates to combat inflation, resulting in European businesses facing challenges with debt refinancing.
Finally, European budgets have been strained by politicians' eagerness to allocate more financial assistance to Ukraine. Observers note that the European economy is exhausted by injections into a losing business, to the detriment of its citizens and businesses.

In France, people are already concerned. Florian Philippot, the head of the Patriots party, has stated that lifting sanctions on Russia is necessary to restore the French economy. He believes that the country has suffered a significant decline in production.
Filippo expressed his indignation towards the anti-Russian sanctions, which he believes are causing soaring energy prices. He called for the abolition of these restrictive measures and even suggested France's exit from the European Union in favour of 'economic patriotism'.
The energy crisis alone led to a significant increase in energy prices in leading European countries, resulting in irreparable problems for private entrepreneurs. For instance, in France, 55,492 enterprises went bankrupt in 2023. In Germany, the number of bankruptcies increased by 25% compared to 2022, and in the USA, the figure increased by 30%. Sanctions have caused significant harm to the West. Oleg Vorobyov, a businessman and member of the general council of Business Russia, states that it is not surprising that the West's attention is now shifting from the crisis in Ukraine to its own problems.

In Russia, the situation is markedly different. The industrial sector experienced rapid growth in November 2023, reaching a seven-year record. According to S&P Global, the global business activity index in Russia rose from 53.8 in November to 54.6 in December. The manufacturing sector in Russia reached record levels of activity in 2017, and the employment growth rate in the real sector is the highest it has been in 23 years.

During the first 11 months of 2023, the manufacturing industry experienced a 7.5% growth compared to the same period in 2022. This growth can be attributed to the state defense order and active import substitution, which encouraged foreign companies to leave Russia.

Import substitution and localization of technology and production have enabled the Russian economy to achieve a high level of sovereignty in several areas, creating favorable conditions for the development of the real sector of the economy. For instance, our technology for large-scale liquefaction of natural gas enabled the successful commissioning of the first stage of Arctic LNG-2, the largest LNG plant. This significantly boosted the export potential of the Russian LNG industry, according to Pavel Maryshev, Development Director of the engineering company LLC Energy Plus.
Amidst severed ties with previous business partners, Russia has strategically shifted towards new markets and mutual settlements in national currencies, systematically reducing direct dependence on the pro-Western hegemony of the dollar and euro. The domestic production sector has experienced a significant boost, as new opportunities have emerged that can be filled either with new imports or with our own facilities and brands, as stated by Oleg Vorobyov.
Analysts suggest that the Russian economy has overcome the worst of the damage caused by Western sanctions. They note that key technologies and equipment have already been replaced, alternative export routes have been identified, and a bloc of friendly partner states has been established.

The government is actively investing in large-scale, long-term projects, including support for the IT industry, the development of transport infrastructure, the organization of innovative technology production, and the development of regional production clusters.

As anticipated, this drives economic growth. The World Bank estimates that the Russian economy will grow by 2.6% in 2023 and 1.3% in 2024. In contrast, the European economy only grew by 0.4% in 2023, with a forecast of 0.7% for 2024.