Russia’s economy is facing significant challenges, a point highlighted by former President Donald Trump in a recent statement suggesting the country is in deep peril due to the ongoing war in Ukraine. This marked a notable change in Trump’s tone, hinting at the possibility that Ukraine might realistically reclaim its territories. However, economists warn that the ground realities are far more complex than they appear.
Experts suggest that while Russia is indeed going through a crucial period, with its economy experiencing more pressure than it has since the early chaotic days of the invasion, it is not on the verge of an immediate collapse. For the moment, many analysts believe President Vladimir Putin is unlikely to revise his military strategies or objectives.
Maria Shagina, a senior fellow at the International Institute for Strategic Studies, pointed out, “For the first time since the invasion, the government is confronted with a genuine trade-off: whether to build a tank or invest in the civilian economy.” Essentially, this dilemma poses a stark choice for the Kremlin as it navigates the twin pressures of military spending and economic maintenance amidst rising budget deficits.
The figures tell a grim story. Russia’s finance ministry is now projecting GDP growth of less than 1% for 2024-2025, a significant downgrade from previous forecasts that estimated growth at around 2.3-2.5%. The head of Sberbank, German Gref, recently characterized the country’s economic condition as slipping into “technical stagnation,” signaling further concerns about a sustained downturn.
In light of these challenges, the Russian government has responded by raising the value-added tax (VAT) from 20% to 22%, a decision that breaks a key promise made by Putin. With defense expenditures soaring—now accounting for about 40% of the Kremlin’s overall budget—Russians find themselves footing the bill for the war more directly.
Putin has long projected an image of economic stability and fiscal conservatism; however, the reality isshifting quickly. The federal budget deficit reached a staggering 4.9 trillion rubles (approximately $61 billion) between January and July—a figure that already surpasses the government’s projections for the entire year. Forecasts suggest this gap could widen to about 4.6 trillion rubles ($55 billion) by 2026.
Shagina mentions that two-thirds of the national welfare fund, initially touted as a financial cushion for emergencies, has already been consumed. This is a sharp contrast to the first couple of years of conflict, where aggressive state spending stimulated significant economic growth of 4-5% annually. During that period, factories dedicated to military production operated at full capacity, leading to historically low unemployment and wage growth in many regions of Russia.
Putin himself has previously assured the public of economic progress, stating during a televised call-in, “The economy is developing, moving forward actively. Overall, the situation in Russia is stable, and growth continues despite all external threats and attempts to pressure us.” However, this narrative appears to be faltering as the wartime economic boom begins to stall.
Vladislav Inozemtsev, a noted Russian economist, argues that the dramatic increase in military spending—previously raised by up to 30% annually—simply cannot continue indefinitely. “Once the money stops flowing, the growth slows down too. It was never sustainable—that’s why the boom is over,” he explained. With the war dragging on, anticipated cuts in spending may soon affect various sectors, from infrastructure to healthcare, as the government scrambles to balance its budget.
Despite the sanctions and pressures from the West, there’s a growing belief among some Ukrainians that these measures have not inflicted the devastating blow hoped for by Washington and Brussels. Following the EU and the US reducing their reliance on Russian oil and gas, Moscow managed to redirect its energy exports primarily towards India, China, and Turkey. This shift has been facilitated by a network of “shadow fleet” tankers, which remain elusive to sanctions.
The Kremlin’s adaptive economic strategies include leveraging parallel imports for critical goods. This thriving trade network allows Russia to circumvent sanctions by acquiring necessary items, from semiconductors to consumer electronics, through intermediaries in neighboring countries such as Turkey, the UAE, and former Soviet republics like Armenia and Kazakhstan.
Inozemtsev has noted that “if all sanctions had been enacted within the first 60 days, Russia’s economy would have been destroyed.” Over four years, however, the gradual implementation allowed for adaptation and mitigated immediate economic catastrophe.
Meanwhile, despite Trump’s calls for steep tariffs on India and China, aimed at dissuading their energy purchases from Russia, European leaders show little appetite for such measures. This reluctance is highlighted by Hungary and Slovakia’s continued energy imports from Russia, despite the political and economic pressures surrounding the conflict.
Ukraine, in an effort to push back against Western hesitance, has ramped up drone strikes targeting Russia’s oil infrastructure. Recent data indicates that 16 of Russia’s 38 refineries have suffered strikes since August, significantly reducing diesel exports and leading to fuel shortages that not only trouble civilians but also jeopardize the operational capacity of the Russian military.
As reports of closed petrol stations surface from remote areas to the capital, the ramifications of these shortages present a critical concern. Diesel, the cornerstone of both the civilian economy and military logistics, is increasingly difficult to come by, leading to fears among Russian military planners that the situation may reverse, impacting their offensive capabilities in Ukraine.
Reflecting on these developments, Ukrainian President Volodymyr Zelenskyy has hailed the drone campaigns as “the most effective sanctions, the ones that work the fastest.”
Ultimately, the growing economic strain raises a fundamental question: will these pressures compel Putin to reassess his strategy in Ukraine? Trump posited that a realization of the war’s true costs might incite public discontent, but many believe that Russians are accustomed to hardship, with dissent suppressed under the current regime. Inozemtsev remarked, “Russians can live with zero growth… In Russia, it’s just normal.”
