The Russian economy is beginning to show signs of exhaustion. Until now it had been catapulted by an arms industry that has operated at full speed to serve the war fronts in Ukraine, has shown exceptional resilience to G-7 sanctions and an unquestionable ability to circumvent vetoes on its sales of oil and gas, which has brought the Kremlin foreign currency and enough cash flows to overcome any suspension of payments.
This is admitted by Elvira Nabiulina, governor of its Russian central bank and the true architect of the fact that the ruble has survived the express prohibition of the Biden Administration and the rest of the Western allies so that Moscow could greenback as an international transaction currency since the first weeks of the invasion of Ukraine. Now, however, the economy “is going through a point of regression” – Nabiulina admits – due to the “shocks “external”. Despite which, he said, he maintains active resistance to contain the escalation of prices and try to lower interest rates.
In reality, Russia is immersed in an inflationary spiral. Prices rose to their highest level in September – 9.8% – since falling from double digits in March 2023, although in October it fell to 8.6%. “We believe that our economic policy will lower it to 4.5% or 5% in 2025” before it stabilizes around 4%, its monetary authority said. If this were the case, “we will consider lowering the price of money,” to reactivate the granting of credit, which is slowing down industries and which has plunged businessmen into pessimism as 1,000 days have passed since the invasion of their southern neighbor.
Last month, Nabiulina raised rates to 21%, without ruling out further increases, also at record levels, in December. While Vladimir Putin’s economic team increased defense spending by 25% for the 2025 budget, to exceed $145 billion, a sign of the Kremlin’s interest in adding fuel to its war machine, which fuels four out of every ten dollars. of its GDP. To a large extent, the salary revaluation of the sector that supports the activity has generated remuneration competition with the rest of the productive segments and has precipitated prices, in addition to causing a break in traffic and labor mobility between companies and industries. Butter or potatoes, for example, have risen more than 25% this year.
This cyclical deterioration has led Andrei Klepach, chief economist of the state development entity VEB.RF, to reduce half a point, to 2%, the rebound in GDP for 2025 due to the decline in investment in fixed capital – from nine tenths, to 1%—due to credit restrictions. Something that also worries Alexander Shokhin, president of the employers’ association, who complains about the direct relationship between sky-high rates and decisions to delay business investment.
The use of the dollar as a monetary weapon could also become more acute with the discounted strength that the greenback will have, according to market consensus, throughout Donald Trump’s second term, which not only suggests that the ruble – like most currencies – will have serious difficulties in cushioning future exchange rate attacks on the American currency, but it calls into question any containment of the still rampant inflation or the urgent cheapening of money in Russia.
Without progress on the front and with doubts in the economy
Heading into the fourth year of hostilities between Moscow and kyiv, neither of the contenders can claim victory. The change of tenant in the White House, the use of long-range missiles by Ukraine to which Joe Biden has agreed, supported by the United Kingdom and Germany, and the response with nuclear threat from Putin and his intercontinental ballistic prototype —“which cannot shoot down any current anti-aircraft system,” he said—they have put serious attempts at ceasefire negotiations on the table for the first time.
After more than 200,000 deaths, between 3 and 4 times more injuries, millions of displaced people, the territory and economy of Ukraine devastated and a demographic bomb ready to explode due to the distortion between the male and adult population – in a precarious situation due to deaths in the contest—and the feminine and young.
While Western sanctions and labor and production disruptions take their toll on the Russian economy and society, under an insatiable demand for recruitment from the population by Putin, who has wanted to pay for it with North Korean fighters.
In the Russian collective subconscious, the idea that its soldiers are cannon fodder is beginning to germinate, as well as the intention to escape into exile, explains The Economist, which highlights the existence of a tense calm in the country’s social climate. It is a first vector that induces peace talks. Along with the danger of new supply interruptions in Europe, which is also beginning to show a desire to expand its arms production in the face of the probable alteration of the status quo of NATO by Trump and his demand to far exceed 2% of the GDP of each ally in defense spending. Or the admission by kyiv that it will have to give up territory. Probably another 11% in addition to the 7% it had to accept after the invasion of Crimea and Eastern Donbas in 2014.
Russia, Europe and Ukraine have, due to diverse and conflicting interests, a shared objective in seeking a cessation of hostilities. Perhaps for the first time since February 2022.
In this geostrategic game, one of the keys is Russia’s socio-economic situation. Tens of thousands of residents near the border with Ukraine have been evacuated by ground incursions on federation soil, and the Russian military is taking too long to respond to kyiv’s resistance. To make matters worse, the ruble acts as a thermometer to warn that the bacchanal of military spending could have reached its limit and that the overheating recorded by the GDP could be the prelude to a debacle in the making.
Essentially, and although full employment persists in an industrial war economy and Putin has diversified his hydrocarbon exports from Europe to Asia, the price of crude oil has decreased in the last two years and the value of Russian sales in the first half of 2024 They have been cut by 4% —measured in dollars— compared to the same period last year and up to a third compared to 2022.
The complex situation of 2025
The dynamic part of the economy is explained by the abandonment of austerity. Largely, so as not to irritate its population, which has rubles in its pockets. Although at the cost of the deficit worsening by 2 points of GDP this year and draining the reserves accumulated over the past decade. This double strategy has been the trigger for the average increase in federal disbursements of 15% in the first two exercises of the invasion and the driving force of military spending which, according to figures from the Bank of Finland, will reach 60% in 2025. That is, an arsenal to use in weapons, in household income, inject between 195,000 and 400,000 rubles into combatants’ checks, increase pensions by 10% or renew infrastructures essential road, rail or port routes to facilitate trade and logistics routes to Asia.
All this has created excess debt. From consumers, who spend 11% of their disposable income to pay expenses incurred at abnormally high interest rates, and from companies, which are increasing their debts by more than 20% annually. Since the beginning of the armed conflict, consumers have increased their credit commitments above their exceptional salary increases. With growing unease over rising costs of living, budget imbalances cannot continue sine die with the current price of money. Nor resorting without remedy to financial reserves that would evaporate, at this rate, in five years. Analysts anticipate that the central bank will leave the year with rates of 23%.
The Swedish economist Anders Aslund believes that the stage of economic dynamism in Russia “has its days numbered” and that, contrary to what the Kremlin thinks, “the times are not favorable.” Aslund, author of an essay on the crony capitalism and kleptocracy in Russia, alert in Project Syndicate of “hidden costs” of war. Of nearly $190 billion, 10% of GDP, this year, adding to a second wave of G-7 financial sanctions—the freezing of Russian sovereign assets worth $300 billion and their transfer to the Kiev coffers—and that have led their Russian finances and public accounts to excess disbursements. Compared to Ukraine’s bill of 100 billion, half of which covers international cooperation.
Torbjörn Becker, director of the Stockholm Institute for Economic Transitions, emphasizes a similar idea: “the official narrative that the economy works and that Western sanctions have had no effect is propaganda,” as demonstrated by the fact that Nabiulina has raised rates so much to correct the inflationary consequences of vast fiscal stimuli. Foreign pressure and internal interventionism due to the aggression against Ukraine are collateral damage that reveal “the deterioration of Russian activity,” he specifies.
Even more so if the EU proposal to sanction Chinese firms that negotiate with Russians expires. Or if, at Washington’s behest, Gazprom’s banking arm is fined to undermine the Kremlin’s energy profits abroad. Despite the risk that Moscow will once again turn off the gas spigot to the EU. “The Russian economy is overheated and Putin will not be able to change its course,” anticipates Alexander Mertens of the Atlantic Council.
#Russian #economy #exceeds #days #invasion #Ukraine #ailments
