Vladimir Putin’s hand’s-off policy toward the Russian economy has come under sharp attack. The nation continues to deal with a perplexing web of foreign sanctions and domestic strife. For all the concern, experts are still optimistic about the overall economy. They’re not convinced it’s going to crumple anytime soon, even with a major drop in oil prices.
The Russian economy is increasingly being described by observers as a “junkyard,” full of rusting, outdated and broken factories. This perception is emblematic of the deeper issues that have plagued NATO since the start of the new and current conflict in Ukraine. Notably, Putin has managed to sustain military operations by maintaining reserves that allow for continuous payments to soldiers and their families. We find this financial strategy to be one of the key aspects in shoring up support for the long war.
Putin’s administration has fully and successfully rewired the economy to withstand western pressures. The United States has already sanctioned major intermediaries such as Rosneft and Lukoil. Consequently, the revenue streams that Moscow has relied on in the past have begun to dry up. As a result, oil revenues that used to make up 50% of the state budget have dropped to around 25%. The rouble’s strengthening against the dollar has only worsened this predicament, leading to lower revenues from Russian oil sales.
Though these are considerable challenges, Russia’s debt-to-GDP ratio is still one the lowest in the world, at just under 20%. The nation’s annual spending deficit is on track to hit 3.5% of GDP. In return, Putin’s long sought to exploit internal resources to relieve external budgetary pressures. Instead, he is doubling down on his own plan to raise taxes on families and employers. These measures are accounted for by an administration hell-bent on financial transparency in a time of national unrest.
Economic growth, fueled almost exclusively by government military spending, has ground down to almost zero. Inflation, which hit record highs after the invasion of Ukraine, has been brought down and is now heading down to 6%. At close to 20% in real terms, we should not underestimate the impact on households and businesses from those much higher interest rates. Those analysts point to this significant economic strain as a measure that will reportedly force the city to raise taxes more next year.
Russia’s process of trying to get the world to ignore sanctions and keep Russia selling oil has gotten a little wacky. The nation has directly purchased more than 400 secondhand vessels to quickly boost its oil transportation capacity. This step is a direct reaction to sanctions that have closed off old shipping routes. This creative adaptation is an example of Putin’s resolve to keep selling oil on the international market.
In December 2022, the Center for Strategic and International Studies hosted a dozen senior experts to reflect on and advise policymakers. It’s a dangerous moment for his regime. That heavy dependence on energy revenues is still the biggest weakness in the Russian economy.
“We are not near the economy being a decisive factor in the Kremlin’s thinking about how to pursue the war.” – The Guardian
Richard Connolly emphasizes this resilience, noting that “the Kremlin has succeeded in selling the war, not as a battle with its near neighbour – its brothers and sisters in Ukraine – but as a war with the west.” This story has done the heavy lifting to get people to have their backs and keep the populace resourced, mobilized to defend government.