As the war in Ukraine grinds on, Russia’s economy provides a counterintuitive portrait of economic expansion and danger. Unemployment has dropped to historic lows, while wages in regional—and often overlooked—provincial cities are increasing rapidly. Inflation has completely wiped out these historic wins. Whispers of a country on the verge of collapse. The country’s economic crisis is deepening, but analysts remain wary of declaring the country’s imminent collapse.
Under Vladimir Putin’s administration, Russia has witnessed a historic boom in salary bribes, concentrated largely in the country’s rural regions. In reality, this increase has mostly been swallowed up by inflation that has significantly decreased the value of these increased wages. The Russian economy enjoyed a growth rate of 4-5% annually during the first two years of the conflict, but recent forecasts predict a significant slowdown. The finance ministry has reduced its GDP growth projections for 2024-25 to under 1%, from previous projections of 2.3-2.5%.
Vladislav Inozemtsev, an economist, pointed out that had all sanctions against Russia been imposed within the first 60 days of the war, the nation’s economy would have faced devastating consequences. He stated, “If all sanctions had come in the first 60 days, Russia’s economy would have been destroyed.” This idea highlights the extreme importance of timing in economic sanctions and how if used poorly may deeply hinder their ability to promote national stability.
Amidst some positive signs, Russia’s economy is still dealing with a host of debilitating pressures. Rapid and widespread fuel shortages are quickly becoming an immediate concern. Diesel—the lifeblood of our economy and military operations, in particular—has taken the biggest hit. As of August, 16 of Russia’s 38 refineries had experienced interruptions. As an outcome, the country is currently suffering its lowest diesel export levels since 2020. Despite these efforts, alarm bells have started ringing over the sustainability of Russia’s war efforts.
Defence spending has skyrocketed to make up almost 40% of the Kremlin’s entire budget this year. Yet, as Maria Shagina noted, “For the Kremlin, the choice will always be military spending. A widening deficit, soaring defence outlays and shrinking revenues are making that choice harder.” This sobering statistic is just another indicator of current efforts to find an equilibrium between military aims and real-world economic constraints.
Additionally, according to media reports, two-thirds of Russia’s national welfare fund has already been spent. In response to these revenue shortfalls, Moscow has raised the value-added tax (VAT) from 20% to 22%. While this measure is touted to help stabilize the state’s fiscal situation, it may increase burden on consumers who are already contending with inflationary pressures.
Analysts continue to be split on the long-term prospects of Russia’s economy. Where some alarmists see inevitable doom, others counter that these doomsday forecasts are exaggerated. German Gref, CEO of Sberbank, characterized Russia’s current economic state as “technical stagnation,” suggesting a period of minimal growth without outright failure.
The international context further complicates matters. Ukraine’s drone strikes on Russian oil infrastructure have been described by Ukrainian President Volodymyr Zelenskyy as “the most effective sanctions.” Such actions have struck at critical infrastructure that supports both civilian and military activities inside Russia.
In particular, in answer to the international pushback, Russia announced a pivot in their energy infrastructure and began focusing exports on India, China, and Turkey. Much of this change has been enabled by the use of a “shadow fleet” of tankers that allow Russia to bypass sanctions and continue trading. Unfortunately, this strategy is unlikely to hold up long-term. It increases important questions about how long-term resilient Russia’s economy is going to be in the face of continued outside pressure.
So far, Putin has been able to project confidence about Russia’s economic prospects. He recently stated, “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.” This assertion contrasts sharply with the analyses provided by various economists and financial experts who highlight the growing inconsistencies within the economy.
The intricacies about what is really happening in Russia’s economy paint a picture of a country at a turning point. The economy does have some resilient indicators, including low unemployment and increasing wages. Yet, at the same time, it faces severe macroeconomic pressures such as inflationary pressure, fuel scarcity, and military spending pressure due to the ongoing war in Ukraine.