The recent hike in Russia’s key interest rate to 21% by the Central Bank in late October has stirred renewed debate among media and economists about the Russian economy’s outlook and how economic trends could influence Kremlin policies. Today, few predict an "imminent collapse" of the Russian economy. However, signs of deteriorating trends and economic challenges confront Russian President Vladimir Putin's regime with a dilemma: continuing the aggressive war or quickly ending it are both likely to lead to an economic crisis.
Observers point out several unique features of the Russian economy that cast doubt on claims of its "sustainable development" and "prosperity."
First, the current key rate is more than double the official annual inflation rate, resulting in a double-digit real interest rate — an unusual scenario. This could suggest that actual inflation is much higher than official reports indicate and that inflation expectations among the public and businesses exceed the Russian Central Bank's estimates (over 13%). Even if official inflation figures aren’t distorted, the calculation methods don’t account for changes in the consumer basket due to sanctions, such as the replacement of Western goods with cheaper Chinese alternatives.
Second, despite the high interest rate, loan volume continues to grow, as noted by Elvira Nabiullina, governor of the Bank of Russia — a concern for the central bank. Credit growth is currently driven by increased business lending, while consumer lending has declined in response to high rates and the end of the subsidized “preferential” mortgage program in summer 2024. Commercial lending rates have risen to 25–30% and above, signaling heightened inflation expectations, a shortage of working capital due to increased sanctions-related costs, and labor shortages. These factors create significant risks of defaults and bankruptcies.
Alexandre Krauss
Third, the planned increase in budget spending for 2025 significantly exceeds even optimistic GDP growth projections. The Russian government has forecast real GDP growth at 2.5% for 2025. However, even Russian analysts suggest growth will likely not exceed 2%, and the International Monetary Fund recently lowered its 2025 forecast to 1.3%. Meanwhile, planned federal expenditures are set to rise by nearly 12% (from 37.2 trillion rubles in 2024 to 41.5 trillion in 2025).
Direct military spending for 2025 is expected to reach an unprecedented 13.5 trillion rubles (about $140 billion). Even within Russia, economists doubt that the government’s projected budget deficit of under 1% of GDP is realistic. This is reflected in declining liquid assets in the so-called "National Wealth Fund," which, as of summer 2024, stood at just over $55 billion — less than half of what it was at the start of the full scale war in 2022.
The revival of the Russian economy in 2023–24 is attributed to two main factors: stable oil and gas revenues and significant growth in war-related government spending. Despite sanctions, Russia has found new markets (mainly China and India), and has employed a “shadow fleet” and other strategies to evade sanctions.
"The revival of the Russian economy in 2023–24 is attributed to two main factors: stable oil and gas revenues and significant growth in war-related government spending."
However, both the Russian Central Bank and the Russian parliament are now warning of stagflation (recession combined with high inflation). Resources are dwindling, fiscal stimuli are no longer effective, supply-side constraints (labor shortages and lack of access to technology and modern equipment) are intensifying, and production cannot keep up with demand, driving inflation. This trajectory will likely lead to a severe economic crisis; the only question is when.
Ending the war also carries significant risks for the Russian economy. Exiting the "Keynesian trap" of increased budget expenditures will be painful, as a decrease in aggregate demand could worsen stagflation tendencies and trigger a major downturn and crisis.
Over the course of the war, a significant “war party” has formed in Russia, involving both elites and ordinary citizens. Officials have gained new avenues for corrupt enrichment through sanctions circumvention schemes, while businesses have filled market gaps left by Western companies. Families of soldiers or those working directly or indirectly for the military-industrial complex are earning incomes they couldn’t have imagined pre-war.
By various estimates, direct war beneficiaries include 15 million people or more, comprising over 10% of the Russian population. Additionally, increased payouts in the contract army and military-adjacent sectors, coupled with an obvious labor shortage, have driven up wages in other parts of the economy.
"By various estimates, direct war beneficiaries include 15 million people or more, comprising over 10% of the Russian population."
Though public opinion polls indicate broad support for the war, it’s evident that the conflict has allowed a sizable portion of the population to escape the "poverty trap." A return to pre-war conditions and the end of war-related expenditures will inevitably trigger an economic crisis and heightened social tension.
By launching the invasion of Ukraine, the Russian regime set itself up for a dilemma in which both continuing and ending the war will almost certainly lead to an economic — and possibly political — crisis. Given this, it seems prudent for Ukraine’s allies to make Russia’s continued aggression significantly more painful. Enhancing sanctions to meaningfully reduce Russia’s export revenues and restricting imports of critical technologies and equipment would serve this goal.
Mark Temnycky
The problem is not that sanctions “don’t work” but that they’ve been applied slowly and inconsistently, with enforcement often lacking. Sometimes, sanctions inadvertently benefit Russia; for example, capital outflow restrictions have consolidated capital domestically, providing Putin’s regime with additional resources.
A better approach would be to encourage the maximum outflow of capital — including financial and human resources — by avoiding restrictions on emigration opportunities for Russians opposing the regime. By intensifying sanctions and closing enforcement loopholes, the prospects for Russia’s “celebration” of a prolonged, low-cost war will be sharply reduced, far below the five years or more predicted by a recent analysis in The Economist.
Author's Note: "With special thanks to Oleksiy Zagorodnyuk for his help with data research."
Editor’s Note: The opinions expressed in the op-ed section are those of the authors and do not necessarily reflect the views of the Kyiv Independent.
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