CNN
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Since Moscow’s full-scale invasion of Ukraine in 2022, Russia’s economy has exceeded expectations. The numbers, while not rosy, are not disastrous. Last year, the war economy may have grown faster than the United States and all major European economies. Unemployment is at a record low. And if the balloon defense budget cramps other spending, it will be temporary.
These statistics send a message to domestic and international audiences, said Elina Rybakova, a senior fellow at the Peterson Institute for International Economics. To the Russian people: “We are still standing.” To Ukraine’s allies: “We can outlast you.”
Predicting the image of Russia’s economic strength has real consequences. Some in the West have questioned whether it was imposed by Ukraine’s backers and dismissed by President Vladimir Putin as just a “logistical hurdle.” If they don’t, why bother?
But other experts say this image of resilience is deceptive. Carefully curated by the Kremlin to trick enemies into thinking Russia’s economy is in good shape. As the war approaches its third anniversary, this mask is starting to slip.
To explain Russia’s apparent economic explanation, analysts turned to metaphors. Some people use the phrase “on steroids” to describe rapid but unnatural and unsustainable growth.
“‘Steroids’ are good, but they still produce muscle. I don’t call this muscle,” Rybakova told CNN. “It’s like running around on cocaine.”
Russia may soon feel the pain after the party. Increasingly frustrated Russian officials are warning that the country’s economy is reaching the limits of what it can produce, driving up prices. Inflation accelerated last year even as the central bank hiked interest rates to 21% in October, a two-year high.
While signing a flurry of executive orders on his first day back in the White House, President Donald Trump said Russia’s economy is in “big trouble” and that Putin is “destroying Russia by not making a deal.” “This is a sign that we will do so,” he said. In Ukraine.
Evidence of that problem includes the impact of new sanctions, persistent labor shortages, and signs of a credit bubble. Despite recent battlefield gains, analysts say Russia’s worsening economic problems could bring Putin to the negotiating table sooner than expected, making sanctions relief a stronger negotiating chip for the West. states that there is.
shadow budget
Throughout the war, the Kremlin has extensively used a strategy known as “reflexive control,” in which the enemy’s perception guides the attacker (in this case, Ukraine’s Western backers) to choose actions that benefit Russia. It is intended to.
Weapons are a great example. Every time the West has considered sending new technology to Ukraine — first modern tanks, then fighter jets, then long-range weapons — it has warned of dire consequences, potentially involving a nuclear strike. . This slows down the supply of weapons to Kiev, which benefits Moscow.
The same goes for the economy. The Kremlin wants to convince Ukraine’s allies, especially the United States, of Russia’s economic strength. If Russia can finance a war for many years, the United States may support a ceasefire that supports the Kremlin’s goals. Controlling perception is paramount, observers say.
And it helps to boast that Russia’s economic might. At his marathon annual press conference last month, Putin said Russia’s economy was outperforming Europe and the United States “despite everything.”
Economic growth and low unemployment have become Putin’s “trump cards.” Aleksandra Prokopenko, a fellow at the Carnegie Russia-Eurasia Center, recently wrote:
But these headline numbers are hidden in terms of trends. According to a new report by Craig Kennedy, an associate at Harvard University’s Center for Russian and Eurasian Studies, Russia is using “off-budget financing schemes” to finance the war. hides the true cost of
Russia’s “highly scrutinized” defense budget is at a sustainable level, but there has been a parallel “largely overlooked” surge in corporate borrowing. Although these loans appear private, they are actually state spending in disguise, Kennedy writes.
February 25, 2022 – Day 2 of full-scale invasion – Russia enacts a law forcing the state to compel banks to provide goods and services for the war on conditions set by the state he pointed out.
According to Kennedy, from mid-year to late 2024, Russia experienced an “extraordinary” 71% surge in private credit, equivalent to 19.4% of gross domestic product. He estimates that up to 60% of these loans (up to $249 billion) were made to war-related companies. “These are loans that the state forced banks to extend to largely reprehensible war-related enterprises on concessionary terms,” he writes.
This means Russia is spending almost twice as much on the war as official figures show, Kennedy noted.
The financing scheme could lead to a widespread credit crisis, he said, mainly by imposing large debt obligations on war-related companies that would likely risk overwhelming banks with a “wave of toxic debt”. I warned you.
Kennedy’s analysis prompted a variety of responses. A commentary in the Financial Times indicated that Putin was sitting on a “ticking financial time bomb.”
Others are more benign. Prokopenko and Alexander Koliandru, academics at the European Center for Policy Analysis, dispute some of Kennedy’s findings, writing this month that fears of a banking crisis are “overstated.”
Tymofiy Mylovanov, head of the Kyiv Faculty of Economics and Ukraine’s former economy minister, said the findings were concerning, but not necessarily devastating.
“There are conditions for a crisis, but are there triggers?” he told CNN.
One such trigger could be panic among ordinary Russians, who know what it feels like to wipe out their savings. This could be a run for banks if they believe their deposits are at risk.
Rumors have swirled since the fall that the central bank could freeze customers’ deposits, swelling as savers scramble to profit from high interest rates. The Bank of Russia calls the idea “absurd.” But this has done little to reassure Russians, Milovanov said.
“The fact that they’re talking about it is a sign of trouble,” he said. “They can’t talk about it.”
Meanwhile, Alexei Necheyev, head of Russia’s New People’s Party, proposed a new law to prevent the central bank from freezing customers’ deposits without consular consent.
The central bank is trying to inspire confidence, but some have doubts about Governor Elvira Nabiullina. She was believed to save the economy at the beginning of the war, but some of the Russian elite are turning on her. Rostec, the head of the state-owned Defense Department, said the central bank’s high key interest rate was hampering exports, while the chairman of oil giant Gazprom Neft said expensive credit was affecting companies serving the oil industry. It said it could raise “serious concerns”.
Even Putin, a longtime supporter of Nabiullina, made a disturbing complaint in his year-end press conference that the central bank had used tools other than raising interest rates and acted “more efficiently and earlier.” He said there is a possibility.
Even without the credit crisis, Russia’s economy faces serious headwinds in 2025.
The International Monetary Fund estimates that Russia’s GDP grew by 3.8% in 2024, but predicts growth of just 1.4% this year.
President Putin recently admitted that “the volume of products is not growing at the same rate as consumption.” This is a classic recipe for price increases. Inflation accelerated last year to 9.5% from 7.4% in 2023. Some supermarkets locked butter in cabinets to prevent theft.
Wages are rising, but this reflects problems in the labor market. President Putin boasts of Russia’s record-low unemployment rate of 2.3%, but this sword is double-edged. Lower unemployment means higher wages are higher, since Russian companies (not more than 1.6 million skilled workers) have to pay more to attract labor .
War is associated with labor shortages. Ukraine’s top general, Oleksandr Shilsky, said on Sunday that the Russian military suffered more than 434,000 casualties last year. And according to Ukrainian military estimates, Russia has sustained more than 800,000 casualties since the beginning of the war. Estimates for the UK and US are slightly lower than Ukraine’s numbers. CNN cannot independently verify numbers.
Russia may offset this by encouraging immigration, but Central Asian immigrants have long prepared for a labor gap after recent terrorist attacks in Russia sparked ethnic tensions – faces an increase in xenophobia.
Most importantly, Western sanctions are beginning to suffer serious pain. The package announced by the Biden administration in the final days targeted Moscow’s “shadow fleet.” This is an aging oil tanker used to circumvent previous sanctions on Russian oil exports. Dozens of these ships have dropped anchor around the world, unable to dock and lower due to new measures. China and India, whose oil and gas purchases from Russia funded the war, are reportedly looking for other suppliers.
Kiev’s refusal to renew a gas transportation contract that allows Russian gas to flow through Ukraine will cost the sale $5 billion a year, Reuters reports. The energy giant recorded a loss of about $7 billion in 2023. That’s $100 million over nearly 25 years, and we’re looking at x over 1,500 jobs. Less money for Gazprom means less for Russia’s war chest.
Prokopenko, a Carnegie fellow, said rising economic tensions are straining Russia’s social contract.
“The population no longer expects justice from the Kremlin. Instead, they expect financial support,” she told CNN.
With this support “decreasing” – as war spending eats into the budgets of other services, Prokopenko warned that there is a “clear discrepancy between the expectations of the population and the Kremlin’s ability to provide.”
Moscow cannot maintain broader economic stability and at the same time maintain regular funding of the war and the economy, she said. The Kremlin has destroyed all three so far, but something may have to give soon.
