Since Moscow\u2019s full-scale invasion of Ukraine in 2022, Russia\u2019s economy has surpassed expectations. Its figures are, if not rosy, not ruinous either. Last year, the war economy likely grew faster than the United States and all major European economies. Unemployment is at a record low. And if the ballooning defense budget has cramped other spending, that\u2019s only temporary. <\/p>\n
These statistics send a message to audiences at home and abroad, said Elina Ribakova, senior fellow at the Peterson Institute for International Economics. To the Russian public: \u201cWe\u2019re still standing.\u201d To Ukraine\u2019s allies: \u201cWe can outlast you.\u201d <\/p>\n
Projecting an image of Russia\u2019s economic strength has real-world consequences. Some in the West have questioned whether the sanctions imposed by Ukraine\u2019s backers \u2013 and dismissed by President Vladimir Putin as mere \u201clogistical hurdles\u201d \u2013 work at all. If they don\u2019t, why bother? <\/p>\n
But other experts say this image of resilience is a mirage \u2013 one carefully curated by the Kremlin to make its adversaries think Russia\u2019s economy is in good shape. As the war nears its third anniversary, this mask is starting to slip. <\/p>\n
To explain Russia\u2019s apparent economic might, analysts have turned to metaphor. Some have used the phrase \u201con steroids,\u201d to describe growth that is rapid, but unnatural and unsustainable. <\/p>\n
Russia may soon feel the pain after the party. Increasingly disgruntled Russian officials have warned that Russia\u2019s economy is hitting the limits of what it can produce, driving up prices. Inflation accelerated last year despite the central bank hiking interest rates to 21% in October, a two-decade high. <\/p>\n
While signing a flurry of executive orders on his first day back in the White House, US President Donald Trump said Russia\u2019s economy was a sign that the country was in \u201cbig trouble,\u201d and that Putin was \u201cdestroying Russia by not making a deal\u201d on Ukraine. <\/p>\n
Evidence of that trouble includes the impact of new sanctions, persistent labor shortages and signs of a credit bubble. Despite recent battlefield gains, analysts say Russia\u2019s worsening economic problems could bring Putin to the negotiating table sooner than expected and may make sanctions relief a more powerful bargaining chip for the West. <\/p>\n
Throughout the war, the Kremlin has made extensive use of a strategy known as \u201creflexive control,\u201d aimed at shaping an adversary\u2019s perceptions in a way that leads the adversary \u2013 in this case, Ukraine\u2019s Western backers \u2013 to choose actions that benefit Russia. <\/p>\n
Weapons are a case in point. Every time the West has considered sending new technology to Ukraine \u2013 first, modern tanks, then fighter jets, then long-range weapons \u2013 the Kremlin has warned of dire consequences, potentially involving a nuclear strike. This has slowed the supply of weapons to Kyiv, benefiting Moscow. <\/p>\n
The economy is no different. The Kremlin wants to convince Ukraine\u2019s allies, particularly the United States, of Russia\u2019s economic strength. If Russia can fund its war for years, the US might support a ceasefire that favors the Kremlin\u2019s goals. Controlling perceptions is paramount, observers say. <\/p>\n
And so, it helps to boast of Russia\u2019s economic might. At his marathon annual press conference last month, Putin said Russia\u2019s economy was growing \u201cin spite of everything,\u201d outstripping Europe and the US. <\/p>\n
Economic growth and low unemployment have become Putin\u2019s \u201ctrump cards,\u201d Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, wrote recently. <\/p>\n
But these headline numbers conceal concerning trends. Russia is hiding the true cost of its war by using a shadow \u201coff-budget financing scheme,\u201d according to a new report by Craig Kennedy, an associate at the Davis Center for Russian and Eurasian Studies at Harvard University. <\/p>\n
While Russia\u2019s \u201chighly scrutinized\u201d defense budget remains at sustainable levels, there has been a parallel and \u201clargely overlooked\u201d surge in corporate borrowing. These loans look private but really are disguised state spending, Kennedy wrote. <\/p>\n
On February 25, 2022 \u2013 day 2 of the full-scale invasion \u2013 Russia enacted a law that empowers the state to force banks to lend to businesses providing goods and services for the war on terms set by the state, he noted. <\/p>\n
Between the middle of that year and late 2024, Russia saw an \u201canomalous\u201d 71% surge in private credit, by an amount equal to 19.4% of its gross domestic product, according to Kennedy. He estimates up to 60% of these loans (as much as $249 billion) have been made to war-related firms. \u201cThese are loans that the state has compelled banks to extend to largely uncreditworthy, war-related businesses on concessionary terms,\u201d he wrote. <\/p>\n
This means Russia is spending almost twice as much on the war as official figures indicate, Kennedy noted. <\/p>\n
The funding scheme could lead to a far-reaching credit crisis, he warned, in large part by imposing heavy debt loads on war-related companies that are likely to default over time, which risks overwhelming banks with \u201ca wave of toxic debt.\u201d <\/p>\n
Kennedy\u2019s analysis has provoked a range of responses. A Financial Times commentary said it showed Putin was sitting on a \u201cticking financial time bomb.\u201d <\/p>\n
Others are more temperate. Prokopenko and Alexander Kolyandr, a scholar at the Center for European Policy Analysis, have also disputed some of Kennedy\u2019s findings, writing this month that fears of a banking crisis are \u201coverblown.\u201d <\/p>\n
Tymofiy Mylovanov, head of the Kyiv School of Economics and Ukraine\u2019s former economy minister, said the findings were concerning, but not necessarily destructive. <\/p>\n
One such trigger could be panic among ordinary Russians, who know how it feels to have their savings wiped out. If they believe their deposits are at risk, this could spark bank runs. <\/p>\n
Since the fall, rumors have swirled that the central bank could freeze customers\u2019 deposits, which have ballooned as savers have rushed to profit from high interest rates. The Bank of Russia has called the idea \u201cabsurd.\u201d But this has done little to reassure Russians, Mylovanov said. <\/p>\n
\u201cThe fact that they are talking about it is a sign of trouble,\u201d he said. \u201cThey cannot not talk about it.\u201d <\/p>\n
Meanwhile, the head of Russia\u2019s New People party, Alexei Nechayev, has proposed a new law to prevent the central bank from freezing customers\u2019 deposits without the Duma\u2019s consent. <\/p>\n
While the central bank tries to inspire confidence, some are voicing doubts about its governor, Elvira Nabiullina. Although she was credited with saving the economy at the war\u2019s outset, some of Russia\u2019s elite have since turned on her. The head of the state-owned defense conglomerate Rostec said the central bank\u2019s high key interest rate was hampering exports, while the chair of oil giant Gazprom Neft said expensive credit could impact companies providing services to the oil industry, raising \u201cserious concerns.\u201d <\/p>\n
Even Putin, a longtime supporter of Nabiullina, made a muted complaint during his year-end press conference, saying the central bank could have used instruments other than interest rate hikes and acted \u201cmore efficiently and at an earlier stage.\u201d <\/p>\n
Even without a credit crisis, Russia\u2019s economy faces serious headwinds in 2025. <\/p>\n
The International Monetary Fund estimates that Russian GDP grew 3.8% in 2024, but forecasts just 1.4% growth this year. <\/p>\n
Putin recently conceded that \u201cthe amount of products has not grown as much as consumption has\u201d \u2013 a classic recipe for price rises. Inflation accelerated to 9.5% last year, from 7.4% in 2023. Some supermarkets locked butter in cabinets to prevent thefts. <\/p>\n
Although wages are up, this reflects problems in the labor market. Putin boasts of Russia\u2019s record-low 2.3% unemployment rate, but this sword is double-edged. Low unemployment means higher wages, as Russian companies \u2013 short of 1.6 million skilled workers \u2013 must pay more to attract labor. <\/p>\n
Russia could offset this by encouraging immigration, but Central Asian migrants \u2013 long used to plug gaps in the workforce \u2013 have faced rising xenophobia after recent terror attacks in Russia stoked ethnic tensions. <\/p>\n
Most importantly, Western sanctions are beginning to inflict serious pain. A package announced by the Biden administration in its final days targeted Moscow\u2019s \u201cshadow fleet\u201d \u2013 aging oil tankers used to dodge earlier sanctions on Russia\u2019s oil exports. Dozens of these ships have dropped anchor around the world, unable to dock and unload due to the new measures. China and India \u2013 whose oil and gas purchases from Russia have helped fund its war \u2013 are reportedly looking for other suppliers. <\/p>\n
Kyiv\u2019s refusal to renew a gas transit agreement that allowed Russian gas to flow through Ukraine will cost Gazprom up to $5 billion a year in sales, Reuters has reported. The energy giant posted a loss of almost $7 billion in 2023 \u2013 its first in nearly 25 years \u2013 and is considering axing more than 1,500 jobs. Less money for Gazprom means less for Russia\u2019s war chest. <\/p>\n
The growing economic strain is causing Russia\u2019s social contract to creak, said Prokopenko, the Carnegie fellow. <\/p>\n
With this support \u201cdwindling\u201d \u2013 as war spending eats into budgets for other services \u2013 Prokopenko warned there was now \u201ca clear divergence between the expectations of the population and the Kremlin\u2019s capacity to deliver.\u201d <\/p>\n
Moscow cannot keep financing the war and the regular economy at the same time as maintaining broader economic stability, she said. Although the Kremlin has so far fudged all three, something may soon have to give. <\/p>\n<\/p>\n
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