The Russian economy is grappling with significant challenges reminiscent of the late Soviet era, facing soaring inflation, stagnated economic growth, and increasing military expenditure, all under the shadow of strict Western sanctions. According to economists, if these trends continue, the impacts could mirror the economic turmoil seen during the last years of the Soviet Union.
High inflation rates are at the forefront of Russia's troubles. President Vladimir Putin recently acknowledged the inflation crisis on his annual press conference, labeling it as "an alarming signal". The inflation rate currently stands at around 9%, with concerns it could escalate to as high as 9.5% by 2025 according to state forecasts. The economic measures taken—the central bank raising interest rates from 19% to 21%—have failed to dampen rising prices.
Experts are warning of impending economic stagnation. Alexander Kolyandr, a financial analyst, noted, "Overall stagnation, similar to the Soviet Union at the beginning of the 1980s," is expected. The International Monetary Fund has also lowered its projected GDP growth for Russia from 1.5% to 1.3%, indicating sluggishness across major sectors of the economy.
To fuel its military efforts, Russia has been ramping up its defense budget drastically, from $59 billion in 2022 to $109 billion this year, with predictions of $126.8 billion by 2025. This surge means defense spending will account for 32.5% of the federal budget, raising alarms for economists who fear this focus might strangle other economic sectors.
Roman Sheremeta, Professor of Economics, explained, "The war is going to considerably burden the already bleeding Russian budget." The Kremlin has shifted its fiscal strategy, using national wealth funds and increasing trade with non-Western countries to address the fallout from international sanctions imposed after the Ukraine invasion began.
Despite these adjustments, experts warn about the unsustainable nature of Russia's financial strategy, characterized by unprecedented defense expenses, labor shortages, and the crushing weight of international sanctions. Alexandra Prokopenko, former central bank official, highlighted, "The elite are fighting to survive and, even though they remain loyal to Putin, dissatisfaction is brewing among them due to rising costs and strained credit conditions."
Retail sectors are witnessing upheaval, with more than 200 shopping centers at risk of insolvency due to high debt levels, compounded by soaring costs driven by inflation. Companies, like MTS, the largest mobile operator, reported nearly 90% drops in net income primarily due to rising expenses associated with servicing debts. Many Russian CEOs are now expressing their concerns publicly about the soaring interest rates crippling their operations.
Internationally, Russia's reliance on oil and gas revenues continues to be under threat. While oil exports remain pivotal, traders predict prices may decline, which could severely restrict Russia's ability to finance its military campaigns. A report from Reuters indicated the Russian firm Rosneft signed a ten-year deal worth $13 billion to supply crude oil to India; nevertheless, analysts caution these revenue streams may not be sufficient if global oil prices drop.
Kolyandr offered a sobering forecast: "Russia could experience severe crises by 2025, depending significantly on sanctions, oil prices, and its ability to maintain military expenditures and industry outputs. The condition of the economy suggests it is bleeding and will need external support to continue its military operations."
Putin’s government insists efforts will be made to stabilize the economy. Still, as Wladyslaw Wlaszuk, economic advisor to the Ukrainian President noted, "The economic problems of Russia are enormous. The myth of invincibility is broken." The parallels drawn to the Soviet Union signal alarm, indicating potential challenges for Putin's regime as public dissatisfaction over economic hardships grows alongside military failures on the battlefield.
Overall, the combination of intensified defense spending, mismanaged resources, long-term sanctions, and crippling inflation sets the stage for what some speculate could be one of the most turbulent periods for the Russian economy since the Soviet collapse.
