OPINION
In November, the Center for Analysis and Strategies in Europe (CASE) published a report titled “The Dictator's Reliable Rear. Russian Economy at the Time of War.” Its authors — economists Vladislav Inozemtsev, Sergey Aleksashenko, and Dmitry Nekrasov — believe that international sanctions in their current form are insufficient to create a serious threat to “Putinomics.” Here, Inozemtsev explains why the sanctions have produced a weaker effect than was hoped for, and why Russia's economy has turned out to be significantly more resilient than expected.
Enough money for war
Russia's economy, which some experts and politicians predicted would quickly collapse under the pressure of Western sanctions and European embargoes, has nevertheless survived its first 1,000 days of full-scale war. Since May 2022, the IMF and the World Bank have revised Russia's GDP growth forecasts 11 times — and always upward. Meanwhile, from 2021 to 2024, the Kremlin has increased nominal military spending by a factor of 3.4 — quite a feat, even considering the ruble's depreciation. In 2025, the Kremlin has plans to drive up its military expenses by another quarter, and to do so without reducing the real incomes of the population or unbalancing the state budget.
How much longer will Russian resources last? Expert assessments vary: some predict an imminent collapse and demand new, tougher sanctions; others, plenty of pro-Kremlin figures among them, argue that sanctions do not work at all, and that the Russian economy, even if it has been pushed to the limit, is holding up well.
Many thought that the raw material focus of the Russian economy was an indicator of its relative backwardness. But there is another angle to such views: the world's most fossil-rich country is difficult to isolate from the global economy thanks to the reality that oil and other resources will always find their buyer. The strong government presence in Russia's economy appeared to make it similar to the ineffective, state-planned Soviet model, but it turned out that state-owned companies can indeed adapt their behavior to private sector needs.
The less-than-desired impact of the sanctions is the result of multiple factors. The Kremlin has been able to continue exporting commodities thanks to a diversified group of customers in the Global South. At the same time, Western economic sanctions and restrictions largely stopped the outflow of capital from Russia. As a result, Putin seriously strengthened his financial base.
This is not to say that the sanctions regime has been a complete failure. Russia is lagging ever further behind the developed world technologically and is relying on China for many goods that it used to produce itself. The country has virtually no prospects of returning to its pre-war level of integration in the global economy in the foreseeable future. Still, the restrictions have so far failed to meet the central objective: altering Vladimir Putin’s calculus with regard to the continuation of the war in Ukraine. The Russian authorities and population have yet to realize the inevitability of their economic decline, and the distant future is, evidently, hardly a decisive concern for most in the here and now.
Four pillars of economic sustainability
How can we describe the state of play at the end of 2024?
On the one hand, Russia is facing rampant inflation, triggered by the government's fiscal policy and huge payments to military personnel. Since the beginning of 2024, the maximum payout for signing a military service contract with the Ministry of Defense has grown 20 times faster than the official inflation rate would suggest it ought to. The Bank of Russia base rate suppresses investment activity and essentially blocks the development of several industries, including housing construction. Limited foreign exchange earnings combined with unchanged import volumes are causing a rise in the dollar exchange rate, which in turn will result in an additional price surge. Accordingly, we can expect a slowdown in Russia's economic growth in early 2025 — but it could be temporary, as the drop in 2022 was.
Despite the downward trends, the Russian population is unlikely to run into serious economic hardship in the near future. Unlike in previous years, the nation is faced with a labor shortage, which was caused by mass military recruitment, the emigration of hundreds of thousands of educated and enterprising Russians, and the unstoppable exodus of guest workers. The shortage, which will remain a constant for years to come, makes employers willing to pay higher wages, reflected in nominal income growth of at least 17% in 2024. This growth holds negative implications for the economy as a whole because it siphons off resources, but as long as the budget allows for such spending, a significant portion of the working population will not see a drop in income. At the same time, 18 million Russians are living below the poverty line — more than before the full-scale invasion, if we count them according to pre-war criteria. This group, which mostly consists of pensioners, will be hit hardest by inflation. The majority of working Russians will soon forget the “butter rush,” just as they have forgotten last year's panic over eggs — which have actually fallen in price by 18.7% over the past 10 months.
These hiccups are fundamentally different from the major crises of the past, when an abundance of labor allowed the Russian government and business sector to care very little about the welfare of workers, whether they were local (as in the 1990s), or imported (as in the 2010s). Today, so long as personal incomes do not slump, there will be no sense of crisis.
The second factor that has kept Russia's economy stable during the war is the state of its budget. Few would have guessed that between 2021 and 2025, revenue would grow by at least 60% in nominal terms (which is 18% above accumulated inflation). This inflow is ensured by high-tech tax administration,high business profits, and growth in the nominal incomes of the population.
I do not doubt that, with inflation at around 10-11% and tax increases of 2-2.5 trillion rubles ($18.8-23.5 billion), Russia's 2025 budget will not just meet but, overachieve its revenue targets. Meanwhile, all previous crises in Russia occurred against the backdrop of serious budgetary failures — which are not expected in the short term.
It is known that the Ministry of Finance is prepared to raise funds through the purchase of federal bonds by the Bank of Russia, but this solution is aimed more at saving budget funds than at building up debt. On the one hand, few institutions will borrow from the Central Bank at a rate of 21% or more (which is above the key rate) while placing as collateral federal bonds that, at best, yield 21.5-21.7% a year. On the other hand, most of the income transferred to the Bank of Russia by the Ministry of Finance through the banks holding federal bonds will soon be returned, as 75% of the Central Bank's profit is directed to the federal budget. In other words, those who dream of seeing the Russian economy crumble should pop the champagne no sooner than six months after the Ministry of Finance misses its revenue target.
The third important circumstance concerns Russia's foreign trade relations. Russia remains dependent on the export of oil and other raw materials, and while it has run into a bit of trouble in this domain — ferrous metal exports, which accounted for 10.6% of all shipments abroad in 2021, slumped by one-fifth in 2024 — the main export commodity, oil, is still selling well.
Neither the European embargo nor the sluggish fight against Putin's “shadow fleet” and illegal shipments have made much of a difference. Recall that Iran has been smuggling oil to China for years, passing it off as Malaysian crude.
Even at an export price of $50 per barrel, Russia may well be able to maintain its current budget figures, even if company profits would inevitably fall. If a truly significant threat to the Russian economy was present, it would likely be noticeable in advance — so far, I do not see such a threat, but it may appear in 2025-2026.
A hypothetical Russian oil revenue drop to $50 a barrel would likely result in the devaluation of the ruble at a rate exceeding inflation — another challenge for the economy and the population, but hardly a catastrophe. The budget would continue to be filled, and the Kremlin would be able to reduce real payments to the population smoothly enough to prevent any meltdown — be it economic or social.
The fourth and final circumstance relates to interest rate growth and credit constraints. In my opinion, this factor will also have a limited impact on the Russian economy. Most of the mortgage loans issued in 2020-2024 have been taken at preferential rates and will require billions of dollars in budget subsidies in the coming years, but this spending will not affect the population in any way. Already in 2024, these expenses have quadrupled compared to the targets.
Corporate lending will slow down, but there are two considerations to keep in mind. On the one hand, much of this lending is offered on non-market terms. Over $28.3 billion in loans have been issued at preferential rates that struggle to match even the official inflation rate. On the other hand, the scope of loans raised is far from being as large as one might think.
The Bank of Russia has just published a report on debt-servicing expenses of companies. It shows that, by the end of 2023, they amounted to just over 3% of the cost of products. Of course, in times of war, the government will hardly prioritize commercial investment, focusing instead on finding money for the defense industry and the army. But even in this situation, I do not see the necessary prerequisites for a serious recession.
Growth without development
Now onto the prospects. As a baseline scenario, I envision the following: in 2025, the Russian economy will show official growth of 1.5-1.75%; wages will continue to grow by 3-4%, but real incomes will almost cease to increase. Inflation will remain high and is unlikely to fall below the 2024 rate (although some easing in the second half of the year is possible).
The military industry will continue to increase output, and as a result, the Armed Forces will put an end to the shortage of shells and missiles we have all been hearing about since 2022. The budget plan will be executed with minor, insignificant deviations (plus or minus 3-4%) in both revenues and expenditures. The dollar exchange rate by the end of 2025 will be in the range of 130-135 rubles.
What could have a significant impact on this trend? In my opinion, reversing it would require a change in external conditions.
There are convincing reasons to assume that the most acute phase of the war between Russia and Ukraine will end with a truce in the first half of the new year. If this happens, Russia could cut its military spending — though hardly by more than 1% of GDP, as the defense industry has been promised years of contracts in line with the Kremlin's strategy. Nevertheless, such a development would certainly lift the spirits of the business community.
Additionally, while we are unlikely to witness the lifting of sanctions (even a small portion of them), enforcement will become much less aggressive, providing additional room for maneuver. In any case, this scenario in no way negates the main point of our joint report with Sergei Aleksashenko and Dmitry Nekrasov: the Russian economy is resilient enough to provide Putin with everything he needs for the war — for as long as it takes before the war ends on terms satisfactory to the Kremlin.
It is also possible that the confrontation will intensify — for example, due to a misunderstanding between Putin and Trump (or, to put it bluntly, if Putin deceives Trump during negotiations). Such a turn of events would change the whole forecast, which is built on an inertial scenario based on a limited, very moderate sanctions policy (the 15th package of sanctions, which the EU has begun to develop, does not contain any radical proposals).
A sharp escalation of the hostilities, a new mass mobilization, at least partial accession to the sanctions by China and India (which is highly likely if Moscow chooses to use tactical nuclear weapons), the closure of various maritime straits for ships carrying Russian cargo — this set of factors really could collapse the Russian economy and lead to a massive political crisis within a few months. But this scenario can only be considered as a force majeure, a situation beyond reasonable foresight.
If none of the outlier events occurs — if the only developments consist of “talks on negotiations” while the war continues, likely with less intensity — the basic scenario outlined above seems the most likely. Having said that, I must reiterate what I have already expressed in many interviews: the Russian economy is headed for a dead end. Its trajectory is best described as “growth without development” — a slight increase in gross output figures (especially in defense and related industries) without any advancement in technologies.
“Growth without development” implies a deterioration in the quality of all goods, increasing dependence on imports of consumer goods of even medium technological complexity, deliberate substitution of higher-quality goods with lower-quality analogs (in the food sector, for one), and a transition to outdated manufacturing standards. These trends will be exacerbated by the degradation of production facilities, which cannot be replaced or modernized without links to Western countries.
Still, stronger than it looks
In conclusion, let us reiterate a few key points. Russia is a private competitive economy built by domestic and Western reformers on the ruins of its Soviet predecessor. The very attempt to build such a system was a success — but it is hard to assess whether the result is positive or negative. The biggest miscalculation of those analyzing current events is not misjudging the degree of drawdown of the country's oil production or the gaffes in predicting the dollar exchange rate and magnitude of inflation.
The main mistake is that no one expected the Kremlin to create an environment in which people would hold on to their assets and property even while enjoying access to open borders — in which the same people would enlist to fight a fratricidal war for a few tens of thousands of dollars, or in which entrepreneurs would become the main guarantor of the authoritarian regime's success.
Back in 2010, I wrote that the emerging regime should not be seen as a reincarnation of Soviet totalitarianism, but Putin has discovered an entirely new fine line between freedom and dictatorship. Simple methods of fighting the system that he created are doomed to failure.
In many ways, we see confirmation of what was said 15 years ago. The monster — fostered by our homegrown liberals, by market believers, and by Western sympathizers — cannot be stripped of its power by poorly enforced trade embargoes, or even by provoking ten percent inflation. This realization is long overdue.