Russia’s economy is stagnating – but that won’t force it to end the war

In recent months, many western media commentators^[1] have suggested the Russian economy is in such serious trouble that President Vladimir Putin will soon have little choice but to end the war in Ukraine.

In December, the Washington Post reported^[2] fears among Russian businesses that interest rate hikes to combat inflation could bring the economy to a halt in 2025. More recently, an article in Politico^[3] suggested the reason Putin now seems ready to negotiate an end to the war is because he wants to “avoid a humiliating bankruptcy”.

Since Russia’s full-scale invasion of Ukraine three years ago and the subsequent imposition of tough economic sanctions, the Russian economy has unquestionably been under pressure^[4]. Problems have been accumulating and Russia does appear to be experiencing gradual economic decline – but not at all to the extent that has been claimed.

Russia’s economic performance over the last four years can be summarised by a look at the key indicators. While there are doubts as to the precision of some official Russian statistics, they still present a fair picture of the overall situation.

How Russia’s economy has changed throughout the war:

In spite of the war and sanctions, the Russian economy has proved to be robust^[6]. Growth has been driven to a large extent by sharply increased budget spending, not only on the military but on infrastructure projects^[7].

These projects include investment to improve transport links with China, secure greater economic self-reliance by producing goods previously imported from the west, and tackle some of Russia’s social problems – above all, its low birth rate^[8].

In 2025, the government is increasing its maternity payments^[9], with first-time mothers to receive 677,000 roubles (around £5,800) – up from 630,400 roubles in 2024. Making sure Russians have “as many children as possible”, Putin’s spokesman Dmitry Peskov told^[10] the Washington Post in 2024, is “the underlying goal of our state policy”.

However, the 2.5% growth in GDP forecast for 2025 is probably overoptimistic. Problems have mounted in recent months. The Russian economy became overheated, fuelled by budget funding and generous credit, leading to inflation of at least 10%.

Increased military production, the mobilisation of personnel to the armed forces, and significant outward migration gave rise to an acute labour shortage. The end-of-year unemployment rate was only 2.3%, compared with 4.5% before the war. To attract labour and recruits, wages and payments to people signing military contracts have increased rapidly.

Russia’s central bank increased its interest rate^[11] from 16% in December 2023 to 21% in October 2024, where it remains. It is these developments that have prompted claims that Russia’s economy is heading for disaster.

But Russia has had high interest rates before: 19% in 1998 and 13.1% in 2009, and inflation fell quickly on both occasions. There are signs the economy is now beginning to cool down – it is under pressure, yes, but by no means in crisis^[12].

The business sector has started to feel the impact of the high interest rates, the government is selectively reducing the volume of loans provided on generous terms, and firms are taking measures to raise productivity.

The Russian rouble has been appreciating^[13], and the rate of inflation and interest rates should start to fall later in the year. In January 2025, the unemployment rate began to increase^[14], if only a little, to 2.4%. The federal budget can be expected to remain in near-balance this year, possibly with scope to increase military spending above the current planned level.

While there is no threat of imminent economic collapse, there is no real prospect for development either. The Russian economy is facing a period of stagnation^[15], with ageing infrastructure and equipment and little technological innovation.

Spending on research and development has been little more than 1% of GDP^[16] over many years. And Russia is becoming increasingly dependent economically on China, which is now by far its largest trade partner – accounting for 39% of imports^[17] in 2024. China is Russia’s main source of many (not always high-quality) industrial and consumer goods.

Russia’s civil aviation fleet is shrinking steadily and degrading under the impact of sanctions, which have made it difficult to obtain spares. It is striving to keep its many Boeings and Airbuses flying, while the promised new fully Russian airliners fail to appear, with few likely until 2027-28.

Russia’s stock of cars is also ageing. Customers are having to choose between far-from-modern domestic Ladas, Chinese cars unsuited to Russia’s roads and climate, and imported second-hand vehicles of dubious quality. In 2024, 69% of all cars^[18] purchased in Moscow were Chinese – a total of 139,000, compared with 13,000 Ladas.

The mounting problems shows that Russia has a regressing economic order. In time, these pressures could force a Russian president to seek better relations with the west. But that time has not yet arrived.

If Putin does end the war in Ukraine, it will not be because of economic imperatives. It is far more likely to be because doing so may bring recognition by the US that he is the president of a great power who deserves respect. This is something that every leader of the Soviet Union and Russia has always craved.

References

1. ^{^} western media commentators (www.express.co.uk)
2. ^{^} Washington Post reported (www.washingtonpost.com)
3. ^{^} article in Politico (www.politico.eu)
4. ^{^} been under pressure (www.foreignaffairs.com)
5. ^{^} CC BY-NC-ND (creativecommons.org)
6. ^{^} proved to be robust (case-center.org)
7. ^{^} infrastructure projects (publications.bof.fi)
8. ^{^} low birth rate (www.reuters.com)
9. ^{^} increasing its maternity payments (economictimes.indiatimes.com)
10. ^{^} Dmitry Peskov told (www.washingtonpost.com)
11. ^{^} increased its interest rate (www.reuters.com)
12. ^{^} no means in crisis (www.foreignaffairs.com)
13. ^{^} has been appreciating (www.cbr.ru)
14. ^{^} began to increase (rosstat.gov.ru)
15. ^{^} period of stagnation (russiapost.info)
16. ^{^} 1% of GDP (issek.hse.ru)
17. ^{^} 39% of imports (www.iep.ru)
18. ^{^} 69% of all cars (www.autostat.ru)
19. ^{^} Maxim Shipenkov / EPA (epaimages.com)