Russian economy cannot cope with war

They boast about the resilience of Russia's economy, claiming everything is fine. But that’s far from the truth.  

I prefer not to rely on reports from dictatorial regimes. Instead, I enjoy gathering news from open sources and piecing together the puzzle.  

So, here’s what I’ve found:

Our enemy (Russia) is far from doing well, and 2025 will be the last year of their so-called "resilience."

So, here's what's happening, point by point, with sources:  

Economic Problems 

– High inflation:

As of the end of 2024, inflation in Russia reached 9.6%, which significantly exceeds the Central Bank's target.

Reasons: ruble depreciation, increased government spending (war and subsidies), labor shortages, loss of export markets for energy resources, money printing (the money supply grew by 20% over the year due to budget deficits).

As a result — a record-high key interest rate.

The Central Bank of Russia was forced to raise the key rate to 21% to fight inflation, which negatively impacts economic growth.

As a result, loans soared to 25%, including mortgages, which have almost collapsed.

- Budget deficit:

In 2024, Russia's budget deficit exceeded the planned figures by more than double, reaching about 3.3 trillion rubles, which is nearly 10% of the budget's expenditures.

It is forecasted that the deficit will persist into 2025, with an expected shortfall of around 8 trillion rubles (!). This is due to increased war-related spending at the expense of social programs. This amounts to nearly 20% (!) of the planned budget expenditures. Where will they get the money from?

Officially, defense and security spending for 2025 is planned at $176 billion, which accounts for 41% of the federal budget (!).

Economists express concerns about Russia's ability to finance such expenditures without significant borrowing (but who will lend to them?), given limited reserves and lack of access to international capital markets.

- Economic slowdown:

GDP growth is projected to decline from 3.9% in 2024 to 2.5% in 2025 and 2.6% in 2026 (and considering that neither Putin nor Russian statistics can be trusted, growth is more likely to approach zero).

Here’s a fresh forecast: growth is expected to be less than 1%. 

Energy Problems

- Decline in gas exports: 

The halt in pipeline gas supplies to Western Europe is expected to reduce Russian exports to the EU by 14 billion cubic meters in 2025.  

- Falling market share in Europe:

Russia's share of gas imports in the EU has dropped from 45% in 2021 to 15% in 2023.  

With the cessation of transit through Ukraine, the share of Russian gas in the European market will drop to as low as 5% (!).

- The need for reorientation towards Asian markets and even greater dependence of "The Great" Russia on China.

At the same time, Russia must redirect its supplies to Asian markets, which requires significant investments in infrastructure.

Technological Issues

- Lag in innovation:

Despite some achievements, Russia continues to lag behind in key technological sectors due to sanctions and limited access to Western technologies (including technologies for resource extraction intensification, semiconductors, various types of electronics and software, machinery, aircraft components, and more).

- Low spending on R&D (research and development):

Russia's spending on research and development remains low compared to leading innovative economies.

Specifically, Russia spends about 1% of its GDP on science, ranking 43rd globally, while countries like Israel (6%) and South Korea (5.2%) lead the world.

Social and Humanitarian Problems

- Rising poverty:

Despite official claims of rising incomes, real poverty among the population is increasing due to high inflation.

- Increased social inequality:

The gap between the rich and the poor is widening, creating social tensions.

- Healthcare issues:

Access to quality healthcare remains a pressing problem, especially for the elderly (and indeed, why should they need medical care?). This is how Putin plans to save on pensions.

Management System Issues

- Corruption:

Despite official statements about fighting corruption, it remains a serious problem undermining the effectiveness of government management.

- Excessive centralization:

The concentration of power and resources in the federal center reduces the effectiveness of regional governance.

Economic Structure Imbalance

- Dependence on raw material exports:

Russia's economy remains heavily reliant on the export of oil and gas, making it vulnerable to fluctuations in global prices (in 2024, over 31% of budget revenues come from the oil and gas sector).

- Insufficient development of high-tech industries:

The share of high-tech products in exports remains low.

But that's not all.

1. A Kremlin-affiliated analytical center forecasts a "silent crisis" in Russia's economy (from the second half of 2024).

Despite nominal growth in the banking credit portfolio, its real dynamics are slowing due to rising inflation. "This is already a sign of the future cooling," write the analysts.

Russia is also facing an increased likelihood of a banking crisis. The decline in asset quality and the formal onset of the crisis is only a matter of time, according to a recent analytical note from the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASTF).

Signs of the forthcoming crisis, according to CMASTF, include:

- Low levels of bank capital. Many major banks have reached the minimum acceptable capital adequacy thresholds.

- High interest rates. The Bank of Russia has tightened its monetary policy, and corporate loan rates have reached levels that effectively block access to borrowed funds for companies. Even for reliable borrowers, the gap between the key and loan rates has significantly widened.

- Business over-indebtedness. In such conditions, companies are unable to service their debts on time, which will lead to widespread debt restructuring in the coming months.

1. A high key interest rate could trigger stagflation, meaning an economic downturn and a collapse of investments. This is mentioned in the report from the Center for Macroeconomic Analysis and Short-Term Forecasting titled "Risks of Stagflation in the Russian Economy."

2. The Russian Direct Investment Fund (RDIF) is preparing to buy stakes in Russian companies that are struggling with the increased lending rates and rising debt servicing costs at unprofitable prices.

3. In 2024, over 86% of organizations in Russia faced a shortage of personnel, with some sources reporting up to 91%. The total shortage is estimated at 4.8 million people.

4. Compared to September 2023, demand for mortgages on ready-made housing in the regions dropped by 57%.

5. The Russian real estate market is heading into stagnation due to high interest rates.

This is just a quick analysis of the events occurring in Russia, and it shows that things are not as good as official sources portray.

Source 

About the author. Anatolii Amelin, co-founder and director of economic programs at the Ukrainian Institute for the Future

The editors do not always share the opinions expressed by the blog authors.

• As a result of the war against Ukraine, the Russian economy has lost between 1.5 and 1.7 million able-bodied citizens