For so long, Russia’s wartime economy seemed impervious to external pressure. Western hopes that biting coordinated sanctions would force President Vladimir Putin to sue for peace proved illusory.
Massive military spending — $263bn between 2022 and 2024, according to available data — helped output grow by more than 4% in 2023 and 2024. Yet with the fourth anniversary of Russia’s invasion of Ukraine on the horizon, deep economic and financial cracks have finally begun to appear.
Putin’s war machine is beginning to run out of steam. The finance ministry projects 1% growth in 2025, against earlier forecasts of 2.5%. In its latest World Economic Outlook, published this week, the International Monetary Fund has lowered its forecast to 0.6% growth this year, from a 1.5% prediction in April. Household lending is nearly at a standstill.
Last month German Gref, the CEO of state lender Sberbank, admitted the country was in “technical stagnation”. Even as growth dips toward zero, prices are rising: the IMF tips inflation to hit 9% this year.
In September, the Bank of Russia cut its benchmark rate from 18% to 17%, but its need to contain inflation means it dare not trim rates further.
The fiscal buffers Putin built up before attacking Ukraine “are beginning to be worn down,” reckons Timothy Ash, an associate fellow at the Royal Institute of International Affairs in London.
According to the latest purchasing managers’ index data from S&P, the manufacturing sector “remained in decline” in September, hobbled by falling orders, supply chain strains and a surprisingly sharp drop in new exports. Weak demand was blamed by the rating agency on “financial difficulties [with] clients and hesitation among customers”.
Experts say conditions will only worsen as long as Putin clings to his aim of subduing and absorbing Ukraine. “If the war continues, the economic crunch will hit Russia in the next 18 months,” said Sophie Ibbotson, an adviser to the World Bank in central Asia.
“If Ukraine can hang on that long, Russia will face really fundamental problems,” she said. “It is running out of money, people and kit — which is why China’s support is critical, as China has an awful lot more of those things. The question is whether [Chinese president] Xi Jinping will continue to bankroll a failing project.”
Entrepreneurs leave
Two other, interlinked challenges Russia faces are capital flight and brain drain. Thousands of Russian firms and dozens of global corporates fled the country in 2022. Many found safe haven in central Asia and the Caucasus, notably Azerbaijan, Georgia, Kazakhstan and Uzbekistan.
“A lot of Russian start-up firms have relocated to Kazakhstan and listed on the AIX [Astana International Exchange],” said Janet Heckman, a former senior banker at the European Bank for Reconstruction and Development, now a non-executive director at Citigroup Kazakhstan and Georgia’s TBC Bank.
She pointed to the welter of global corporates that have in recent years ploughed capital into central Asia, including EY, PwC, Siemens, Japan Tobacco International and Turkish consumer goods group Anadolu Efes. She added: “It’s exciting to see.”