Can Russian Economic Difficulties Save Ukraine?

Numerous Western and some Russian economists are predicting a financial-economic crisis in Russia, resulting from the burdens of a ‘war economy’ and Western sanctions during the NATO-Russia Ukrainian War. In fact, the evidence for this is contradictory, and the problems that exist are manageable for the foreseeable future. Moreover, there are various paths of development that do not include an inevitable crisis moving forward. No doubt the general burden of war and greater emphasis on military production largely for ‘domestic use’ instead of export hampers the Russian economy in many ways, as do sanctions. However, the difficulties are being exaggerated by the West as are their potential to produce economic and financial crises, no less a political crisis, and there are mitigating circumstances and opportunities that tend to reduce the weight of this burden.

Numerous Western officials, analysts, propagandists, and combinations thereof have been forecasting an economic or financial crisis in Russia that could cripple Russia’s war effort and perhaps destabilise Russian President Vladimir Putin’s so-called ‘system.’ Putin acknowledged with calm concern that inflation and interest rate hikes it made necessary were a problem in his December 17th annual marathon press conference. Reuters reports that the Russian president is more seriously concerned than those comments suggest and considers that his ‘special military operation’ (SMO) in Ukraine has “basically achieved its goals, in particular creating a land bridge between the Russian ‘mainland’ and Crimea (www.reuters.com/world/europe/putin-growing-concerned-by-russias-economy-trump-mulls-more-sanctions-2025-01-23/). The claim of achieved war aims, which implies Putin is being pushed to peace talks because of economic troubles, is based however, on just one source, creation of a land bridge has never been among Putin’s oft-declared four goals of the SMO: Ukrainian neutrality, annexation of four Ukrainian regions besides Crimea, Ukraine’s de-militarization, and its de-Nazification.

Former Morgan Stanley banker Craig Kennedy asserted that Russia’s economy is vulnerable, given the Central Bank’s massive printing of money and the growth of corporate debt now at $415 billion, marking a 71 percent increase since September 2022. One might counter that the US national debt of some $37 trillion should be of greater concern, but we can skip over that polemic for now. The Financial Times’ Martin Sandu called Russia’s “war economy” a “house of cards” because the “majority of credit has been devoted to military production, which can produce a credit crisis in the next few years (https://t.me/economica/5681). Bloomberg was bearish but more restrained, limiting the dangers to slow growth predicted for next year. It recently wrote: “President Vladimir Putin’s invasion of Ukraine triggered an economic boom in Russia built on the back of government stimulus. Almost three years on, there are gathering signs the bill is about to come due. The mood in Moscow and other cities remains upbeat with packed restaurants and busy luxury stores, but a combination of record-high interest rates and persistent inflation is increasingly threatening forecasts for another year of slower, but still war-fueled growth” (www.bloomberg.com/news/articles/2025-01-08/russia-putin-s-war-economy-poised-for-soft-bumpy-landing).

There are certainly signals that there are problems in the Russian economy, and some may very well be related to the NATO-Russia Ukrainian war, but none are prohibitively difficult to contend with. Russia’s Central Bank is forecasting a fall in growth from 3.5-4.0 percent in 2024 to as low as 0.5 percent in 2025, while the Economic Ministry sees a decline only to 2.5 percent (www.bloomberg.com/news/articles/2025-01-08/russia-putin-s-war-economy-poised-for-soft-bumpy-landing). Inflation is high but far from astronomically so, projected at 8.5-9 percent in 2024 due to significantly high levels of ruble printing, in part due to few goods supplies resulting from sanctions (“Grechka, Kurtis’s, svinitsa, stanut samymi dostupnymi produktami v 2025 body,” Parlamentskaya gazeta, 27 December – 16 January 2025, p. 1). To rein in the situation, Russia’s Central Bank (TsB) has raised the key interest rate several times since the war began, most recently to 21 percent in November, when Central Bank Chairwoman Elvira Naibiullina declared the hike’s purpose is to lower inflation to 4 percent. This move produced an unprecedented wave of criticism in some elite circles and even the upper and middle classes (www.bloomberg.com/news/articles/2025-01-08/russia-putin-s-war-economy-poised-for-soft-bumpy-landing).

Controlling inflation is a ‘populist’ move—that is, a politically motivated step intended to assuage everyday Russian consumers, who are far less interested in the exchange rate as compared to inflation. Nevertheless, the credit rate hike has both its economic and potential political costs. A credit crunch is evident in the rise of rejections of mortgages for new housing starts, reaching 59 percent in June 2024 and 72 percent in November as a result of the repeal of the Mikhail Mishustin government’s massive mortgage program (https://t.me/economica/4839). By December it was being reported that Russian families with two children were unable to get mortgages at the market rate in 98 percent of Russia’s 89 regions (https://t.me/economica/5341). The number of Russian debtors is rising rapidly, and the total debt attained record levels in December, reaching 38 trillion rubles, around $380 billion, with debt to banks amounting to a quarter of Russia’s GDP (https://t.me/economica/4541). Auto dealerships and the agricultural sector are facing a likely wave of bankruptcies (www.bloomberg.com/news/articles/2025-01-08/russia-putin-s-war-economy-poised-for-soft-bumpy-landing). Vice President of Russia’s Union of Shopping Malls (Soyuz torgovykh tsentrov) Pavel Lyulin said that the TsB’s harsh policies could lead to the closure of more than a thousand shopping centers or malls. Lyulin backed up his claim by noting that many banks are warning shopping center owners about a significant increase in the cost of previously issued loans and that tenants are beginning to leave the shopping malls in large numbers due to expensive rentals, loans and high taxes. If the Central Bank raises the rate even higher in December, he added, the owners of shopping centers will have no choice but to declare bankruptcy (https://t.me/economica/4299). GazProm recently announced it was planning mass layoffs, including a 50 percent cut in its central apparatus, which includes some 30,000 personnel (https://dzen.ru/news/story/daa85b41-2c4c-57ff-905b-8ed484783e63?lang=ru&from=main_portal&fan=1&annot_type=trust&t=1736770000&persistent_id=3124960112&cl4url=10fd127dca18469a91e3d45c4e1306f8&tst=1736770653&story=984c2ad5-198b-5bf7-8a05-1588503b583e&utm_referrer=dzen.ru). The Russia state’s railroad company ‘Rossiiskie zheleznyie dorogi’ (RZhD) has been forced to drastically cut its re-investment program and settle for mere maintenance as a result of high debts, which rose 50 percent in 2024, and the Central Bank’s high interest rates (www.epravda.com.ua/rus/news/2024/11/25/722256/). According to Harvard University’s Davis Center, the credit crunch already is forcing banks to make $250bn in off-budget soft loans to defence companies that could cause a crisis (https://lnkxtcdab.cc.rs6.net/tn.jsp?f=001l1th8JNf7fVU6OHHPFcVjWW_LdVv-OlWR1tSXGLS0FgAZt1VTb2UZ47CH0wSfZD_9oWeuubdOr7BQgXnAN3rpWHelivDzNflTyvtXKzdvKte1fiD4VgqxcgOREaR_Bf4ZwdSXRWEG9uDV5z5PDoLuHT7UFPCuZDcmU0XJPsbRq-0_ZNgrzEhBO4l-IWecudP6RhFPs6TnJ3ZRy_oGoTXjB5BXnV9k2nkd4qZyIhiiwgm-sieTwczEw==&c=0Zvbaq0PUwNA2Fn765C6ywwsS-xjcBjyyMMKZBwb5-QskJqdIPzshQ==&ch=MyHGMHHzCthAf6uzVUPbMnSstA4JFUegjR5V4tIBreny84hnCpv4pA==). This claim, however, has been refuted by others (https://en.thebell.io/no-russia-is-not-on-the-verge-of-a-banking-crisis/).

Overall, a general belt tightening is gripping the country and will be needed to continue the war effort at its present level. The rate of bankruptcies is worth watching closely, but such will have no chance to spark a political crisis for more than a year and likely several years.

 Most recently, VTB First Deputy Chairman Pyanov asked Naibiullina, who he sarcastically calls ‘Snegurochka’ (a snow maiden for Russia’s version of Santa Claus, ‘Ded Moroz’ or Grandfather Frost) to actively stabilize the ruble exchange rate instead of raising the key interest rate in order to avoid economic hypothermia and recession. According to Pyanov, top managers were being “stunned” by the value of the dollar in the exchanges, and inflation expectations in the bank increased. Pyanov also asked the “Snow Maiden Department” to explain more clearly how precisely it will get to the 4% inflation target (https://t.me/economica/4433). Naibiullina has consistently responded to critics, saying the Bank’s various rate hikes have restrained inflation, which otherwise would be at 30 percent (https://t.me/economica/5069). The business community’s concern over exchange rates expressed by Pyanov is not misplaced. Alfa-Forex’s General Director has said in early December that the rate could reach 127 rubles around the New Year, taking into account US President-elect Donlad Trump’s plans to drive oil prices down (https://t.me/economica/4824). Pyanov probably has overstated matters, and his may represent lobbying and the somewhat exaggerated fears of instability extant in Russian culture, refracted through the business community lens. The ruble certainly has weakened since the February 24, 2022 invasion. In February 2022 the ruble-dollar exchange rate stood at 77 rubles to the dollar. Immediately with the invasion, the rate skyrocketed to a peak on March 11, 2022 of just under R134. But the CB quickly got things under control, and the economy began to adjust. By April 22, 2022, the rate had fallen to prewar levels and remained in that range until April 2023, when it reached R78. Since then it has peaked once at R101 in October 2024. Recently it has reached a new peak at just over 110 on January 4^th and as of writing (January 14^th) it is R103.24. Nevertheless, the 127 level was never reached, though it could be later in the year.

To the pressures or at least potential pressures on the Russian economy must be added the West’s war on Russian energy exports. This war includes: oil and gas related sanctions, the destruction of the Russo-German ‘North Stream’ natural gas pipeline for Russian gas exports to Europe, Ukraine’s discontinuation of transport of Russian gas to Europe, the failed January 12^th Ukrainian drone attack on the Russian gas transit compressor station in Krasnodar through which natural gas is sent to the southern route Russo-Turkish ‘Turkish Stream’, and the Ukrainian attacks on the shadow fleet transporting Russian oil and gas to circumvent sanctions. Trump may be seeking to lift such sanctions in order to drive oil and gas prices down, further pressuring Russia’s budget and banks.  

But crucially, the claim that Russia now has a ‘war economy’ is exaggerated, as the precent of GDP on military spending stands at an only slightly high 6 percent. NATO requires a minimal expenditure of 2 percent for its member-states but it is now moving to require 5 percent. There is nothing as yet surreal about the scale of the Russian economy’s emphasis on war-related production. Indeed, the shift to greater defense spending and production starts from a low point. Indeed, in 2016, despite the ongoing civil war in Ukraine and Kiev’s refusal to honor the Minsk 2 agreements, Russia cut defense spending. Moreover, unlike the West, Russia never fell to the delusion that conventional wars between states were a thing of the past and maintained its defense industry’s capacity to provide not only products for export but those for supplying its own military. 

Thus, Russia’s economic woes are still manageable and far from politically explosive. Both inflation and interest rates are predicted by the Central Bank to decline this year, with inflation falling to 4.5%-5% by year’s end and returning to 4 percent in 2026 and an average key interest rate between 17%-20% for 2025 (www.bloomberg.com/news/articles/2025-01-08/russia-putin-s-war-economy-poised-for-soft-bumpy-landing). No economic-financial crisis appears imminent, certainly not in the coming year plus.

Russian budget deficits caused by the war and military spending hikes are run of the mill, indeed low by Western, particularly US standards. Moscow is spending RUB10 trillion ($100 billion) a year on the war, increasing its budget deficits, though 2024’s deficit has fallen from that of 2023. The Russian government recently approved its budget for 2025-2027, which raises military expenditure by nearly 25 percent to 33 percent of the federal budget and above 6.2 percent of GDP. Defense spending has more than doubles since Putin opened his ‘special military operation.’ Spending on all defence and security needs will amount to 17 trillion roubles, almost 41 percent of total expenditure and 8 percent of the country’s GDP.The federal budget’s defense spending increases by $28 billion in 2025 (https://www.euronews.com/my-europe/2024/12/01/russian-defence-spending-rises-to-a-record-high-a-third-of-the-budget; https://tradingeconomics.com/russia/government-budget-value; and https://www.reuters.com/world/europe/russia-hikes-national-defence-spending-by-23-2025-2024-09-30/). For comparison, U.S. spending on defense came to some 15 percent of the federal budget and 3.5 percent of GDP in 2023. On the key issue of the budget deficit’s hare of GDP, however, the Russian case does not seem a serious problem as of yet. The Russian government projects the 2024 budget deficit at 1.7 percent of GDP — up from the previous projection of 1.1 percent and the initial projection of 0.9 percent — and the 2025 budget deficit is seen at 0.5 percent of GDP. For comparison, the U.S. budget deficit sgare of GDP was 6.3 percent and in the EU it was 3.5 percent (www.statista.com/statistics/217428/us-budget-balance-and-forecast-as-a-percentage-of-the-gdp/ and https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-22102024-ap).

NATO member Turkey has had inflation rates three-four times those of Russia since the NATO-Russia Ukrainian War began. Moreover, mitigating circumstances and opportunities that can reduce the weight of this burden. That sanctions have led to new innovation in the Russian economy through import substitution, and old Western partners have been replaced by companies from the ‘global South’ and Asia. Similarly, new sanctions, such as those leveled against the 185 ships constituting the shadow fleet servicing Russian oil and gas export in ways that circumvent previous sanctions on said exports are themselves likely only to produce new innovation. Adaptation to the new sanctions will likely mean only a temporary disturbance of transport results from the fleet sanctions. Some may accrue to Russia’s benefit. For example, ship owners may turn to Russian insurance companies to obtain policies once purchased from Western companies now forbidden to conclude insurance contracts. They may turn to Russian rather than Western ports to get needed repairs. Similarly, the West or at least Ukraine is biting off its foot to spite its face by attacking Turkish Stream, which is important to Turkey, a member of the military alliance feeding Ukraine’s war effort—NATO. It appears that each side in the conflict is moving towards the limits they can bare.

A potential danger comes with cross-border payment limitations as a result of Western sanctions’ SWIFT access cut off to Russia, but Russia has been able to develop work-arounds in partnership with China in the past and is likely to be able to do the same sufficiently under any new sanction restrictions. For example, even Russia’s key partner, China, is at least to some degree plays along with the Western sanctions regime against Russia. According to ‘First Group’ General Director Aleksei Poroshin, Chinese banks recently have begun to decline working with Russian banks under American sanctions (https://t.me/economica/4427). But the scale and permanence of this refusal remain unclear and is likely limited.

Conclusion

Despite all the problems, there is no evidence of an extraordinary war effort collapsing the Russian economy. Russian economic growth is pegged to be about 4 percent for 2024. Even if the worse case scenario for 2025 — 1 percent — occurs, this is not even a recession. It would take a deep and long recession to spark any grumbling among the Russian elite or populace. A credit crisis is possible down the road a year, but not inevitable, since as inflation eases so too can the key interest rate. US sanctions on Russian and oil and natural gas are likely to raise their prices and thereby Russia’s key budget revenue sources’ contribution to the coffers, controlling deficits.

Even if the war, its attendant sanctions and war on Russian energy exports were to spark an economic crisis, Western leaders would be mistaken in delaying peace talks with Russia in the hope that a crisis could force a change in Russian policy or the regime itself. Russians are used to hardship and because of their security vigilance, especially vis-a-vis the potential of security and military threats from the West, most are willing to endure much for the nation’s defense before raising economic demands, no less political ones. The cultural value of national solidarity helps to cement this tendency. Although there is a significant portion of the Russian population that supports peace negotiations over the continuation of the war, they remain a minority. Moreover, any political opposition or radicalization, inside or outside the ruling elite, can be negated by a less soft, less surgical repression than is extant in Russia. So any game-changing economic or financial crisis will take at least two years (perhaps forever) from its onset to produce the scale of political backlash capable of ending Putin’s special military operation one way or another. By that time — given its crumbling economy, army, and state — Ukraine is almost surely to have ceased its existence. But it cannot be excluded that NATO or some of its European members (UK, France, and Poland in particular) will intervene directly militarily to reach some Russian crisis period, but that will provoke economic and political crises in the West. In that event, we will all be in a state of crisis politics. The West would be wise to begin negotiations with Russia. That is how to save some rump of a Ukrainian state and avoid a costly war for itself not hoping for an unlikely economic or political collapse.

2025 is not 1991. The USSR had a hyper-centralized economy with few sources of foreign income and a cumbersome Party apparat that knew ideology not economics. Putin’s Russia has a modern, largely Western-style economy, a rational-legal state bureaucracy, and a wealth of human and natural resources it has the ability to develop and deploy. There is no economic collapse, palace coup, or state disintegration by ‘decolonialization’ likely or even possible in the short- to mid-term, as many in DC and Brussels dream. In the long-term, we are all dead.

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About the Author – 

Gordon M. Hahn, Ph.D., is an Expert Analyst at Corr Analytics, www.canalyt.com. Websites: Russian and Eurasian Politics, gordonhahn.com and gordonhahn.academia.edu

Dr. Hahn is the author of the new book: Russian Tselostnost’: Wholeness in Russian Thought, Culture, History, and Politics (Europe Books, 2022). He has authored five previous, well-received books: The Russian Dilemma: Security, Vigilance, and Relations with the West from Ivan III to Putin (McFarland, 2021); Ukraine Over the Edge: Russia, the West, and the “New Cold War” (McFarland, 2018); The Caucasus Emirate Mujahedin: Global Jihadism in Russia’s North Caucasus and Beyond (McFarland, 2014), Russia’s Islamic Threat (Yale University Press, 2007), and Russia’s Revolution From Above: Reform, Transition and Revolution in the Fall of the Soviet Communist Regime, 1985-2000 (Transaction, 2002). He also has published numerous think tank reports, academic articles, analyses, and commentaries in both English and Russian language media. 

Dr. Hahn taught at Boston, American, Stanford, San Jose State, and San Francisco State Universities and as a Fulbright Scholar at Saint Petersburg State University, Russia and was a senior associate and visiting fellow at the Center for Strategic and International Studies, the Kennan Institute in Washington DC, the Hoover Institution at Stanford University, and the Center for Terrorism and Intelligence Studies (CETIS), Akribis Group.