{"id":10726,"date":"2025-11-14T17:35:48","date_gmt":"2025-11-14T16:35:48","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=10726"},"modified":"2025-11-14T17:35:48","modified_gmt":"2025-11-14T16:35:48","slug":"war-is-wearing-down-the-russian-economy","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2025\/11\/14\/war-is-wearing-down-the-russian-economy\/","title":{"rendered":"War Is Wearing Down the Russian Economy"},"content":{"rendered":"<p><em>Despite the closure of trade channels with the West, the Russian economy has grown in the more than three years since the invasion of Ukraine. But it is now beginning to show signs\u2014some of them striking\u2014of a slowdown. Inflation is high, and sanctions, low energy prices, and massive military spending are weighing heavily. In addition, a structural transformation has turned the country into a war economy oriented toward the East, heavily dependent on China, in a friendship that may be \u201cwithout limits\u201d but appears unbalanced. Domestically, the majority of the population continues to ignore the war, shielded by generous state transfers and massive propaganda. While repression has choked off dissent, some have actually benefited from the conflict. Thanks to a Constitution that allows him to remain in office until 2036, Putin seems destined to endure\u2014unless an economic crisis erodes the support surrounding him.<\/em><\/p>\n<p>&nbsp;<\/p>\n<p>More than three years of armed conflict and two years of surprising growth: this is the current picture of the Russian economy. But now it has begun to slow, while inflation and the public deficit remain at high levels. In short, in Moscow the war in Ukraine is beginning to show its effects.<\/p>\n<p>For the first time, the governor of the Russian central bank, Elvira Nabiullina, has used the expression \u201csoft landing\u201d to describe the country\u2019s current economic situation, while some commentators openly evoke the risk of stagflation\u2014that is, the combination of economic stagnation and inflation. Western sanctions, the low prices at which Russia is forced to sell its energy commodities, the uncontrolled military expenditures, and a restrictive monetary policy to contain inflation are now making themselves felt.<\/p>\n<h3><strong>The Shadows Over the Russian Economy<\/strong><\/h3>\n<p>In 2023 and 2024, Russian GDP grew by more than 4% per year, but in the first quarter of 2025 expansion decreased drastically. The forecasts for all of 2025 and for 2026 do not exceed 0.9%, far below the government target of 2.5%. Additional confirmation of the slowdown comes from data on declining rail freight traffic, car sales, steel production, and especially oil and natural gas output.<\/p>\n<p>Inflation remains high, around 10%, while in 2024 nominal wages increased by 18%, supported by a very low unemployment rate (2.2%). However, this figure reflects a shortage of labor more than genuine growth in employment. Emigration, military mobilization, and war casualties have drastically reduced the supply of labor. The fighting in Ukraine has a high human cost: Russia has suffered a number of losses almost five times greater than in all the other conflicts it has fought since the end of World War II\u2014even though Putin had imagined that conquering \u201cLittle Russia\u201d would be a walk in the park, illustrating how terribly wrong tyrants can be.<\/p>\n<p>But there is another factor that makes the Russian economy fragile: what the Russian central bank euphemistically calls \u201cstructural transformation.\u201d<\/p>\n<p>For years\u2014albeit hesitantly and with some skepticism\u2014Russia looked toward the West and pursued, though chaotically, private initiative. Since 2022, things have changed, and the country has restructured itself into a war economy oriented toward the East. This shift has required major investments, not only in the military industry but also in the creation of new supply chains, with intensified trade relations with China, India, and Turkey.<\/p>\n<p>GDP continues to grow, but expansion is increasingly linked to the war effort, while the \u201ccivilian\u201d economy weakens. Medium-term prospects point to further slowdown, which could lead to social tensions as living standards fall. Domestic demand remains weak, and exports also contracted in the first quarter of 2025, penalized by Western sanctions on oil and gas\u2014Russia\u2019s main export items.<\/p>\n<p>Further problems for the Russian Federation stem from falling oil prices, compounded by the fact that sanctions force Moscow to offer discounts to its buyers. The drop in crude inevitably hit the stock market, since oil companies represent about one quarter of total market capitalization. The Moex Index, which tracks the fifty largest listed companies, declined sharply after the rally recorded at the start of President Trump\u2019s term, when markets hoped (in vain) for a partial easing of sanctions.<\/p>\n<p>That is not all. The collapse in energy exports directly affects the state budget: in March, fiscal revenues from oil and gas decreased by 17% year-on-year. In April, the Ministry of Finance raised the deficit forecast for 2025 to 1.7% of GDP, but more reliable estimates put the shortfall at 2.6%. Meanwhile, military spending now absorbs roughly 40% of the public budget.<\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-10735 size-large\" src=\"https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-1024x578.png\" alt=\"\" width=\"640\" height=\"361\" srcset=\"https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-1024x578.png 1024w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-300x169.png 300w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-768x434.png 768w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-1536x867.png 1536w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui-600x339.png 600w, https:\/\/www.rivistaeco.com\/wp-content\/uploads\/sites\/2\/2025\/11\/2025.09_grafici_hamaui.png 2008w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Persistent Inflation<\/strong><\/h3>\n<p>The official inflation target is 4%, but the rate recorded in July was 8.8%. This is a persistent phenomenon; to counter it, the Russian central bank has raised the key interest rate to 21%, one of the highest levels since the end of the USSR. Precisely this very high real interest rate (now above 10%) has led some observers to suspect that actual inflation is in fact far higher than officially stated. In any case, interest rates this high discourage investment, especially in sectors unrelated to defense. At the same time, high interest rates have encouraged inflows of foreign capital and a strong appreciation of the ruble. While this makes imports cheaper and helps contain inflation, it penalizes competitiveness and further slows growth. In other words, a strong ruble in this context is more a symptom of weakness than of strength.<\/p>\n<h3><strong>A Marriage of Convenience Between the Russian Bear and the Chinese Dragon<\/strong><\/h3>\n<p>On the geopolitical front, the \u201cno-limits friendship\u201d between Russia and China undoubtedly carries strategic and tactical importance: from 2022 to today, trade between Moscow and Beijing has increased by 30% per year.<\/p>\n<p>However, one must consider that the two countries have radically different histories, cultures, and worldviews. The sense of insecurity inherited from the Soviet Union, deep hostility toward the West, the push for territorial expansion, and the messianic ideology rooted in Orthodox Christianity sharply distinguish today\u2019s Russia from today\u2019s China. Not to mention that in the nineteenth century a significant part of Russia\u2019s territorial expansion occurred at China\u2019s expense. Unequal and humiliating treaties such as the Treaty of Kulja (1851), the Convention of Peking (1860), and the agreement for leasing the Liaotung Peninsula (1898) have now been diplomatically forgotten out of convenience. But marriages of convenience last only as long as both spouses benefit.<\/p>\n<p>In the long run, it is far from clear whether Russia will truly be a reliable partner for Beijing. For now, the war in Ukraine has strengthened China\u2019s position, and the risk is that the Russian bear will become increasingly subordinate to the Chinese dragon.<\/p>\n<h3><strong>Putin\u2019s Popularity Remains Intact. For Now<\/strong><\/h3>\n<p>Meanwhile, what is the mood of Russian citizens? Various surveys show that about half of Russians continue to say they pay little or no attention to the war in Ukraine. Credit goes also to the Kremlin\u2019s efforts to shield the middle class from the reality of the conflict. High compensation paid to families of fallen soldiers and the fact that the war has largely been fought by volunteers have so far avoided widespread protests. Sanctions have been partially circumvented thanks to increased trade with China, India, and Turkey. Some groups, such as workers in the military industry or entrepreneurs who took over from Western companies, have even benefited from the war. Those who tried to oppose the invasion openly have been silenced by the harshest repression in decades.<\/p>\n<p>Vladimir Putin, who trains every day and pays careful attention to his health, could remain in power for a long time. The Constitution allows him to stay in office until 2036, when he will be 83. Let us hope that the deteriorating state of the Russian economy will erode, at least in part, the popularity that surrounds him.<\/p>\n<p>&nbsp;<\/p>\n<p><em>Rony Hamaui is Adjunct Professor at Universit\u00e0 Cattolica del Sacro Cuore in Milan and has worked in several banking institutions. He graduated from Bocconi University and holds a Master of Science from the London School of Economics.<\/em><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Despite the closure of trade channels with the West, the Russian economy has grown in the more than three years since the invasion of Ukraine. 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