Sunday | January 26, 2025
Since Russia’s full-scale invasion of Ukraine in 2022, its economy has defied expectations. While not thriving, it has avoided collapse. In 2023, the war economy likely grew faster than the United States and major European economies. Unemployment hit a record low, and although increased defense spending has strained other areas of the budget, this is viewed as a temporary issue.
These economic indicators serve a dual purpose, according to Elina Ribakova, a senior fellow at the Peterson Institute for International Economics. To the Russian public, the message is, “We’re still standing.” To Ukraine’s allies, it’s, “We can outlast you.” This portrayal of resilience challenges the effectiveness of Western sanctions, dismissed by President Vladimir Putin as mere “logistical hurdles.” If sanctions appear ineffective, it raises doubts about their value.
However, experts argue that Russia’s image of economic strength is largely a façade, carefully crafted by the Kremlin to mislead its adversaries. As the war approaches its third anniversary, cracks in this narrative are becoming more apparent.
To explain Russia’s seemingly robust economy, analysts have used metaphors like “on steroids” to describe growth that is fast but unsustainable. Ribakova, however, offered a starker comparison: “Steroids is a good one, but it still produces some muscle. I wouldn’t call this muscle. It’s more like running around on cocaine.”
Signs of strain are emerging. Discontent among Russian officials is growing, with warnings that the economy is nearing its production limits, driving up prices. Inflation accelerated last year, despite the central bank’s aggressive response, including hiking interest rates to 21%—a 20-year high. Russia may soon face the consequences of its artificially propped-up economy.
On his first day back in the White House, U.S. President Donald Trump, while signing a series of executive orders, remarked that Russia’s economy was evidence of the country being in “big trouble.” He criticized President Vladimir Putin, saying, “Putin is destroying Russia by not making a deal” on Ukraine.
Indicators of this economic strain include the effects of new sanctions, ongoing labor shortages, and signs of a growing credit bubble. While Russia has achieved recent battlefield gains, analysts suggest its deepening economic challenges could pressure Putin into negotiations sooner than anticipated. These issues may also enhance the leverage of sanctions relief as a bargaining tool for the West.
Shadow budget
Throughout the war, the Kremlin has employed a strategy known as “reflexive control,” designed to shape an adversary’s perceptions and lead them to actions that ultimately benefit Russia. This tactic has been particularly evident in the realm of weapons. Each time the West has debated sending advanced technology to Ukraine—be it modern tanks, fighter jets, or long-range weapons—the Kremlin has issued dire warnings, often invoking the threat of nuclear escalation. These warnings have delayed the delivery of critical arms to Kyiv, a delay that has worked to Moscow’s advantage.
The economy is another front where this strategy is evident. Russia seeks to convince Ukraine’s Western allies, especially the United States, of its economic resilience. If Russia can project the ability to fund its war indefinitely, it might push the U.S. and others toward supporting a ceasefire aligned with Kremlin goals. Controlling perceptions is central to this effort, observers say.
As part of this narrative, the Kremlin touts its economic strength. At his marathon annual press conference last month, President Vladimir Putin claimed that Russia’s economy was growing “in spite of everything,” outperforming both Europe and the U.S. Economic growth and low unemployment, as Alexandra Prokopenko of the Carnegie Russia Eurasia Center recently noted, have become Putin’s “trump cards.”
However, these positive headlines mask troubling realities. A new report by Craig Kennedy, an associate at Harvard University’s Davis Center for Russian and Eurasian Studies, reveals that Russia is concealing the true cost of its war through a shadow “off-budget financing scheme.”
While Russia’s official defense budget appears sustainable, Kennedy highlights a parallel and largely overlooked surge in corporate borrowing. These loans, while ostensibly private, are effectively disguised state spending. On February 25, 2022—just the second day of the invasion—Russia enacted a law allowing the state to compel banks to lend to businesses supporting the war effort on terms dictated by the government.
Between mid-2022 and late 2024, Russia experienced an “anomalous” 71% increase in private credit, equivalent to 19.4% of its GDP. Kennedy estimates that up to 60% of these loans—about $249 billion—have gone to war-related enterprises. These are loans the state has forced banks to provide to companies that are often financially unviable, offered on heavily concessionary terms.
This hidden financing effectively doubles Russia’s war expenditure compared to its official figures. Kennedy warns that this approach could lead to a severe credit crisis, burdening banks with toxic debt as war-related companies inevitably default. Such a collapse could have far-reaching implications for Russia’s already fragile economy.
Savers’ jitters
Kennedy’s analysis has sparked diverse reactions. A commentary in the Financial Times described his findings as evidence that Putin is presiding over a “ticking financial time bomb.”
Others have adopted a more cautious stance. Alexandra Prokopenko and Alexander Kolyandr, a scholar at the Center for European Policy Analysis, have disputed aspects of Kennedy’s conclusions, suggesting that fears of an impending banking crisis are “overblown.” Similarly, Tymofiy Mylovanov, president of the Kyiv School of Economics and a former Ukrainian economy minister, acknowledged the concerning nature of the findings but noted they might not be catastrophic.
“The conditions for a crisis are there—but is the trigger?” Mylovanov told CNN.
One potential trigger could be public panic. Ordinary Russians, familiar with the devastation of lost savings, might react to fears of instability by withdrawing their deposits en masse, sparking bank runs. Since last fall, rumors have circulated that the central bank might freeze customer deposits, which have surged as savers sought to benefit from high interest rates. While the Bank of Russia has dismissed these rumors as “absurd,” they persist, eroding public trust.
“The mere fact that such rumors are being discussed is a sign of trouble,” Mylovanov noted. “They cannot not talk about it.”
Amid these concerns, Alexei Nechayev, leader of Russia’s New People party, has introduced a legislative proposal requiring parliamentary approval before the central bank could freeze deposits.
Doubts about the central bank’s leadership have also emerged. Governor Elvira Nabiullina, once lauded for stabilizing Russia’s economy at the onset of the war, is now facing criticism from within the country’s elite. Sergey Chemezov, head of the state-owned defense conglomerate Rostec, has blamed high interest rates for stifling exports. Similarly, Gazprom Neft’s chairman warned that expensive credit could harm companies servicing the oil industry, expressing “serious concerns.”
Even President Putin, a long-time supporter of Nabiullina, issued a subtle critique during his year-end press conference. He remarked that the central bank could have deployed alternative measures to interest rate hikes and suggested it might have acted “more efficiently and at an earlier stage.”
Headwinds
Russia’s economy is bracing for significant challenges in 2025, even without the emergence of a full-blown credit crisis.
The International Monetary Fund estimates that Russian GDP grew by 3.8% in 2024 but projects a sharp slowdown to just 1.4% this year. President Vladimir Putin has acknowledged economic imbalances, noting that “the amount of products has not grown as much as consumption has”—a classic precursor to inflation. Price increases have already surged, with inflation rising to 9.5% in 2024 from 7.4% the year before. In a striking sign of financial strain, some supermarkets resorted to locking butter in cabinets to prevent theft.
While wages have risen, this trend underscores deeper labor market issues. Russia’s unemployment rate hit a record low of 2.3%, a figure Putin has touted as a success. However, this tight labor market has forced companies to offer higher wages to attract workers, exacerbating costs. Compounding the problem, Russia faces a shortage of 1.6 million skilled workers, driven in part by war-related casualties. Ukraine’s top general, Oleksandr Syrskyi, reported that Russian forces suffered over 434,000 casualties in 2024 alone, including 150,000 fatalities. Since the war’s inception, Russia is estimated to have sustained more than 800,000 casualties, according to Ukrainian military figures. While UK and US estimates are slightly lower, the toll remains staggering. CNN has not independently verified these numbers.
Immigration, traditionally a source of workforce replenishment, offers limited relief. Rising xenophobia, fueled by ethnic tensions following recent terror attacks, has made Russia less welcoming to Central Asian migrants who once filled labor gaps.
Western sanctions are also tightening the economic screws. A package introduced in the final days of the Biden administration targeted Russia’s “shadow fleet”—aging oil tankers used to bypass earlier sanctions on oil exports. Many of these ships now sit idle, unable to dock and unload due to the new restrictions. China and India, major buyers of Russian oil and gas, are reportedly seeking alternative suppliers, further threatening Russia’s energy revenues.
Additionally, Kyiv’s refusal to renew a gas transit agreement with Moscow is projected to cost Gazprom up to $5 billion annually, according to Reuters. The energy giant, which posted a nearly $7 billion loss in 2023—its first in 25 years—is reportedly considering laying off more than 1,500 workers. With reduced revenue from Gazprom, Russia’s primary war financier, the Kremlin faces growing financial strain.
This economic turbulence is testing the resilience of Russia’s social contract, said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center. “The population no longer expects justice from the Kremlin; instead, they expect financial support,” she explained.
However, that financial support is dwindling as war expenditures siphon funds from other public services. Prokopenko warned of a widening gap between public expectations and the Kremlin’s ability to deliver.
“The Kremlin cannot simultaneously sustain war spending, economic stability, and social support indefinitely,” she said. While Moscow has so far managed to balance these demands, it is becoming increasingly clear that something will have to give.