Russia's Economy Wobbles Under Strain of Ukraine War

Newsweek

3 days ago

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
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Russia's war economy has received welcome news about a dip in inflation but faces further turbulence due to concerns over state bailouts for firms and further sanctions on its key energy exports.
High key interest rates to cool the economy have lowered short-term inflation, but European Union (EU) measures to make it harder for Moscow to sell oil could hurt revenues, a financial expert has told Newsweek. Another expert said that the Russian economy has come close to stagnation, and late and unpaid loans have increased.
It comes amid a warning that the country's high payments to soldiers fighting in President Vladimir Putin's full-scale invasion of Ukraine, and the resultant labor shortage, could further destabilize the Russian economy.
Newsweek has contacted the Russian finance ministry for comment.
Russian Central Bank Governor Elvira Nabiullina (left), Vladimir Putin (center) and Russia's Finance Minister Anton Siluanov (right) pictured on March 17, 2025, at the Grand Kremlin Palace in Moscow, Russia.
Russian Central Bank Governor Elvira Nabiullina (left), Vladimir Putin (center) and Russia's Finance Minister Anton Siluanov (right) pictured on March 17, 2025, at the Grand Kremlin Palace in Moscow, Russia.
Getty Images
Why It Matters
Putin's aggression prompted western-led sanctions aimed at choking his war machine, but Russia's economy has still grown, helped in part by record military spending.
But war losses have fueled a worker shortage that has stoked inflation, which Russia's Central Bank has tried to cool with a key interest rate that it dropped to 20 percent last month—still too high for business leaders unhappy at how it stifles lending and investment.
The Central Bank can claim its interest rate has worked, albeit temporarily, after reporting four percent inflation, but this small victory may be only a façade of domestic economic stability as sanctions and state bailouts loom.
What To Know
Russia's Central Bank said that the country's seasonally adjusted annual rate (SAAR) of inflation decreased to four percent in June, which is in line with its target inflation rate.
Bloomberg said this SAAR decrease was the first sign that efforts to lower the inflation rate were working and, although the official annual inflation rate remains nine percent, at the current rate inflation could hit four percent annually next year.
Russian economy expert Vasily Astrov, of the Vienna Institute for International Economic Studies, told Newsweek on Tuesday that inflation had subsided markedly partly thanks to the strong ruble, which suppressed the growth of import prices.
But it was mostly due to the Central Bank's extremely tight monetary policy in which it raised the key interest rate to 21 percent. This was reduced in June but Central Bank Governor Elvira Nabiullina teased pausing further rate cuts if inflation continues.
Astrov said this high key rate has cooled domestic demand, with the welcome side effect of decreasing inflation. But the downside is that the economy has "come close to stagnation" and nonperforming (late and unpaid) loans (NPLs) have increased.
Bloomberg reported top Russian bank executives privately discussed seeking a state-funded bailout if nonperforming loans continue to grow this year, amid concerns NPLs could nearly double from four percent to seven percent by next year.
But Bloomberg said the Central Bank told lenders to focus on restructuring credit with the borrowers and absorb the bad loans.
The Institute for the Study of War (ISW) said this showed it was not wanting to bail out major banks, a move which could cause liquidity problems.
A photo of Russian ruble notes taken on January 11, 2025, in Bath, England.
A photo of Russian ruble notes taken on January 11, 2025, in Bath, England.The think tank added that any failure of a major Russian bank would undercut Putin's narrative that neither the war in Ukraine nor Western sanctions are hurting the Russian economy.
Nabiullina has downplayed the risk of a systemic crisis, saying at a financial forum in St. Petersburg on July 2 that Russia's banking system was "well capitalized" with capital reserves of 8 trillion rubles ($102 billion).
Troop Costs
The ISW also said that payments to Russian soldiers to fight in Ukraine and an increasing labor shortage will likely further destabilize the economy, regardless of the Kremlin's claims of economic stability.
Large one-time payments to attract recruits coinciding with expanding Russia's defense industrial base will be difficult for the economy to maintain, the think tank said.
Astrov said that payments for soldiers are around two percent of GDP but this level can be sustained for quite some time, and Putin has announced recently that military spending will not increase further.
Labor shortages are still a problem, although they have eased somewhat recently in line with the economic slowdown.
"Part of the problem is the anti-migration policies of the authorities, given that immigration used to be historically an important source of labor force for Russia," Astrov added.
Sanctions
On July 18, the EU adopted its 18th package of sanctions against Moscow aimed at curbing oil and energy revenues. The package includes plans to lower a price cap for Russian oil from $60 per barrel set by the G7 to $47.60.
Leigh Hansson, sanctions partner at international law firm Reed Smith, told Newsweek that lowering this limit could hurt Russian oil revenues, making it harder to find vessels willing to carry the cargo—although Ukraine has pushed for bigger cuts to the price cap.
The U.K. has also imposed new sanctions on Russia's sanctions-busting "shadow fleet," targeting 135 oil tankers along with two Russian firms: shipping company Intershipping Services LLC and oil trader Litasco Middle East DMCC.
What People Are Saying
Vasily Astrov, expert on the Russian economy at the Vienna Institute for International Economic Studies, told Newsweek that "inflation has really subsided markedly over the past few months. The outcome of this policy has been a marked cooling of domestic demand, with the welcome side effect of rapid disinflation.
"On the downside of this policy, the economy has come close to stagnation, and NPLs have shot up."
Leigh Hansson, Reed Smith sanctions partner, told Newsweek that EU sanctions "have the potential to hurt Russian oil revenues as it may become more difficult to find vessels willing to carry the cargo."
What Happens Next
There will be anticipation over whether the Central Bank cuts the key interest rate and the current inflation rate can be maintained. Meanwhile, Kyiv will hope that new sanctions on Russian energy can further hurt the economy.
Hansson said it will be interesting to see whether the U.S. and other G7 countries go along with the new price cap mechanism, or whether this will create a disconnect in enforcement across the market.