Some analysts have likened Russia’s current economic situation to being “on steroids,” while others compare its rapid yet unsustainable growth to “running on cocaine.” According to CNN, Russia may soon experience the painful crash after the party. Even Russian officials, increasingly discontent, have warned that the country’s economy is nearing its production limits, driving up prices.
Despite successes on the battlefield, some experts suggest that Russia’s economic troubles could pressure President Vladimir Putin into negotiating sooner than anticipated. The potential easing of Western sanctions may become a significant bargaining chip, CNN reported.
Throughout the war, the Kremlin has employed a strategy known as "reflexive control," designed to manipulate Ukraine's allies into actions that benefit Moscow. For instance, Russia tries to convince Kyiv's supporters of its economic strength and ability to fund the war indefinitely, encouraging decisions aligned with Moscow's goals. Experts believe this control over perception is crucial. However, behind the figures and claims of "economic growth and low unemployment" lies a different reality.
The hidden costs of war
The Kremlin has obscured the true cost of its war against Ukraine through “shadow” financing mechanisms, CNN noted, citing a report by Craig Kennedy of Harvard University. While Russia’s defense budget appears stable, there has been a parallel surge in corporate borrowing, which essentially serves as disguised government spending.
The government has forced banks to issue preferential loans to companies tied to military contracts. Between mid-2022 and the end of 2024, private lending grew by 71%, equivalent to 19.4% of Russia’s GDP. Kennedy estimates that roughly 60% of these loans—up to $249 billion—were funneled into war-related enterprises. This scheme risks a banking system collapse when war-linked companies begin defaulting on their loans.
One potential trigger for a banking crisis could be panic among Russians, who might rush to withdraw their savings if they sense financial instability.
Economic challenges ahead
Even without a credit crisis, CNN forecasts significant difficulties for Russia’s economy in 2025. The IMF projects GDP growth to slow to 1.4% this year, down from 3.8% in 2024. Inflation has surged to 9.5% in 2024, compared to 7.4% in 2023. Some supermarkets have even resorted to locking up cooking oil to prevent theft.
CNN also highlighted that the low unemployment rate masks a shortage of skilled workers, forcing companies to raise wages and further fueling inflation. Meanwhile, Western sanctions are beginning to bite, eroding the social contract between the Kremlin and the Russian population. Russians expect financial support from the government, not justice, but rising military expenditures are crowding out other spending, reducing support for the populace. The growing gap between public expectations and Kremlin capabilities could soon lead to a tipping point.
Analysts believe Moscow cannot sustain both its war effort and economic stability indefinitely, increasing the likelihood of disruption.
Economic decline in numbers
In the first three weeks of January 2025, prices in Russia rose by 0.92%, exceeding the inflation rate for all of January last year (0.86%). Food inflation reached 11.4%, a new high since October 2022. As The Moscow Times noted, “Rosstat reported new inflation records just hours after President Vladimir Putin held a government meeting, where he described last year as 'successful' for the economy.”
On Jan. 23, Reuters reported that Putin has recognized the strain the war in Ukraine has placed on Russia’s economy. This weakening has reportedly shaped his view that a ceasefire through negotiations may become necessary.