Economy
As Russian Economy Sputters,
A Moment of Truth Approaching for Putin’s Regime
A Moment of Truth Approaching for Putin’s Regime
May 29, 2025
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Sergei Shelin
Journalist, independent analyst
Journalist Sergei Shelin argues that, with economic and fiscal challenges mounting against the backdrop of the war in Ukraine, the Putin regime will soon face a moment of truth: push for some sort of ceasefire or transition fully to a “mobilization economy.”
The original text in Russian was published in the Moscow Times and is being republished here with the author’s permission.
Donald Trump’s peace push briefly diverted attention from Russian domestic factors, as if they had no bearing on Vladimir Putin’s willingness – or unwillingness – to stop the war in Ukraine. The nation’s obedience continues to please the president, but the economic downturn is clear. Will this compel Putin to pump the brakes? His managerial instincts should not be underestimated.
To understand Putin’s decision-making in this context, let’s look at the pace of the downturn and the mood among the captains of the economy.
Simple and grim
Today, there is no sign of a breakdown in economic management or a sense of loss or confusion among the top ranks of state managers. Putin’s technocrats grumble, but they are following the plan that crystallized in their heads once it became clear that spending on the war in 2025 would again exceed that of the previous year.
Their plan is simple. First, maintain ultra-high interest rates to suppress inflation, nonmilitary sectors and real household consumption spending.
Donald Trump’s peace push briefly diverted attention from Russian domestic factors, as if they had no bearing on Vladimir Putin’s willingness – or unwillingness – to stop the war in Ukraine. The nation’s obedience continues to please the president, but the economic downturn is clear. Will this compel Putin to pump the brakes? His managerial instincts should not be underestimated.
To understand Putin’s decision-making in this context, let’s look at the pace of the downturn and the mood among the captains of the economy.
Simple and grim
Today, there is no sign of a breakdown in economic management or a sense of loss or confusion among the top ranks of state managers. Putin’s technocrats grumble, but they are following the plan that crystallized in their heads once it became clear that spending on the war in 2025 would again exceed that of the previous year.
Their plan is simple. First, maintain ultra-high interest rates to suppress inflation, nonmilitary sectors and real household consumption spending.
“The money extracted from the nonmilitary side of the economy is redirected toward the war effort. Russians are not spending their nominally higher income; instead, they are depositing the extra money at quasi-state banks.”
Pyaterochka, Russian chain of convenience stores. Source: VK
These funds are used by the government without being returned to depositors.
For now, this approach seems to be working. In recent months, industrial output has been rising on the military side of the economy and declining on the nonmilitary side. Moreover, “inflation has sharply slowed – this can now be stated quite definitively and (almost) without any caveats.” This comes from a report by analysts close to the government, who themselves express some surprise at what they are seeing.
Seasonally adjusted real consumption spending declined in March and April, despite a 17.9% year-over-year jump in nominal income in the first quarter. But Russians did not spend these gains. Instead, as mentioned above, they took them to the bank, pushing the savings rate to a first-quarter record of 10%.
Overall federal budget expenditures (which still mostly go directly or indirectly toward financing the war) soared 21% year over year in January-April. The budgeted hike in military spending in 2025 to 8% of GDP (RUB 18 trillion, based on the revised GDP estimate) will apparently be realized.
Dubious militarization
Still, the technocrats’ plan does not account for many critical things, and these things are what ordinary Russians and economic managers have to deal with.
By itself, the regime’s intention to get to $200 billion in military spending appears attainable. After all, the share of Soviet military spending as a share of GDP averaged 8-10% from the 1960s through the 1980s. But the enforced belt-tightening needed for this militarization is being carried out in a dubious way.
In real terms, only pensions are falling. Wages are still rising (though bureaucratic bigwigs would like to change that). “Most likely, the race to raise wages that we have seen in recent years will end in 2025, literally in the next quarter,” boldly forecasts Dmitri Belousov, the government’s economic ideologist and brother of newly appointed Defense Minister Andrei Belousov.
But this is just hope.
For now, this approach seems to be working. In recent months, industrial output has been rising on the military side of the economy and declining on the nonmilitary side. Moreover, “inflation has sharply slowed – this can now be stated quite definitively and (almost) without any caveats.” This comes from a report by analysts close to the government, who themselves express some surprise at what they are seeing.
Seasonally adjusted real consumption spending declined in March and April, despite a 17.9% year-over-year jump in nominal income in the first quarter. But Russians did not spend these gains. Instead, as mentioned above, they took them to the bank, pushing the savings rate to a first-quarter record of 10%.
Overall federal budget expenditures (which still mostly go directly or indirectly toward financing the war) soared 21% year over year in January-April. The budgeted hike in military spending in 2025 to 8% of GDP (RUB 18 trillion, based on the revised GDP estimate) will apparently be realized.
Dubious militarization
Still, the technocrats’ plan does not account for many critical things, and these things are what ordinary Russians and economic managers have to deal with.
By itself, the regime’s intention to get to $200 billion in military spending appears attainable. After all, the share of Soviet military spending as a share of GDP averaged 8-10% from the 1960s through the 1980s. But the enforced belt-tightening needed for this militarization is being carried out in a dubious way.
In real terms, only pensions are falling. Wages are still rising (though bureaucratic bigwigs would like to change that). “Most likely, the race to raise wages that we have seen in recent years will end in 2025, literally in the next quarter,” boldly forecasts Dmitri Belousov, the government’s economic ideologist and brother of newly appointed Defense Minister Andrei Belousov.
But this is just hope.
“Russians already hold more money than the domestic market for goods and services can absorb. If they panic and rush to spend their savings en masse, the market will collapse.”
The current lull in inflation owes not only to the Central Bank’s high key rate but also to the ruble’s unexpected and likely short-lived strength, not to mention rather irrational and erratic shifts in consumer behavior.
Prices have stopped rising, but not because there is an abundance of goods. “Demand for complex durable goods – gadgets, cars, electronic equipment – has fallen. On top of that, retailers themselves have problems with debt, rising logistics costs and higher rent,” according to Dmitri Belousov.
Yet at any moment, Russians may want to buy more rather than less. Household savings are now approaching RUB 60 trillion and growing rapidly. Interest payments on deposits are projected to reach RUB 9 trillion this year (up from RUB 7 trillion in 2024).
Fragile victory over inflation
In reality, these tens of trillions in deposits function as war bonds. The Russian economy will likely never be able to turn people’s savings into material goods and services without devaluing that money. The authorities are thus searching for ways to limit or altogether block access to these funds.
To do this, there is no need to freeze deposits. One option is to convert them into long-term securities, with payouts made the responsibility of the next generation of bureaucrats and political leaders. But Russians are not buying these ideas, and the government is not yet ready to force the issue.
For now, therefore, the illusion of state munificence is being maintained.
Prices have stopped rising, but not because there is an abundance of goods. “Demand for complex durable goods – gadgets, cars, electronic equipment – has fallen. On top of that, retailers themselves have problems with debt, rising logistics costs and higher rent,” according to Dmitri Belousov.
Yet at any moment, Russians may want to buy more rather than less. Household savings are now approaching RUB 60 trillion and growing rapidly. Interest payments on deposits are projected to reach RUB 9 trillion this year (up from RUB 7 trillion in 2024).
Fragile victory over inflation
In reality, these tens of trillions in deposits function as war bonds. The Russian economy will likely never be able to turn people’s savings into material goods and services without devaluing that money. The authorities are thus searching for ways to limit or altogether block access to these funds.
To do this, there is no need to freeze deposits. One option is to convert them into long-term securities, with payouts made the responsibility of the next generation of bureaucrats and political leaders. But Russians are not buying these ideas, and the government is not yet ready to force the issue.
For now, therefore, the illusion of state munificence is being maintained.
“The exorbitant deposit rates annoy government fiscal managers, but a panic among depositors would trigger a spike in inflation and instantly undo the ‘victory’ over inflation so painstakingly achieved.”
Another problem also threatens this victory: cheap oil. The latest budget lowered projected oil and gas revenues by RUB 2.6 trillion, from RUB 10.9 trillion to RUB 8.3 trillion. At the same time, total expenditures were bumped up RUB 0.8 trillion (remember: military spending cannot be cut).
Indeed, spending will rise even further. In January-April, expenditures rose at such a pace that the deficit reached RUB 3.2 trillion, exceeding the January-April deficit in any previous wartime year. For the full year, revenues may be RUB 2-3 trillion less than penciled in, while spending may overshoot by another trillion or two. As a result, the deficit could reach RUB 5 trillion. This would be a second wind for inflation.
It will be constantly fueled by the accelerating decline in output of nonmilitary goods and services.
Until now, Putin’s economic managers have proven capable of balancing the fiscal needs of the state at war and the material demands of the population. But the stability of the Russian economy is deteriorating and seems to be nearing a breaking point. Most economic managers would welcome a ceasefire in Ukraine. But the decision is not theirs to make.
Of course, Putin will be able to continue the war if he chooses. But his regime will soon face a moment of truth: push for a pause in the war or transition fully to a “mobilization economy” – abandoning any pretense of protecting household savings and possibly forcing workers to work at designated firms. In my view, this choice will have to be made already this year.
Indeed, spending will rise even further. In January-April, expenditures rose at such a pace that the deficit reached RUB 3.2 trillion, exceeding the January-April deficit in any previous wartime year. For the full year, revenues may be RUB 2-3 trillion less than penciled in, while spending may overshoot by another trillion or two. As a result, the deficit could reach RUB 5 trillion. This would be a second wind for inflation.
It will be constantly fueled by the accelerating decline in output of nonmilitary goods and services.
Until now, Putin’s economic managers have proven capable of balancing the fiscal needs of the state at war and the material demands of the population. But the stability of the Russian economy is deteriorating and seems to be nearing a breaking point. Most economic managers would welcome a ceasefire in Ukraine. But the decision is not theirs to make.
Of course, Putin will be able to continue the war if he chooses. But his regime will soon face a moment of truth: push for a pause in the war or transition fully to a “mobilization economy” – abandoning any pretense of protecting household savings and possibly forcing workers to work at designated firms. In my view, this choice will have to be made already this year.
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