ECONOMY
Inozemtsev: ‘We Will See a Big Fight Between the Economic Bloc and the Silovik Bloc over Military Spending’
May 19, 2025
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Vladislav Inozemtsev
Сofounder and expert at the Center for Analysis and Strategies in Europe (CASE) in Nicosia, Cyprus - Yevgeny SenshinJournalist
Economist Vladislav Inozemtsev tells Republic there is no sense in making forecasts about the Russian economy currently, as we do not whether there will be war or peace in the next year. He also talks about how the Russian budget is doing amid the recent drop in oil prices and constantly rising military spending.
The original interview in Russian was published in Republic. We are republishing the first part of it with their permission.
What is happening in the Russian economy today overall? I’m looking at a recent update from the Center for Macroeconomic Analysis and Short-term Forecasting. It says there is a decline across a number of sectors. But overall, nothing terrible. Still, several economists believe the economy is stagnating. What can you add to this picture?
Many people say Russian official statistics are all a lie and done only for propaganda. But I see things a little different. Some data is hidden. If only distorted figures are published, then it soon becomes obvious to everyone. It is impossible to radically distort statistics in one place without it showing up somewhere else. So I think government agencies are generally telling the truth.
Indeed, the update you refer to says there is currently a decline across most industries. And the growth that is written about there, 1.1%, is driven exclusively by the military-industrial complex, as was partly the case last year too.
So the situation is getting worse. But we need to keep two things in mind. First, we need to understand what is driving this deterioration. And second, how does that affect the war?
The driver is largely the efforts to reduce inflation. Because fighting inflation through the key rate cannot work in Russia by and large. For it to work, all prices need to be set by the market.
What is happening in the Russian economy today overall? I’m looking at a recent update from the Center for Macroeconomic Analysis and Short-term Forecasting. It says there is a decline across a number of sectors. But overall, nothing terrible. Still, several economists believe the economy is stagnating. What can you add to this picture?
Many people say Russian official statistics are all a lie and done only for propaganda. But I see things a little different. Some data is hidden. If only distorted figures are published, then it soon becomes obvious to everyone. It is impossible to radically distort statistics in one place without it showing up somewhere else. So I think government agencies are generally telling the truth.
Indeed, the update you refer to says there is currently a decline across most industries. And the growth that is written about there, 1.1%, is driven exclusively by the military-industrial complex, as was partly the case last year too.
So the situation is getting worse. But we need to keep two things in mind. First, we need to understand what is driving this deterioration. And second, how does that affect the war?
The driver is largely the efforts to reduce inflation. Because fighting inflation through the key rate cannot work in Russia by and large. For it to work, all prices need to be set by the market.
“But when the government itself constantly raises prices for products and services of ‘natural monopolies’, no matter how much you adjust the key rate, costs will still rise, and prices will follow.”
Monument to the T-34/85 tank near the Uralvagonzavod complex. Source: Wiki Commons
This is the reason for the situation. The key rate is going higher and higher. The primary effect is super-favorable conditions for depositors. People and businesses are bringing money to banks. Consumer demand is shriveling up. Inflation is not falling, as it is fueled by rising costs, with the state doing its part by raising wages (first in the army and the military-industrial complex and then in other industries) and indexing tariffs [for services]. And the money is flowing into banks, not being spent or invested. That is why overall consumer demand is stagnating.
This situation is created by government actions, in particular the monetary authorities’. I think the economy is headed for zero growth... But I want to point out something else. There is a widespread view among economists that a halt to growth is like a catastrophe. But it just means people go to the shops and buy roughly the same things as yesterday – no more, but also no less.
Of course, certain categories of the population are getting poorer – there is no doubt about that. At best, a third of the population benefits from the war. Another third has maintained their standard of living. The rest are getting poorer.
This situation is created by government actions, in particular the monetary authorities’. I think the economy is headed for zero growth... But I want to point out something else. There is a widespread view among economists that a halt to growth is like a catastrophe. But it just means people go to the shops and buy roughly the same things as yesterday – no more, but also no less.
Of course, certain categories of the population are getting poorer – there is no doubt about that. At best, a third of the population benefits from the war. Another third has maintained their standard of living. The rest are getting poorer.
“But this kind of stagnation is not a catastrophe, not a recession, not a depression and not the kind of dramatic drop in income that we all remember from the 1990s.”
The military engine of the Russian economy has clearly run out of gas. The reason for this is simple. For the last three years, the state has been investing huge sums in the military-industrial complex, accelerating growth. And this was money that it had accumulated in reserves. Remember, there were discussions among economists a long time ago. For example, the well-known “patriotic economist” Sergei Glazyev called for throwing money into the economy – then everything would be great, production would grow, everything would develop. Now, this is exactly what has been going on. But instead of printing money, the state unfroze reserves and poured them into the economy by financing the military-industrial complex and handing out money to soldiers (all this would have been senseless under normal conditions).
This approach naturally generated growth. Through the budget money was reallocated from the National Wealth Fund and reserves to businesses and households. But there it froze. The state became poorer, because the reserves are now tending toward zero, and businesses and households became somewhat richer. All the data shows that aggregate corporate earnings were at all-time highs in 2023-24 (exceeding RUB 30 trillion each year), while the money on the population’s bank accounts doubled and now exceeds RUB 60 trillion.
This approach naturally generated growth. Through the budget money was reallocated from the National Wealth Fund and reserves to businesses and households. But there it froze. The state became poorer, because the reserves are now tending toward zero, and businesses and households became somewhat richer. All the data shows that aggregate corporate earnings were at all-time highs in 2023-24 (exceeding RUB 30 trillion each year), while the money on the population’s bank accounts doubled and now exceeds RUB 60 trillion.
“But all this money that went to both businesses and households is sitting and waiting. Because no one knows what will happen next. No one knows whether the economy will go back to normal or another round of war is in store.”
A Russian T-14 Armata tank. It cost $5.0-7.1 million in 2022. Source: Wiki Commons
Plus, very high deposit rates – you put money in the bank and save to receive future income, meaning you consume little and do not invest – are influencing behavior.
This is the strange picture that has emerged, with economic development grinding to a halt. What happens next, in my view, depends solely on what the Kremlin does regarding the war. If it chooses to keep fighting and escalate tensions again, that is one scenario. If there is peace or simply a stop to the war, that is another scenario. But overall, the picture where the Russian economy stagnates is realistic.
How big of a risk do you think a further decline in oil prices is for the Russian budget? In particular, the Ministry of Finance recently was forced to revise its estimate of revenues and the budget deficit for the current year. Due to cheap oil, state coffers will not receive a planned RUB 2.6 trillion. The hole in the budget is set to grow to RUB 3.8 trillion.
Firstly, as we see, oil is going up again. The Americans are resetting their relations with China. As I expected, all this hysteria about 145% tariffs is going away. Stock markets are rapidly rebounding. Accordingly, the scenario of a recession in the West will not materialize. So I think Brent will rise again to around $70 per barrel in a couple of weeks and the current hysteria will subside.
Still, the Russian budget was drawn up in 2025 under extremely unlikely conditions. To assume the price of Urals would be $69.70 per barrel was very bold. But the main issue destabilizing the budget is not oil prices but the stronger ruble. Even if we had today’s oil prices at the November USD/RUB rate of 110, I think all budget targets could be met, albeit just barely. The ruble strengthening is partly related to the very high interest rates and a large inflow of money [into the country]. Including hard currency that is exchanged for rubles and put on deposits. This is also due to expectations of a ceasefire in Ukraine.
In other words, my main idea is that all forecasts are completely meaningless given the fork in the road. If we know what will happen in 2025-26 – war or peace – then we can make forecasts. Until we know what the decision will be at this fork, all forecasts are just a shot in the dark.
As for the budget deficit, the government has the ability to reduce it significantly versus the 1.7% of GDP deficit that Siluanov cited at a government meeting on April 30.
I think if the war continues and oil prices remain at current levels, the government can in any case adjust the exchange rate, bringing it back above USD/RUB 100, which would cut the deficit in half. If we get peace, I think the situation will not be much worse either. Then the Central Bank will start to cut rates, the attractiveness of deposits will decrease and imports will increase, with the dollar and euro similarly surging past 100 against the ruble. Because today the weak dollar is due to the difference in interest rates. If the key rate is cut to at least 10-12%, there will be no strong ruble.
So I think it is too early to panic. Even a budget deficit of 1.7% is not a problem for Russia by and large. I think serious difficulties may come up with a deficit of 3-4% of GDP, that is, RUB8 trillion. But as things stand now, relatively speaking, and especially compared to developed countries, this is literally nothing.
Then, in light of the abovementioned problems, how do you see the outlook for spending on the special operation and the military-industrial complex?
In Russia, fiscal policymakers have tried, let’s say, to think rationally during all the years of the war. This rational thinking is basically the following. Every time a three-year budget was adopted, it was believed the Kremlin would boost military spending and the “denazification” of Ukraine was right around the corner, after which everything would go back to normal and spending would begin to decrease. But each subsequent year it turned out that this was wrong, that military spending had only just peaked and would begin to decrease the following year.
I have a vague feeling that this practice should end with the 2025 budget. Firstly, military spending is truly high by the standards of the Russian economy. Secondly, throughout Putin’s entire tenure, military “toys” have ranked second or third in terms of expenditures.
In the 2000s, military spending was approximately 25-35% of oil and gas earnings. Some crazy money came our way, and we spent some of it on military fun. Later, this share began to grow, especially after the Crimean “events,” but still rarely exceeded 40% of oil and gas earnings. Yet in 2025, it surged past 100% – even in the budget, I think it was 107%. It will be even more, since oil and gas earnings will fall by about a quarter and military spending is not being sequestered.
This is becoming really alarming. That is, relatively speaking, they began to spend not just more on military “toys” than on food, but they also began to spend more than they take in. This is just irresponsible fiscal policy.
So I believe military spending this year has reached a certain limit. All these years the danger was that these expenditures were growing uncontrollably. But the military lobby wanted more and more. But this was considered, let’s say, an indisputable budget item that would be financed in any amount.
Let’s see what happens in the autumn when the next budget is adopted.
This is the strange picture that has emerged, with economic development grinding to a halt. What happens next, in my view, depends solely on what the Kremlin does regarding the war. If it chooses to keep fighting and escalate tensions again, that is one scenario. If there is peace or simply a stop to the war, that is another scenario. But overall, the picture where the Russian economy stagnates is realistic.
How big of a risk do you think a further decline in oil prices is for the Russian budget? In particular, the Ministry of Finance recently was forced to revise its estimate of revenues and the budget deficit for the current year. Due to cheap oil, state coffers will not receive a planned RUB 2.6 trillion. The hole in the budget is set to grow to RUB 3.8 trillion.
Firstly, as we see, oil is going up again. The Americans are resetting their relations with China. As I expected, all this hysteria about 145% tariffs is going away. Stock markets are rapidly rebounding. Accordingly, the scenario of a recession in the West will not materialize. So I think Brent will rise again to around $70 per barrel in a couple of weeks and the current hysteria will subside.
Still, the Russian budget was drawn up in 2025 under extremely unlikely conditions. To assume the price of Urals would be $69.70 per barrel was very bold. But the main issue destabilizing the budget is not oil prices but the stronger ruble. Even if we had today’s oil prices at the November USD/RUB rate of 110, I think all budget targets could be met, albeit just barely. The ruble strengthening is partly related to the very high interest rates and a large inflow of money [into the country]. Including hard currency that is exchanged for rubles and put on deposits. This is also due to expectations of a ceasefire in Ukraine.
In other words, my main idea is that all forecasts are completely meaningless given the fork in the road. If we know what will happen in 2025-26 – war or peace – then we can make forecasts. Until we know what the decision will be at this fork, all forecasts are just a shot in the dark.
As for the budget deficit, the government has the ability to reduce it significantly versus the 1.7% of GDP deficit that Siluanov cited at a government meeting on April 30.
I think if the war continues and oil prices remain at current levels, the government can in any case adjust the exchange rate, bringing it back above USD/RUB 100, which would cut the deficit in half. If we get peace, I think the situation will not be much worse either. Then the Central Bank will start to cut rates, the attractiveness of deposits will decrease and imports will increase, with the dollar and euro similarly surging past 100 against the ruble. Because today the weak dollar is due to the difference in interest rates. If the key rate is cut to at least 10-12%, there will be no strong ruble.
So I think it is too early to panic. Even a budget deficit of 1.7% is not a problem for Russia by and large. I think serious difficulties may come up with a deficit of 3-4% of GDP, that is, RUB8 trillion. But as things stand now, relatively speaking, and especially compared to developed countries, this is literally nothing.
Then, in light of the abovementioned problems, how do you see the outlook for spending on the special operation and the military-industrial complex?
In Russia, fiscal policymakers have tried, let’s say, to think rationally during all the years of the war. This rational thinking is basically the following. Every time a three-year budget was adopted, it was believed the Kremlin would boost military spending and the “denazification” of Ukraine was right around the corner, after which everything would go back to normal and spending would begin to decrease. But each subsequent year it turned out that this was wrong, that military spending had only just peaked and would begin to decrease the following year.
I have a vague feeling that this practice should end with the 2025 budget. Firstly, military spending is truly high by the standards of the Russian economy. Secondly, throughout Putin’s entire tenure, military “toys” have ranked second or third in terms of expenditures.
In the 2000s, military spending was approximately 25-35% of oil and gas earnings. Some crazy money came our way, and we spent some of it on military fun. Later, this share began to grow, especially after the Crimean “events,” but still rarely exceeded 40% of oil and gas earnings. Yet in 2025, it surged past 100% – even in the budget, I think it was 107%. It will be even more, since oil and gas earnings will fall by about a quarter and military spending is not being sequestered.
This is becoming really alarming. That is, relatively speaking, they began to spend not just more on military “toys” than on food, but they also began to spend more than they take in. This is just irresponsible fiscal policy.
So I believe military spending this year has reached a certain limit. All these years the danger was that these expenditures were growing uncontrollably. But the military lobby wanted more and more. But this was considered, let’s say, an indisputable budget item that would be financed in any amount.
Let’s see what happens in the autumn when the next budget is adopted.
“I bet there will be no increase in military spending. It might be minimal, at 2-3% in nominal terms. Military expenditures have hit a ceiling, though – they cannot go any higher.”
Putin at the Russian Union of Industrialists and Entrepreneurs conference, March 2025. Source: Kremlin
Accordingly, the next question is: can the budget withstand the current level of spending? My answer is: it can. Because in any case, tax receipts will grow – at least 10-12% a year, in line with inflation. In addition, “targeted” tax increases will probably continue. So there will be no less money in nominal terms, so the budget will be able to cope with the current level of military spending painlessly.
My forecast is that the country can afford these expenditures for a long time as long as they do not grow further. But if Putin wants to spend RUB 20 trillion next year, then, in my view, everything will go off the rails. I think at the year-end, we will see a big fight between the economic bloc and the silovik bloc over military spending.
Where does the business community fit into that fight?
If the war continues, a significant increase in taxes will be required. Remember, the well-remembered excess profit tax was levied in 2023 on large corporations, supposedly to compensate for high profits in 2022. I suspect if it is necessary to increase spending again, the government will go down this path. It will simply start issuing orders on who should contribute how much, without a systematic increase in the profit tax and so on.
In my view, this would start to cause very serious problems in the tax system. Because, frankly speaking, it is hard at this point to push through a big, systematic increase in taxes, and the Kremlin would turn to “manual control.” There would be some talks with individual companies and a lot of nontransparent things. This, of course, would cause problems.
As for the redistribution of property, I do not consider this the most important thing. Because property does not go into the budget. It passes one way or another from one private business to another. Just maybe to one that is closer to the Kremlin. But it does not directly affect budget revenues, which are very much needed now. But the confiscation of “excess profits” would be a bad sign for business.
My forecast is that the country can afford these expenditures for a long time as long as they do not grow further. But if Putin wants to spend RUB 20 trillion next year, then, in my view, everything will go off the rails. I think at the year-end, we will see a big fight between the economic bloc and the silovik bloc over military spending.
Where does the business community fit into that fight?
If the war continues, a significant increase in taxes will be required. Remember, the well-remembered excess profit tax was levied in 2023 on large corporations, supposedly to compensate for high profits in 2022. I suspect if it is necessary to increase spending again, the government will go down this path. It will simply start issuing orders on who should contribute how much, without a systematic increase in the profit tax and so on.
In my view, this would start to cause very serious problems in the tax system. Because, frankly speaking, it is hard at this point to push through a big, systematic increase in taxes, and the Kremlin would turn to “manual control.” There would be some talks with individual companies and a lot of nontransparent things. This, of course, would cause problems.
As for the redistribution of property, I do not consider this the most important thing. Because property does not go into the budget. It passes one way or another from one private business to another. Just maybe to one that is closer to the Kremlin. But it does not directly affect budget revenues, which are very much needed now. But the confiscation of “excess profits” would be a bad sign for business.
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