EConomy
For Putin, Continuing the War Means Further Lowering Russians’ Standard of Living
January 27, 2025
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Sergei Shelin
Journalist, independent analyst
Journalist Sergei Shelin acknowledges that the Russian economy displayed unexpected resilience in the first three years of the war but cautions against assuming this trend will continue. In 2025, he believes the burden of the war will significantly impact ordinary Russians.
The original text in Russian was published in the Moscow Times and is being republished here with the author’s permission.
Year-end inflation in Russia exceeded the estimate of the Central Bank, coming in at 9.52%. Source: VK
The economic model of Putin’s regime proved itself so resilient in 2022-24 that it was tempting to see its resources as inexhaustible. But pressures in the Russian economy have been building throughout the past year, and the Kremlin will be able to continue its war in Ukraine only at the cost of major sacrifices at home.
Since the invasion of Ukraine in February 2022, the Russian economy and its captains have defied expectations: the severing of ties with the West has not caused a collapse in foreign trade; the nonstop growth in military spending has not blown up the budget; household consumption, after dipping initially, bounced back fully in 2023. Putin’s economic managers have proven themselves to be cold-blooded and resourceful.
Their unexpected success has popularized the idea that the regime’s material resources are inexhaustible – at least for next few years (see Russia.Post about the resilience of the Russian economy here). Yet the numbers from the third year of the war do not confirm this.
Statistics do not always lie
In the absence of better data, I will use the figures reported by Rosstat and the Central Bank. Many are embellished: consumer price inflation is actually higher than officially reported, economic growth lower, etc. But the official data is interconnected and not so falsified as to hide the growing problems in the economy.
Rosstat claims that fourth-quarter seasonally adjusted GDP was about 5% higher in 2024 than in 2021, the last full quarter before the war. This is most likely overestimated, but the fact that sectors tied to the war effort have grown is beyond doubt.
This is also visible in industry. The monthly industrial production index (seasonally adjusted) is now 6-7% higher than it was on the eve of the war. Mineral extraction has fallen 1-2% (oil production had to be cut under OPEC+ limits), but manufacturing soared 15% in the last three years. Construction has seen an even bigger jump (up about 20%). And this is definitely not driven by residential construction.
Since the invasion of Ukraine in February 2022, the Russian economy and its captains have defied expectations: the severing of ties with the West has not caused a collapse in foreign trade; the nonstop growth in military spending has not blown up the budget; household consumption, after dipping initially, bounced back fully in 2023. Putin’s economic managers have proven themselves to be cold-blooded and resourceful.
Their unexpected success has popularized the idea that the regime’s material resources are inexhaustible – at least for next few years (see Russia.Post about the resilience of the Russian economy here). Yet the numbers from the third year of the war do not confirm this.
Statistics do not always lie
In the absence of better data, I will use the figures reported by Rosstat and the Central Bank. Many are embellished: consumer price inflation is actually higher than officially reported, economic growth lower, etc. But the official data is interconnected and not so falsified as to hide the growing problems in the economy.
Rosstat claims that fourth-quarter seasonally adjusted GDP was about 5% higher in 2024 than in 2021, the last full quarter before the war. This is most likely overestimated, but the fact that sectors tied to the war effort have grown is beyond doubt.
This is also visible in industry. The monthly industrial production index (seasonally adjusted) is now 6-7% higher than it was on the eve of the war. Mineral extraction has fallen 1-2% (oil production had to be cut under OPEC+ limits), but manufacturing soared 15% in the last three years. Construction has seen an even bigger jump (up about 20%). And this is definitely not driven by residential construction.
“Everything that serves the army and the military economy has grown, even if the figures are exaggerated.”
No more miracles
The federal budget shows what the price of this growth is. It finished the pre-war 2021 with a half-trillion-ruble surplus: revenues came in at RUB 25.3 trillion and expenditures at RUB 24.8 trillion. Three years later, in 2024, revenues were up RUB11.4 trillion (+45%), expenditures RUB 15.4 trillion (+62%), with the budget deficit reaching RUB 3.5 trillion (1.7% of GDP). Still, the federal deficit has exploded since the war started (by about RUB 10 trillion total), but there has been no fiscal meltdown.
It would be fair to say that hardly any more could have been squeezed out of state finances over these years. The growth in federal spending from 2021 to 2024 was almost twice the pace in the three pre-war years (from 2018 to 2021).
Recall that when spending was ramped up RUB 8.1 trillion during the pandemic, Putin’s fiscal managers complained about as unbearable. Now, they are afraid to complain, yet this does not make things any better for the budget.
Foreign trade also looks battered and bruised. For the most part, however, imports of components for the war economy and consumer goods have not stopped flowing. The fact that these flows did not collapse because of sanctions – as they were rerouted to the East within a few months – was perceived as a miracle. But it seems the Kremlin’s luck is running out.
Wartime quality
In the first 10 months of 2024 (the latest available data), Russian exports amounted to $354 billion. Even in nominal terms, this is plainly lower than in the same period of the pre-war 2021 ($388 billion). In real terms, the decline is even more precipitous, as inflation has made goods more expensive in dollars, not to mention the cost the economy needs to pay to get around sanctions.
The structure of exports has also worsened. In 2021, the share of energy products was 54% ($204 billion), while by end-2024 it had risen to 62% ($218 billion). In other words, Russia’s non-oil and gas exports, in particular metals, have plunged. Russian oil can still be sold to the rest of the world, even though Europe has stopped buying it. But China does not need Russian metals in such quantities.
In the same three-year period, imports of goods have slumped, falling from $245 billion before the war to $230 billion currently. Though the statistical decline does not seem so big, the real-life impact is tangible.
The federal budget shows what the price of this growth is. It finished the pre-war 2021 with a half-trillion-ruble surplus: revenues came in at RUB 25.3 trillion and expenditures at RUB 24.8 trillion. Three years later, in 2024, revenues were up RUB11.4 trillion (+45%), expenditures RUB 15.4 trillion (+62%), with the budget deficit reaching RUB 3.5 trillion (1.7% of GDP). Still, the federal deficit has exploded since the war started (by about RUB 10 trillion total), but there has been no fiscal meltdown.
It would be fair to say that hardly any more could have been squeezed out of state finances over these years. The growth in federal spending from 2021 to 2024 was almost twice the pace in the three pre-war years (from 2018 to 2021).
Recall that when spending was ramped up RUB 8.1 trillion during the pandemic, Putin’s fiscal managers complained about as unbearable. Now, they are afraid to complain, yet this does not make things any better for the budget.
Foreign trade also looks battered and bruised. For the most part, however, imports of components for the war economy and consumer goods have not stopped flowing. The fact that these flows did not collapse because of sanctions – as they were rerouted to the East within a few months – was perceived as a miracle. But it seems the Kremlin’s luck is running out.
Wartime quality
In the first 10 months of 2024 (the latest available data), Russian exports amounted to $354 billion. Even in nominal terms, this is plainly lower than in the same period of the pre-war 2021 ($388 billion). In real terms, the decline is even more precipitous, as inflation has made goods more expensive in dollars, not to mention the cost the economy needs to pay to get around sanctions.
The structure of exports has also worsened. In 2021, the share of energy products was 54% ($204 billion), while by end-2024 it had risen to 62% ($218 billion). In other words, Russia’s non-oil and gas exports, in particular metals, have plunged. Russian oil can still be sold to the rest of the world, even though Europe has stopped buying it. But China does not need Russian metals in such quantities.
In the same three-year period, imports of goods have slumped, falling from $245 billion before the war to $230 billion currently. Though the statistical decline does not seem so big, the real-life impact is tangible.
“Goods of pre-war quality are consumed less. They have been largely replaced by shabby substitutes that cost just as much.”
A Chinese Chery car on a Moscow street. Source: VK
Russia’s dependence on imports has grown, including in the “civilian” economy. For example, in 2024, the car market was technically back to where it was before the war, with 1.7 million passenger cars and light commercial vehicles sold – in line with the late 2010s and early 2020s. Alas, the devil is in the details: in the last pre-war year, Russians bought a little over 100k Chinese cars, versus about 900k in 2024. The domestic automobile industry has not recovered. Demand is being balanced by supply from China.
All the above can and should be called successes, albeit with reservations. Putinomics has indeed proven its resilience. But let’s now look at things that cannot be seen as, or have ceased to be, successes.
Getting harder to twist the data
According to official data, the consumer price index (CPI) rose 32% in 2022-24. Even this clearly underestimated figure is high. And since the second half of 2024, both Russian households and businesses have perceived inflation as a growing problem.
In the three years preceding the war, from 2019 to 2021, the CPI increased only 17%, which was considered a serious failure of the financial authorities at the time. Now, these same authorities are trying to tame much higher price growth with rate hikes that have taken the key rate to a level three times that in peacetime. The anti-inflationary effect has been minimal, while taking out a loan has become, for the most part, a privilege reserved for those picked by the leader to receive subsidies.
All the above can and should be called successes, albeit with reservations. Putinomics has indeed proven its resilience. But let’s now look at things that cannot be seen as, or have ceased to be, successes.
Getting harder to twist the data
According to official data, the consumer price index (CPI) rose 32% in 2022-24. Even this clearly underestimated figure is high. And since the second half of 2024, both Russian households and businesses have perceived inflation as a growing problem.
In the three years preceding the war, from 2019 to 2021, the CPI increased only 17%, which was considered a serious failure of the financial authorities at the time. Now, these same authorities are trying to tame much higher price growth with rate hikes that have taken the key rate to a level three times that in peacetime. The anti-inflationary effect has been minimal, while taking out a loan has become, for the most part, a privilege reserved for those picked by the leader to receive subsidies.
“As you might expect in wartime, prices for food, housing and communal services, health care, education and tourism are rising faster than elsewhere in the economy.”
How are you looking at the upcoming year? With hope (blue), uncertainty (green) or anxiety (red); too hard to answer (gray). Source: Levada Center
After the tapering of the government’s subsidized mortgage program, housing construction started to slide (the soaring headline figures for the construction sector are driven by the army). This is now reflected in official data.
More precisely, “private construction,” where mass falsification of statistics has become the rule, is still growing, according to Rosstat. At the same time, the construction of apartment buildings is already on the decline: in the first 11 months of 2024, 33.2 million square meters were built, versus 35.7 million square meters in the same period of the pre-war 2021.
The government tells us that, never mind construction, retail is doing well, with monthly sales, adjusted for seasonality, now 6% higher than before the war. Indeed, the 2022 nosedive in sales has basically been clawed back. But further growth seems unlikely.
The secret of the temporary stability
For people to buy more goods, there needs to be supply. Russians can now afford fewer imported goods than before. This is evident from the foreign trade figures cited above and the weakening of the ruble from RUB 75 for $1 before the war to RUB100 or so for $1 currently.
As for Russian-made goods, no official data has suggested an increase in production. Even the authorities, who are proud of the headline expansion in industrial production, do not call attention to nonmilitary segments, where there are simply no drivers for growth.
Still, the Kremlin pats itself on the back for falling unemployment (from 4.4% to 2.4% of the workforce) and soaring real wages at large and medium-sized firms (21% higher than before the war).
These figures are connected and, apparently, accurate. The flow of workers from the civilian economy to the army, arms industry and military construction has created a labor shortage. The total demand for labor has increased by 3.2 million people.
More precisely, “private construction,” where mass falsification of statistics has become the rule, is still growing, according to Rosstat. At the same time, the construction of apartment buildings is already on the decline: in the first 11 months of 2024, 33.2 million square meters were built, versus 35.7 million square meters in the same period of the pre-war 2021.
The government tells us that, never mind construction, retail is doing well, with monthly sales, adjusted for seasonality, now 6% higher than before the war. Indeed, the 2022 nosedive in sales has basically been clawed back. But further growth seems unlikely.
The secret of the temporary stability
For people to buy more goods, there needs to be supply. Russians can now afford fewer imported goods than before. This is evident from the foreign trade figures cited above and the weakening of the ruble from RUB 75 for $1 before the war to RUB100 or so for $1 currently.
As for Russian-made goods, no official data has suggested an increase in production. Even the authorities, who are proud of the headline expansion in industrial production, do not call attention to nonmilitary segments, where there are simply no drivers for growth.
Still, the Kremlin pats itself on the back for falling unemployment (from 4.4% to 2.4% of the workforce) and soaring real wages at large and medium-sized firms (21% higher than before the war).
These figures are connected and, apparently, accurate. The flow of workers from the civilian economy to the army, arms industry and military construction has created a labor shortage. The total demand for labor has increased by 3.2 million people.
“The labor shortage has inflated wages. Millions of Russians employed in the war economy have begun to consume more.”
Meanwhile, the rest of the country – they are the majority – consumes less. For example, old-age pensions, in real terms, are now 2% smaller than before the war.
The economic situation looks relatively stable only because a large share of the money doled out by the government is not spent by recipients; rather, it is stashed away at banks.
In just three years, from December 2021 to December 2024, individual deposits ballooned RUB 20.1 trillion (from RUB 33.5 trillion to RUB 53.6 trillion). In the previous three-year period, from December 2018 to December 2021, the growth in deposits (RUB 6.2 trillion) was a third of that.
If depositors start to doubt the solvency of the government and spend their money, the whole system will quickly lose its appearance of stability. It will be unable to provide Russians with goods and services.
As we see, Putinomics has no secret reserves. The Kremlin has already played its main cards, and its ability to ensure real growth in production and especially consumption looks dubious going forward. Further militarization of the economy can be achieved only by redistributing existing resources.
If Putin rejects forthcoming ceasefire proposals and decides to continue and expand the war, he will have to lower Russians’ standard of living – through inflation, ruble depreciation, higher taxes, restrictions on the use of savings at banks and fewer civilian-economy projects.
This is the outlook for 2025.
The economic situation looks relatively stable only because a large share of the money doled out by the government is not spent by recipients; rather, it is stashed away at banks.
In just three years, from December 2021 to December 2024, individual deposits ballooned RUB 20.1 trillion (from RUB 33.5 trillion to RUB 53.6 trillion). In the previous three-year period, from December 2018 to December 2021, the growth in deposits (RUB 6.2 trillion) was a third of that.
If depositors start to doubt the solvency of the government and spend their money, the whole system will quickly lose its appearance of stability. It will be unable to provide Russians with goods and services.
As we see, Putinomics has no secret reserves. The Kremlin has already played its main cards, and its ability to ensure real growth in production and especially consumption looks dubious going forward. Further militarization of the economy can be achieved only by redistributing existing resources.
If Putin rejects forthcoming ceasefire proposals and decides to continue and expand the war, he will have to lower Russians’ standard of living – through inflation, ruble depreciation, higher taxes, restrictions on the use of savings at banks and fewer civilian-economy projects.
This is the outlook for 2025.
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