ECONOMY
Russian Economy Sobering Up After Fiscal Binge
March 3, 2025
- Andrei YakovlevAssociate at the Harvard University Davis Center & visiting research fellow at the Excellence Cluster “Contestations of the Liberal Script (SCRIPTS)” at Freie Universität Berlin
Economist Andrei Yakovlev notes that the war created not only problems but also opportunities for Russian business, while the Kremlin’s lavish spending of fiscal reserves and excess earnings from oil exports mainly drove economic growth. However, by end-2024, these factors had run out of steam, and Russia now faces the prospect of long-term stagnation, in Yakovlev’s view.
Inflation remains, as always, the major concern among Russian people. Source: Statista
In the three years since Russia’s full-scale invasion of Ukraine, the Russian economy has proven much more resilient than almost all Western, as well as many Russian, experts had assumed back in spring 2022. Though the extent to which Rosstat fudges economic data is up for debate, the 2022 decline in Russian GDP was insignificant, while economic growth was recorded in both 2023 and 2024 – despite the broad international sanctions imposed on Russia. In addition, real wages have risen on the military and the civilian sides of the economy.
Reasons for the economy’s resilience
The Kremlin sent troops into Ukraine in 2022 without considering the interests of business or the arguments of the “economic cabinet” in the government. What it had going for it, however, was the experience that Russian business had built up in dealing with sudden shocks since the late 2000s. Many Western experts missed the improving quality of the Russian bureaucracy that took place in the 2010s (with corruption among lower- and mid-level bureaucrats declining) and the channels for rapid communication between the state and business that were established during the pandemic. In 2020, these channels made it possible to develop and implement effective state support for the economy, which was rolled out on a much larger scale in spring 2022.
The inconsistent design of the sanctions regime has played an equally important role. Sanctions on oil exports – the most sensitive for the Russian budget – were put in place only in December 2022. Because of this delay and amid rising energy prices in 2022, Russia received $100 billion more in export revenues that year than in 2021. Personal sanctions against major Russian businesspeople, introduced without any clear exit strategies or businesses, have pushed oligarchs and their capital into the arms of the Kremlin.
Finally, in 2022 the rift between the West and the countries of the “Global South” became undeniable. As Fiona Hill noted in May 2023, developed countries underestimated the growing influence of the Global South in world trade and global finance.
Reasons for the economy’s resilience
The Kremlin sent troops into Ukraine in 2022 without considering the interests of business or the arguments of the “economic cabinet” in the government. What it had going for it, however, was the experience that Russian business had built up in dealing with sudden shocks since the late 2000s. Many Western experts missed the improving quality of the Russian bureaucracy that took place in the 2010s (with corruption among lower- and mid-level bureaucrats declining) and the channels for rapid communication between the state and business that were established during the pandemic. In 2020, these channels made it possible to develop and implement effective state support for the economy, which was rolled out on a much larger scale in spring 2022.
The inconsistent design of the sanctions regime has played an equally important role. Sanctions on oil exports – the most sensitive for the Russian budget – were put in place only in December 2022. Because of this delay and amid rising energy prices in 2022, Russia received $100 billion more in export revenues that year than in 2021. Personal sanctions against major Russian businesspeople, introduced without any clear exit strategies or businesses, have pushed oligarchs and their capital into the arms of the Kremlin.
Finally, in 2022 the rift between the West and the countries of the “Global South” became undeniable. As Fiona Hill noted in May 2023, developed countries underestimated the growing influence of the Global South in world trade and global finance.
“As a result, the effectiveness of US and EU sanctions has been rather limited, as most Global South countries do not abide by them.”
Pyaterochka grocery store chain. According to some reports, the retail sector, short over a million people, is welcoming pensioners who want to supplement their pensions. Source: Wiki Commons
Nonparticipation in the sanctions regime does not mean that these countries unconditionally support Russia – their governments are simply unwilling to bear the costs of sanctions, while firms from these countries have been keen to cash in on sanctions circumvention given the lucrative terms offered by Russia. At the same time, this “nonparticipation” equated to a crisis of the “rules-based model” that developed countries had been promoting for several decades.
Opportunities for Russian business amid the war
Since the start of the war, the Kremlin has also offered carrots to business. These incentives included spending the fiscal reserves that had been accumulated over the previous 20 years thanks to the efforts of Alexei Kudrin, German Gref and other liberal technocrats in the government. The Kremlin tapped these reserves after the start of the war, and this “pump priming” tangibly boosted demand in the economy.
The exit of large European businesses from Russia is another factor, comparable to the impact of the ruble crisis in 1998-99. That tripled or quadrupled the price of imports in ruble terms, creating space for domestic producers to step into the breach. In 2022, space again opened up after exports of European goods to Russia were banned. Another source of rent was the redistribution of property of foreign companies that had exited Russia. In this regard, a parallel can be drawn with rent opportunities from privatization in the 1990s.
Finally, evading sanctions, amid the handsome gains to be made from that, has led to the emergence of an entire industry of middlemen. A similar process played out in the 1990s, when financial intermediaries organized barter and non-monetary transactions. In addition, as in the 1990s, doing business with the state has turned out to be extremely profitable for banks: back then, it was buying short-dated government bonds and doing currency operations; now, it is extending loans with subsidized interest rates under government programs.
Guns versus butter becomes starker choice for Kremlin
All these rent-seeking opportunities spurred a sort of euphoria in Russian business, which was clearly reflected in 2023 and early-2024 surveys of firms conducted by the Central Bank. Now, however, the sources of rent have run dry, and these opportunities have wound down. In the 1990s, this process took seven years, ending with a default and a devaluation of the ruble in August 1998.
Opportunities for Russian business amid the war
Since the start of the war, the Kremlin has also offered carrots to business. These incentives included spending the fiscal reserves that had been accumulated over the previous 20 years thanks to the efforts of Alexei Kudrin, German Gref and other liberal technocrats in the government. The Kremlin tapped these reserves after the start of the war, and this “pump priming” tangibly boosted demand in the economy.
The exit of large European businesses from Russia is another factor, comparable to the impact of the ruble crisis in 1998-99. That tripled or quadrupled the price of imports in ruble terms, creating space for domestic producers to step into the breach. In 2022, space again opened up after exports of European goods to Russia were banned. Another source of rent was the redistribution of property of foreign companies that had exited Russia. In this regard, a parallel can be drawn with rent opportunities from privatization in the 1990s.
Finally, evading sanctions, amid the handsome gains to be made from that, has led to the emergence of an entire industry of middlemen. A similar process played out in the 1990s, when financial intermediaries organized barter and non-monetary transactions. In addition, as in the 1990s, doing business with the state has turned out to be extremely profitable for banks: back then, it was buying short-dated government bonds and doing currency operations; now, it is extending loans with subsidized interest rates under government programs.
Guns versus butter becomes starker choice for Kremlin
All these rent-seeking opportunities spurred a sort of euphoria in Russian business, which was clearly reflected in 2023 and early-2024 surveys of firms conducted by the Central Bank. Now, however, the sources of rent have run dry, and these opportunities have wound down. In the 1990s, this process took seven years, ending with a default and a devaluation of the ruble in August 1998.
“Now, the sources of rent that enabled the Kremlin simultaneously to finance the war, pay out social benefits and support the economy lasted less than three years.”
From as early as autumn 2024, the Kremlin has faced increasingly painful choices between guns and butter.
The draft budget for 2025-27, submitted to the Duma in September, clearly showed that military spending is the Kremlin’s priority. Not only were expenditures ramped up 25% for 2025 (following a budgeted 70% hike in 2024), but they are now set to remain at that all-time high in 2026-27 – whereas they were supposed to fall after 2024 according to the previous budget. Meanwhile – for the first time under Putin – the budget envisages a reduction in expenditures for social policy in nominal terms.
Central Bank key rate hikes to 21%, intended to bring down inflation and cool off the economy, has put an additional burden on business. Heated discussions are taking place in the public space about the consequences of the high-interest-rate environment, including the risk of mass bankruptcies in construction and other sectors. These headwinds have yet to translate into a real crisis, but experts point to an inevitable slowdown of the economy – which is bound to come at the expense of the civilian side of the economy.
The draft budget for 2025-27, submitted to the Duma in September, clearly showed that military spending is the Kremlin’s priority. Not only were expenditures ramped up 25% for 2025 (following a budgeted 70% hike in 2024), but they are now set to remain at that all-time high in 2026-27 – whereas they were supposed to fall after 2024 according to the previous budget. Meanwhile – for the first time under Putin – the budget envisages a reduction in expenditures for social policy in nominal terms.
Central Bank key rate hikes to 21%, intended to bring down inflation and cool off the economy, has put an additional burden on business. Heated discussions are taking place in the public space about the consequences of the high-interest-rate environment, including the risk of mass bankruptcies in construction and other sectors. These headwinds have yet to translate into a real crisis, but experts point to an inevitable slowdown of the economy – which is bound to come at the expense of the civilian side of the economy.
In late 2024, the government announced an extension of the service life for tens of thousands of apartment building elevators. Source: VK
No imminent collapse, but no real development either
The reserves accumulated for two decades are practically gone. Meanwhile, almost all the GDP growth in 2023-24 is attributable to the defense industry and related sectors. As for trade, there is a strong skew toward China, which accounts for more than a third of exports and imports. Until 2022, the EU and Russia had a similar trade relationship. The key difference is that whereas relations with European partners entailed Russian companies’ gaining investment and access to new technologies, those with the Chinese are limited to pure trade, with most of the profit going to the Middle Kingdom.
At the beginning of the war, most Russian industrial sectors had fairly modern production facilities. This modernization had been achieved thanks to Western technologies and equipment. Thus, when sanctions were put in place, Russian firms needed to find spare parts and components for this equipment. Thanks to supplies from China and Turkey, they managed to do this as early as fall of 2022. Now, however, equipment needs to be replaced, and the technological gap with developed countries is only widening.
The reserves accumulated for two decades are practically gone. Meanwhile, almost all the GDP growth in 2023-24 is attributable to the defense industry and related sectors. As for trade, there is a strong skew toward China, which accounts for more than a third of exports and imports. Until 2022, the EU and Russia had a similar trade relationship. The key difference is that whereas relations with European partners entailed Russian companies’ gaining investment and access to new technologies, those with the Chinese are limited to pure trade, with most of the profit going to the Middle Kingdom.
At the beginning of the war, most Russian industrial sectors had fairly modern production facilities. This modernization had been achieved thanks to Western technologies and equipment. Thus, when sanctions were put in place, Russian firms needed to find spare parts and components for this equipment. Thanks to supplies from China and Turkey, they managed to do this as early as fall of 2022. Now, however, equipment needs to be replaced, and the technological gap with developed countries is only widening.
“A striking example is the end-2024 decision to extend the service life of tens of thousands of elevators in apartment buildings – Russian firms are currently unable to produce the required number of elevators, and there is no money for imports.”
Finally, the economy has been hamstringed by an acute labor shortage amid mobilization, recruitment of contract soldiers and the large wave of emigration, which have come on top of negative long-term demographic trends. Meanwhile, social tension is on the rise: the real income growth in 2023-24 rather reflects the “average temperature in the hospital,” especially outside of big cities. The average figures reported by Rosstat include, on the one hand, a three- to fourfold increase in income for families of contract and mobilized soldiers and, on the other hand, zero income growth for doctors, teachers, pensioners and many private-sector workers, whose pay has not kept up with that of their compatriots employed in the defense industry.
None of this means the Russian economy will collapse tomorrow or the day after tomorrow. But Russia is staring down the barrel of long-term stagnation. Making things worse is the ongoing redistribution of property, underway since 2023, with assets seized and handed over to “new businesspeople,” whose key attribute is total loyalty to the Kremlin (see Russia.Post about it here).
The talks between the Trump administration and the Kremlin that began in February are unlikely to change anything in this regard. Before the war, the main trading partner for Russia, providing access to technology and development opportunities, was the EU. And Europe hardly looks ready to reset its relations with the Putin regime. At the same time, the human and fiscal resources that were built up in the 2000s and 2010s, which could have been used to develop Russia, have now been squandered in three years of war with Ukraine.
None of this means the Russian economy will collapse tomorrow or the day after tomorrow. But Russia is staring down the barrel of long-term stagnation. Making things worse is the ongoing redistribution of property, underway since 2023, with assets seized and handed over to “new businesspeople,” whose key attribute is total loyalty to the Kremlin (see Russia.Post about it here).
The talks between the Trump administration and the Kremlin that began in February are unlikely to change anything in this regard. Before the war, the main trading partner for Russia, providing access to technology and development opportunities, was the EU. And Europe hardly looks ready to reset its relations with the Putin regime. At the same time, the human and fiscal resources that were built up in the 2000s and 2010s, which could have been used to develop Russia, have now been squandered in three years of war with Ukraine.
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