Russia’s economy is facing a “moment of truth” today due to high inflation, a collapsing private sector, and critical shortages of consumer products and needed wartime commodities. These shortages are about to constrain Vladimir Putin’s war in Ukraine. This is the assessment from the long-time economic specialist on the Soviet—and later Russian—economy and widely-published author Anders Aslund.
In a January 14 article written for Project Syndicate, Aslund concludes that the economic costs of almost three years of war following a nearly-failed invasion in February 2022 are taking their toll. His analysis is the Russian economy exhibits all the signs of being on the road to stagflation. This condition is the usual consequence of the twin economic ills of high inflation combined with slow to near-zero growth.
The high and rising prices in Russsia are exacerbated by a constantly worsening condition of labor shortages. Large numbers of workers being mobilized and sent to the front (many of whom have been killed) and many millions of others who have fled the country to avoid conscription or the increasingly repressive state apparatus created the situation.
The CBR Roulette Wheel
At a press conference on December 19, 2024, Russian President Vladimir Putin was asked directly by a UK journalist working for the US network NBC what he would be able to offer US President Donald Trump in any negotiations. Putin, the former KGB Lt. Col., now the “weaker leader” of the two, avoided the question from the correspondent in front of a crowd shocked at someone presenting this barbed question to the Russian dictator.
Accusations that Putin’s power is waning are precipitated by the economic decline created by the war. Moreover, there is no shortage of skepticism that this balancing act that has staved off any major financial disruptions is about to come to an end.
What has held the ailing Russian economy together has been the “magic” performed by the head of the Central Bank (CBR), a female economist named Elvira Nabiullina. Thus far, she has kept the Russian Ruble from collapsing into hyperinflation (as it did in the 1990s) by steadily increasing interest rates, now at 21 percent. But the price for that monetary rigidity is becoming too high to bear.
At the December meeting of the CBR, the expectation was interest rates would rise from 21 to 23 percent. Instead, it remained unchanged—even though the official annual inflation numbers increased from 8.4 percent to 9.5 percent in just two months’ time. This halting of any interest rate hikes is believed to be a direct result of numerous oligarchs that typically only discuss their concerns in private, with Putin bringing their concerns to the forefront of the open airwave news services.
The most notable of these oligarchs is a long-time confidant of the former KGB Lt. Col. Sergei Chemezov, General Director of the nation’s massive defense industrial conglomerate, Rostec. The companies under Rostec’s control produce 80 percent of the weaponry supplied to Russia’s military.
Chemezov has further said these interest rates make it impossible for Russia’s defense firms to conclude export contracts. Exports of weaponry are what have sustained the Russian defense sector thus far. Without these foreign sales the industry’s ability to maintain production becomes even further compromised.
Russia: Real Economic Numbers Don’t Look Good
Even with the CBR controlling the interest rates, the “official” inflation estimates become increasingly less relevant. According to the independent Russian research firm ROMIR, the cost of what economists refer to as the Russian “basket of fast-moving consumer goods (FMCG), such as food and household chemicals, had risen by 22.1 percent year on year in September.”
There is also abundant evidence that the Russian state has been creating a time bomb by engaging in preferential lending practices. Aslund reports that Craig Kennedy, a former banker and specialist on Russia, discovered that since mid-2022, the Kremlin has been pressuring Russian banks to lend to defense firms on rather friendly terms.
Aslund describes these maneuvers as “off-budget financing schemes” and estimates they have “contributed to a $415 billion surge in corporate borrowing, boosting inflation and rendering Russia’s finances highly vulnerable.”
Vladimir Putin at the opening ceremony of international military-technical forum.
His conclusion is these trends will put the Russian economy into what he describes as a “moment of truth.” Inflation, he projects, “will continue to rise in 2025, and people will get even angrier over higher food prices. Major bankruptcies are looming, and the Russian state cannot afford large bailouts. Business leaders are fiercely objecting to high interest rates, and the shortage of labor—and soldiers—is reaching a crisis stage.”
All of this portends a situation where it is difficult for Putin to continue this war. Pressures on the former KGB Lt. Col. are increasing. One hopes those sitting on the opposite side of the negotiation table will utilize it to their maximum advantage.
As one former intelligence official confided in me, “Don’t let the US get snookered on a bad deal when it is Putin—and not us—on the ropes.”
About the Author: Reuben F. Johnson
Reuben F. Johnson is a survivor of the February 2022 Russian invasion of Ukraine and is now an Expert on Foreign Military Affairs with the Fundacja im. Kazimierza Pułaskiego in Warsaw. He has been a consultant to the Pentagon, several NATO governments and the Australian government in the fields of defense technology and weapon systems design. Over the past 30 years he has resided in and reported from Russia, Ukraine, Poland, Brazil, the People’s Republic of China and Australia.
