Russia’s economy has defied expectations since the full-scale invasion of Ukraine in 2022, growing faster than the US and major European economies last year, with unemployment at a record low. The likely explanation, according to experts, is that Russia’s economic strength is a “mirage” created by the Kremlin to make its adversaries think it’s in good shape. In reality, the country is facing significant challenges.
Russia’s economy is heavily reliant on state support, and the war has put a huge strain on the country’s resources. The government has used a “shadow budget” to fund its military efforts, with a significant portion of the funding coming from corporate borrowing. This has led to a credit bubble, with up to 60% of the loans going to war-related firms, according to a new report by the Davis Center for Russian and Eurasian Studies at Harvard University.
The report’s author, Craig Kennedy, warns that this funding scheme could lead to a far-reaching credit crisis, overwhelming banks with “a wave of toxic debt.” The Kremlin’s strategy is to shape the perception of its adversaries, including Ukraine’s Western backers, to believe that Russia can outlast and outspend them, making them more likely to support a ceasefire that favors the Kremlin’s goals.
However, experts argue that the perception of Russia’s economic strength is beginning to slip. The country is facing increasing pressure, with inflation accelerating and the central bank hiking interest rates to a two-decade high. The government’s ability to fund its war efforts and maintain economic stability is under strain, and the situation is likely to get worse in 2025, according to the International Monetary Fund.
The Russian economy is also facing challenges in the labor market, with a severe shortage of skilled workers. The war has played a part in this, with a significant number of Russian soldiers sustaining casualties. To offset this, Russia could encourage immigration, but this is complicated by rising xenophobia following recent terror attacks in Russia.
Western sanctions are also having a significant impact, with a new package targeting Moscow’s “shadow fleet” of oil tankers. The Biden administration’s sanctions have already caused significant pain to Russia’s economy, and China and India are reportedly looking for alternative oil suppliers. The energy giant Gazprom is facing a significant loss, which will hurt Russia’s war chest.
In conclusion, while Russia’s economy may appear strong on the surface, the reality is that it is facing significant challenges. The Kremlin’s strategy to shape perceptions may not be sustainable, and the country’s economic woes could soon become a major concern. As one expert noted, “the conditions for a crisis are there – but is the trigger?”