cross-posted from: https://beehaw.org/post/17940483
Putin’s Booming War Economy Poised for Soft, Bumpy Landing: The invasion of Ukraine triggered an economic boom in Russia built on the back of government stimulus. Almost three years on, there are gathering signs the bill is about to come due.
The mood in Moscow and other cities remains upbeat with packed restaurants and busy luxury stores, but a combination of record-high interest rates and persistent inflation is increasingly threatening forecasts for another year of slower, but still war-fueled growth. “A relatively good period for the Russian economy, which was based on previously accumulated resources, is over,” said Oleg Vyugin, an economist and former top central bank official. “High inflation eats away at all that seemingly short-lived success.”
On top of that, Russia is confronted with sanctions, a recently weakened currency, a muddied outlook for oil prices and the prospect that its biggest trading partner, China, won’t shake off significant economic troubles of its own.
The central bank is forecasting a sharp decline in growth in 2025 to as low as 0.5%, down from an estimated 3.5%-4% last year, and sees inflation returning to its 4% target only in 2026.
While the Economy Ministry’s outlook is more rosy at 2.5% growth this year, Putin said last month that a cooling economy was part of the government’s plan as it aims to “stabilize” inflation.
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Any pain from rising prices is being felt unevenly among Russians in part because a labor shortage has pushed up wages. “If we talk about the middle class, it feels fine now,” said Sergey Dmitrieyev, an IT specialist from Moscow. “Less well-off people are feeling more stressed.”
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The record borrowing costs have started to take a toll. Russian car dealerships are facing a potential wave of bankruptcies, according to the Autostat research group.
The agriculture sector is also feeling the squeeze. “The risk of bankruptcies is rising along with the key rate,” said Eduard Zernin, who served as the head of the Russian Union of Grain Exporters. “When farmers need to fund the sowing in the spring, we will see if those risks materialized.”
Even the largest companies are reviewing their strategies. State-controlled pipeline operator Transneft PJSC and Russian Railways JSC sharply cut investment programs partly due to borrowing costs.
Private businesses like steelmaker Severstal PJSC and miner MMC Norilsk Nickel PJSC are also trimming expenditures, while United Co. Rusal International PJSC, a top aluminum producer, is considering cutting output by more than 10%, citing the economic situation as one of the reasons.
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"[2025] will be “a year of belt tightening,” said Sofya Donets, an economist at T-Investments. “Creditors win, and borrowers can hardly imagine how they will live.”
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A collapse in the cost of crude is one of the biggest risks to the economy in 2025, according to Donets. If the price goes any lower, the state will have to make sacrifices, she said.
Meanwhile, Ukraine ended transit of natural gas across its territory, and while the economic effect will likely be muted, it could still cost Russia about 0.2% to 0.3% of gross domestic product, according to various analyst estimates.
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“The main risks for Russia are problems with payments,” said Alexey Vedev, a former deputy economy minister.
Payment problems and a foreign currency deficit have made it more difficult for Russian business to avail themselves of a relatively cheap borrowing option — yuan-denominated bonds — issuance of which slowed in the second half of the year.
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“The risk of a recession is also the highest in the last three years,” Donets said. “In some quarters, growth may be negative next year. For now, our main forecast is still growth by the end of next year, slightly below 1%.”