Alexander Sammon
Updated on: October 16, 2024 10:53 pm GMT
The pressure on Russia’s economy is mounting, raising questions about how long the Kremlin can continue its military campaign in Ukraine. As economic challenges layer upon each other, expert analyses suggest that President Vladimir Putin may need to reconsider his aggressive policies.
Economic Headwinds for Russia
Economist and author Anders Åslund argues that Russia’s economy is worse off than it appears. He notes a combination of financial, technological, and demographic challenges that have pushed the economy towards “near stagnation.” In his recent piece published in Project Syndicate, Åslund asserts that Western sanctions are slashing Russia’s GDP by 2%-3% annually. This downward trend raises the alarming possibility that Putin may have to end the war in Ukraine as soon as late 2025.
Åslund highlights some critical elements of the current economic situation:
- Hidden Inflation: Sanctions have led to “hidden inflation,” complicating the Kremlin’s financial outlook.
- Budget Consolidation: The Russian government has restricted its annual budget deficit to about 2% of GDP, roughly $40 billion. However, this financial discipline may soon prove untenable.
- Dwindling Reserves: As of March, Russia’s national wealth fund was cut down to $55 billion, which could run dry by next year, forcing difficult budgetary decisions.
Shifting War Resources
As the war drags on, critical resources necessary for military operations are becoming scarce. Åslund points out that weapons exports have significantly collapsed, primarily due to high domestic demand created by the ongoing conflict. He explains that dwindling manpower due to low unemployment, mass emigration, and increasing casualties is further straining Russia’s military capabilities.
Estimates suggest that Russia will spend around $190 billion on the war this year, amounting to about 10% of its GDP. This reveals a stark reality for the Kremlin: options for cutting non-war expenditures are limited. If these budgetary pressures persist, the consequences for the war effort could be dire.
International Predictions
Other institutions are echoing Åslund’s concerns. The Bank of Finland’s Institute for Emerging Economies recently released a report predicting that Russia’s growth could slow to just 1% in 2025 and 2026, a steep decline from 3.5% this year. The analysis implies that achieving sustainable growth will likely be impossible without significant productivity boosts—an outcome that seems unlikely given the ongoing focus on military investment.
Key points from the report include:
- Labor Shortages: The brain drain caused by the exodus of skilled professionals is exacerbating labor challenges.
- Supply Chain Issues: Sanctions have hindered Russia’s ability to obtain critical spare parts and advanced technology from Western sources.
- Economic Vulnerability: “Given Russia’s myopic policy shifts, conditions in its wartime economy could change suddenly,” the report cautioned.
Outlook for Ukraine
Amid these dire forecasts for Russia, Åslund also offers a perspective on Ukraine’s potential path to victory. He posits that if Ukraine had an additional $50 billion per year in support, as well as the ability to target military facilities within Russia, it could significantly bolster its chances in the ongoing conflict.
The challenges facing Russia raise critical questions about the sustainability of its military campaigns. As the implications of these economic constraints unfold, observers worldwide will be watching closely.
Conclusion
The Russian economy is struggling because of sanctions, low reserves, and big problems within the system. Experts think it might not grow for a while, which could make the Kremlin rethink its plans in Ukraine. If Russia keeps spending money on the military without support from its own people or other countries, it could change the course of this long conflict. Right now, both Russia and Ukraine are at a crucial moment that could change their futures.
