Despite expected GDP growth, Russia suffers from high inflation and revenue shortages. The future of war financing remains uncertain.

MOSCOW – Within a few years, the Russian economy has turned into a war economy. It is now completely dependent on arms production and trade China and its ongoing oil and gas business, which continues to find buyers despite Western sanctions. Despite the World Bank’s forecast that GDP may reach 3.2% this year, the economic situation in Russia is not rosy at all. With inflation so high, fears of expropriation and labor shortages due to forced conscription, the country faces greater challenges than ever before.

The Russian economy is losing relevance: inflation is still high

Newsweek Reports indicate that the Russian economy will contract starting in 2025 and then steadily until the end of the decade. According to the International Monetary Fund, GDP will not exceed 1.8 percent next year. The war economy is not a sustainable economy, and as long as President Vladimir Putin continues his bloody war in Ukraine, economic dependence on the conflict will continue to increase. Despite significant interest rate increases by the Russian Central Bank last year, the inflation rate remains at 8%. The central bank expects the average inflation rate to reach 4.8 percent for the year 2024.

It remains uncertain how Putin plans to finance his war after 2024. Russian economist Igor Lepsiz said in an interview with a newspaper in early April. Frankfurter Allgemeine Zeitung (FAZ): “It seems to me and other economists that Russia will still be able to finance the war this year, but then it is not clear where the money will come from.”

The state’s sources of income are getting smaller and smaller, which is only now becoming clear. Gazprom is an example of this, as it recorded losses for the first time in its history in 2023. Instead, the state is incurring more and more debt, the repayment of which will constitute a heavy burden on the budget in the near future. According to experts, the main problem is the current shortage of skilled workers, which is exacerbated by mobilization in Russia. “The state is expanding the arms sector, which then takes over the healthy cells of the civilian economy like a cancer,” says Igor Lepsiz.

Putin will do everything in his power to win the war against Ukraine

Lipsez expects Putin and his power structure to do everything in their power to continue raising money for the Ukraine war – even if it means collapsing the financial system or cutting the population’s pensions. According to Lepsis, pensions have not already been adjusted as they should be due to the high inflation rate.

Vasiliy Astrov of the Vienna Institute for International Economic Studies (WIIW) shares this assessment. He believes that Putin will always find a way to continue the war. „Putin will not run out of money for war,” the Russian expert said last week. Astrov added: “For the Russian economy, the question is what will come after the war, because it is currently completely dependent on it.”

Due to the shortage of skilled workers and the state-controlled war economy, real wages in Russia rose by about eight percent last year, while private consumption increased by 6.5 percent, according to a report by the institute specializing in Eastern Europe.

Russia’s economy: Putin accepts sacrifices

However, Igor Lepsiz does not believe that anything will change in Putin’s power if economic problems become more evident among the population. “Any deterioration in the economic situation will not lead to mass protests. Even if food can no longer be bought except with stamps, as happened in the Soviet Union, which I believe will soon become possible, people will put up with it. Then people starve, pensioners take only cheap medicine and simply die. He told the radio that the political situation will not change had won.