Putin's Other War: An Economy in Decline
With falling oil prices, a tripled deficit and a new wave of sanctions, Russia faces an economic strain that is increasingly hard to hide.
By Gustavo Rabinovitz (Senior at the Group)
Last week was intense for those following the main headlines. A new Pope in the Vatican, a fluctuating conflict between India and Pakistan, a Selic rate hike in Brazil and the t
angle of scandals at the INSS. Amid this whirlwind of news, Russia, which has been waging a brutal war
against Ukraine for more than three years, has increasingly lost the attention of global readers, despite the ongoing conflict. But away from the spotlight, the country's economic situation is steadily worsening.
Since the start of the invasion in 2022, the Russian economy has been put to the test. Heavy sanctions, trade boycotts, asset freezes. Even so, Moscow managed to hold out longer than expected. Expensive oil, new export routes via China and India, and the strategic use of international reserves bought the Kremlin significant time. But this resilience, bought at a high cost, is now showing its instabilities.
The first evident crack is oil. The price of Urals crude, Russia's main export blend - heavier and with more impurities, and therefore cheaper than European oil - fell below the benchmark used to balance the budget. The average price of US$65 per barrel came in below the initial target of US$71.30 for 2024. For 2025, the Russian government revised its expectation even further downward, cutting the projection from US$69.70 to just US$56, which worsens the fiscal outlook and increases pressure on the war budget.
Price (USD) per barrel of Crude Oil Urals Europe CFR Spot in 2024 (Source: Investing.com)
Russia continues to export large volumes, but with smaller margins. What once sustained the financing of the war is now putting pressure on public accounts. This resulted in a revision of the deficit projection for 2025, which tripled, reaching 1.7% of GDP. In addition, there was a significant cut in the outlook for Gross Domestic Product growth this year for the same reasons, from 2.5% to less than 1.8%.
Russia's Budget Deficit (% of GDP) and GDP Growth (%) Projections for 2025 (Source: Reuters)
Putin's government is not only collecting less but also spending more. Russian military spending already reaches 6.3% of GDP, a level typical of countries in total war, which is hard to sustain for long periods due to the volume of debt the country must issue to finance it. Monetary policy does little to ease the situation. The Russian Central Bank has kept interest rates at 21% in an attempt to contain inflation that remains persistent, between 7% and 8%.
However, with rates this high, the economy stalls. Russia is now in full-blown stagflation: high inflation, weak gro
wth and a continuous erosion of the population's purchasing power. A hard trap to escape.
The effects of this economic phenomenon show up on the ground in the real economy. One of the hardest-hit sectors is the automotive industry. The Russian auto industry suffers from a lack of imported parts, production delays and a rapidly aging fleet. Without the capacity to modernize, the sector exposes Russia's structural difficulty in maintaining competitive industrial sectors without access to Western technology.
And international pressure on Russia promises to tighten even further. According to a report by El País published on May 7, the European Union is fast-tracking the approval of its 17th sanctions package, seeking to increase the economic strain on Moscow. What is new is that, in addition to reinforcing existing restrictions, the new package targets intermediary companies in third countries, an attempt to close the loopholes that still allow Russia to import military technology and strategic parts.
Against this backdrop, it is hard to sustain the idea that the Russian economy has withstood the economic war unscathed. In practice, what we see is a slow but steady process of deterioration. The combination of cheaper oil, an exploding deficit, persistent inflation, industrial collapse and growing isolation forms a picture that challenges any narrative of resilience and poses a high risk to the largest country in the world.
The risk, however, is not an abrupt collapse, as seen at other moments in history, but a continuous weakening of the Russian economy. The country is still standing, but at an ever-increasing cost, and with no clear signs that this trend can be reversed. Ignoring this movement just because no dramatic event is happening would be a mistake. What is taking place is a gradual erosion that, sooner or later, will show its effects clearly, and may well put Russia back in the most eye-catching headlines.
