Russia's economy is buckling under the weight of prolonged war expenditures, as cracks in its financial stability become impossible to ignore. Despite the Kremlin's attempts to maintain an air of resilience, economic indicators reveal a bleak reality. Analysts, including those based in Moscow, are now sounding the alarm that 2025 could be a disastrous year for Russia. Here’s a deep dive into the dire state of the Russian economy, and what it means for Vladimir Putin’s war machine.

The Ruble’s Plummet: A Symbol of Economic Weakness

The ruble has sunk to 104 per U.S. dollar, a level not seen since the dark days following the collapse of the Soviet Union. While the Central Bank of Russia (CBR) managed to stabilize the currency in 2022, the pressures of a wartime economy have stretched its capacity to intervene effectively. CBR Governor Elvira Nabiullina is fighting an uphill battle to manage inflation and stabilize the economy, but the tools at her disposal are running thin.

Runaway Inflation and Rising Interest Rates

Inflation, officially projected at 8-8.5% this year, has hit ordinary Russians much harder, with consumer inflation skyrocketing by 22.1% since September 2022. To curb inflation, the CBR has raised interest rates to 21%, with further hikes expected. These measures, while necessary, are choking growth and making life increasingly unaffordable for the average Russian.

A War Economy Overheating

The defense sector is consuming massive resources, leaving the consumer economy gasping for air. The result? Too much money is chasing too few goods. Factories are operating at over 80% capacity, while labor shortages affect nearly three-quarters of enterprises—a nearly double increase from the previous year. Record-low unemployment of 2.4% underscores that the economy is at its absolute limits.

The Cost of War: Unsustainable Spending

Russia’s wartime expenditures are bleeding its coffers dry:

40% of the national budget is allocated to the military, with plans for a 27% increase in 2024.
Spending on soldiers and their families amounted to $32 billion in 2023-24, accounting for 8% of the national budget.
Despite these efforts, Putin has avoided open mobilization, instead relying on incentives to entice recruits. On November 23, he signed a law forgiving up to 10 million rubles in debt for those who enlist, extending debt holidays for soldiers from 30 to 180 days.

These measures underscore the desperation to sustain the war effort, even as the state deficit balloons to 2% of GDP and half of the National Welfare Fund has already been drained.

Economic Stagnation and Stagflation

The Russian economy is grinding to a halt:

GDP growth has plummeted to 3.1%, down from 5.4% in Q1, with the Central Bank forecasting stagnation in 2024 (0.5-1% growth).
Investment is drying up, creating a cycle of stagnation and stagflation that will be difficult to break—a predicament reminiscent of the U.S. economy in the 1970s.

The Sanctions Squeeze

Sanctions imposed by Western nations, coupled with tighter enforcement by even nominal allies like China, are taking their toll. While Russia weathered the initial impact of sanctions, the long-term effects are becoming apparent:

The exodus of Western companies has hollowed out key industries.
Residential real estate has collapsed, with major cities reporting a significant drop in apartment sales.
Over 200 shopping malls are at risk of bankruptcy, with their union seeking preferential loans from the Kremlin.

Public Fatigue and Waning Support

Perhaps most troubling for Putin is the growing discontent among the Russian population. Recent surveys reveal that:

52% of Russians now favor peace talks, up from 35% in April 2022.
Many Russians perceive the war as unwinnable, despite Kremlin propaganda portraying recent months as a series of victories.

This erosion of public support presents a significant challenge for Putin, who relies on nationalistic fervor to justify his aggressive policies.

Putin’s Strategic Dilemma

Faced with mounting economic and political pressure, Putin appears to be maneuvering for a stronger position:

Escalations, such as the recent Kursk incident and intermediate-range ballistic missile (IRBM) threats, may be intended to scare the West into pushing Ukraine toward concessions.
However, these tactics also suggest that Putin recognizes the limits of his military campaign and is hedging his bets.

The Fragile Path Forward

The Russian economy is running on borrowed time, propped up by unsustainable wartime spending and a population growing weary of conflict. Yet Putin shows no signs of backing down, raising the stakes for both Russia and the world. As the war grinds on, the question remains: will Russia’s economic collapse force Putin’s hand, or will the West hold firm in its support for Ukraine?

With the cracks in Russia’s war economy widening, the international community must be vigilant. The path to peace will require both strategic resolve and a recognition of the precarious situation in which Putin finds himself. The hope is that global leaders seize the moment, avoiding any missteps that could turn an impending Russian defeat into a broader geopolitical disaster.

The Russian Economy Under Siege: A Ticking Time Bomb Amid the War in Ukraine