Russia's War Economy: Sustainable or Unsustainable?
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How severe are Russia's current economic challenges amid the war?
On December 20, Russia's economy is facing significant challenges, including high inflation, a growing budget deficit due to massive military, spending, and reduced oil and natural gas revenues. Despite these issues, experts believe the Kremlin can continue its war in Ukraine for several more years, even with current Western sanctions. Analysts suggest the economic strain isn't severe enough to force President Putin to the negotiating table just yet. Earlier this week, Maria Snegevaya, a senior fellow at the Center for Strategic and International Studies, stated that the Russian economy is not facing a catastrophic situation and remains manageable. She noted that Russia could likely sustain the current pace of fighting for another three to five years.
Why is the Kremlin shifting war costs onto Russian citizens?
Other economists agree, suggesting that Russia's ability to wage war is largely unimpeded by current economic constraints, especially as long as they can continue selling oil at reasonable prices. Meanwhile, the initial economic boost from surging military spending appears to be fading, leading the Kremlin to shift the financial burden onto Russian society. This includes increased corporate and income taxes, as well as a hike in the value-added tax to fund record military expenditures. Russian consumers are also dealing with sharp price increases, particularly for imported goods. However, experts like Snegevaya point out that high inflation doesn't typically cause widespread social unrest in Russia, partly due to government, propaganda and public familiarity with fluctuating prices.
What new economic winners have emerged from increased military spending?
According to officials, Russia is now dedicating nearly 40% of its budget to military aggression, a 38% increase from last. year. This spending has created a new class of economic winners, including defense contractors and blue-collar workers, leading to a decrease in economic inequality. Additionally, some of Russia's more rural areas have seen an economic uplift due to high wages for soldiers and significant compensation payments too. Their families, a strategy used to recruit volunteers and avoid broader conscription,
How could depletion of Russia's sovereign wealth fund affect future war financing?
Looking ahead, while the short-term economic challenges are manageable, the long-term outlook could be different. Russia has heavily drawn from its sovereign wealth fund, which has seen a 57% decline in liquid assets since the war began. This depletion could eventually make it difficult for the government to sustain current defense spending without cutting social programs. Increased pressure through stronger sanctions enforcement and efforts to reduce oil sales to countries like India and China could eventually alter the Kremlin's economic calculus.
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Chapters
4 chapters
1
How severe are Russia's current economic challenges amid the war?
0:00–0:45
2
Why is the Kremlin shifting war costs onto Russian citizens?
0:45–1:33
3
What new economic winners have emerged from increased military spending?
1:33–2:07
4
How could depletion of Russia's sovereign wealth fund affect future war financing?
2:07–2:39