The Russian economy on the verge of asphyxiation after a thousand days of war!

As the war in Ukraine drags on, the economic consequences for Russia are beginning to be felt more acutely. Initially noted for its resilience in the face of one of the harshest sanctions regimes in modern history, the Russian economy is now showing clear signs of running out of steam. Inflation is accompanied by skyrocketing interest rates. At the same time, the fragility of the ruble, constantly falling against the yuan, reflects a growing dependence on China, Moscow’s main trading partner.

A disproportionate war effort that weakens the Russian economy

Since the start of the war in Ukraine, Russia has significantly increased its military spending, accounting for 40% of its total defense and security budget. This figure, which represents 8% of GDP, has not been reached since the Cold War. This is an unprecedented financial effort in the country’s recent history. In 2024, this spending is expected to grow by 25%, to a total of 17 trillion rubles ($170 billion), according to official budget forecasts. This massive allocation reflects the Kremlin’s determination to maintain its military effort, despite the heavy pressures placed on its national economy.

To support this spending, the Russian central bank was forced to increase its key rate to 21%, a level not seen in two decades. Although this policy aims to contain galloping inflation, currently estimated at 8%, it nevertheless has direct repercussions on the population and businesses. Households are seeing their purchasing power erode, while businesses face prohibitive borrowing costs. In July, the removal of subsidies on mortgage loans, which until then allowed borrowing at 8%, led to a halving of new loans. Thus, this situation plunged the real estate market into a sudden slowdown. At the same time, business bankruptcies jumped 20% this year, a clear signal of the weakening of the Russian economic fabric. The situation requires unprecedented economic sacrifices, which illustrates the growing tensions of a model under pressure.

A currency under pressure and growing dependence on China

This depreciation of the ruble against the yuan, down 10% this year, illustrates Russia’s growing isolation on the international economic scene. Such a situation also reflects an increased dependence on China, which now plays a central role in Russian foreign trade. Beijing supplies more than 90% of the microelectronics used in Russian weapons, particularly for drones, missiles and tanks. Although strategic, this collaboration proves costly, because it subjects Moscow to the conditions imposed by its Asian partner. This state of affairs increases external economic imbalances. In addition, it makes the Kremlin’s monetary and budgetary management complex.

Domestically, the economic situation continues to deteriorate. The International Monetary Fund anticipates growth limited to 1.3% for Russia in 2024, compared to 3.6% in 2023. This economic slowdown is a direct result of rising borrowing costs, which slows down investments, as well as the loss of qualified manpower, mobilized en masse on the front. Furthermore, the priority given to military spending diverts essential resources from other economic sectors. This context further exposes the Kremlin to major financial challenges, with an overheated economy and increasingly limited prospects for military financing. In the absence of strategic adjustments, these tensions could lastingly alter Russia’s ability to sustain a prolonged war effort.

The Russian economy faces growing challenges, between the intensive war effort and increased dependence on its external partners. This fragility of the ruble and lasting inflation could force the Kremlin to review its economic priorities. Although Moscow is banking on a possible favorable geopolitical change, particularly with the return of Donald Trump, this strategy remains uncertain. Russia’s ability to sustainably bear the cost of this war remains an open question, with potentially decisive implications for its economic and political future.

Luc Jose A.

A graduate of Sciences Po Toulouse and holder of a blockchain consultant certification issued by Alyra, I joined the Cointribune adventure in 2019. Convinced of the potential of blockchain to transform many sectors of the economy, I took the commitment to raise awareness and inform the general public about this constantly evolving ecosystem. My goal is to enable everyone to better understand blockchain and seize the opportunities it offers. I strive every day to provide an objective analysis of current events, to decipher market trends, to relay the latest technological innovations and to put into perspective the economic and societal issues of this ongoing revolution.