From the moment Donald Trump was elected US President, Russia and its allies began to assert that Washington was more interested in peace than Moscow because “Russia was winning.” But the Kremlin’s position is not as strong as it likes to pretend; economists say the economy is struggling and will have serious difficulties meeting rising military expenditure.
The main threats are the falling price of oil and tightening sanctions on Russia’s energy exports, which will result in its revenues being driven even lower. The Russian economy is stagnating, while the civilian sector is close to recession. Higher tax rates may not have the anticipated effect of bringing in extra revenue since the tax base also shrinks as the economy contracts.
Against this background, it will be problematic for Moscow to increase military spending to the levels it will need to sustain the war. In the first years after the full-scale invasion, Russia benefited from weapons reserves that had been preserved since Soviet times, but these too have been depleted.
Last year, military analysts noted a reduction in stocks not only of armored vehicles but also of multiple launch rocket systems like Grad, Uragan, and Smerch. Aware of this, Moscow is trying to increase production, but analysis by Radio Liberty suggests this will not be enough to cover the supply needed to replace losses at the front and arm new military units.
Economists suggest the government may tackle the crisis by devaluing the ruble. Should combat continue, this would permit increased military spending, but sectors not related to military production would suffer from a reduction in government demand, with citizens facing stagnation or a fall in real incomes.
There’s no sign of that for now, indeed, Russian real incomes are still above pre-war levels. But growth is slowing even as the economy suffers acute labor shortages and remains unable to fix deep-seated inefficiencies.
Companies directed to go “on a war footing,” as demanded by Vladimir Putin, are often recording losses. For example, Zaryad, a manufacturer of carbon fiber ice hockey sticks in Naberzhnye Chelny, lost 198m rubles ($2.5m) in 2024 after switching to the production of bulletproof vests.
The Lotus shipyard, in the Astrakhan region, switched to manufacturing potbelly stoves for the military and lost nearly 1.5bn rubles ($18.8m) in 2023, then 2.6bn rubles the following year. The Tambov Bread Factory, which at the beginning of 2023 started producing drones in one of its workshops, also saw a dramatic fall in its profits.
In addition to these difficulties, there have been losses caused by Russia’s endemic corruption. The conservative TV channel Tsargrad was outraged when it emerged that almost 400bn rubles ($5bn) seized from corrupt officials was stolen for a second time. The Prosecutor General’s office had reported the seizure of 504bn rubles in corrupt assets and property, but only 114bn appeared in the budget. “The fight against corruption only breeds new corruption,” the TV station said in a story posted online.
Pro-Kremlin commentators have tried to offer reassurance about the economic position. The business newsletter Vzglyad, for example, said India’s increased purchases of oil from the US instead of Russia were not bad for Moscow, as India will need Russian oil to refine the American fuel. It argued that Europe was threatened with dependence on American oil in the event of a refusal to buy from Russia, and argued that the growth of OPEC+ oil production and fall in prices are in Moscow’s interests.
Pro-Kremlin economists also hope that, with American mediation, Russia will share the European gas market with the US and resume supplies to European countries. Another hope is that Serbia and Hungary will form a “new Austro-Hungary,” which would be completely “tied to Russian oil” and soon joined by Austria and Slovakia in a pro-Russian alliance.
While the new Austro-Hungarian Empire exists only in a world of dreams, such Putin-supporting commentators and propagandists have been forced to look for more realistic ways of coping with Russia’s difficulties. Some have even proposed the compulsory distribution of university graduates to companies, as was the case in Soviet times.
But the authorities will strive to avoid such unpopular measures, and one way of doing so would be to engineer a pause in the war or a reduction in its intensity. It is important for both Ukraine and the West to understand this weakness in Moscow’s negotiating position.
Kseniya Kirillova is an analyst focused on Russian society, mentality, propaganda, and foreign policy. The author of numerous articles for CEPA and the Jamestown Foundation, she has also written for the Atlantic Council, Stratfor, and others.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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