“If You’re Not Buying, Prices Are Normal.” With this aphorism, Anton Siluanov, the Finance Minister of the Russian Federation, commented months ago on the greatest concern of the average Russian: runaway inflation.
But high and stubborn inflation is not the only problem facing the Russian economy. In 2024, serious signs of multiple economic and financial troubles emerged for the first time—imbalances that are a direct consequence of the war in Ukraine. According to independent economists, these issues will only intensify in the coming year, posing one of the biggest challenges for the Kremlin.
Normally, we are interested in the state of the world’s largest economies from the perspective of global economic growth forecasts, international trade, and the direct effects on our own economy. In Russia’s case, things are different this time: the central concern is Russia’s ability to sustain a long-term war—a war of attrition in Ukraine, for which the Kremlin needs an ever-increasing amount of money. Therefore, the sustainability of Russia’s current wartime economic model is directly linked not only to its ability to continue aggression against Ukraine but also to social stability within Russia itself. The latter is a crucial element—alongside authoritarian rule, of course—of the legitimacy of the modern Kremlin dictatorship.
The Fiscal Military Injection and Its Bill
From a macroeconomic perspective, Russia weathered the first and second years of the war relatively painlessly—a slight GDP decline in the first year, followed by 3.6% growth in 2023. When adding other selected economic indicators (low unemployment, a low federal budget deficit), it is not surprising that comments such as “the Russian economy is robust enough to support its military adventure at least in the medium term and withstand the strain of extensive Western sanctions” have been on the rise. Needless to say, Kremlin propaganda echoed similar sentiments, with the obligatory addition: “The war is even a blessing for the Russian economy, as it will spur necessary modernization.”
If we move away from such fairy tales and back to reality, it has been clear from day one that the war is no blessing for the Russian economy but rather a curse. A curse with long-term negative consequences, as it destroys human capital (brain drain, mass arrests, and prison sentences), causes capital flight and the loss of Western technology, erodes confidence in the ruble and domestic investment, and redirects government fiscal resources toward the war, creating new imbalances and fueling inflationary expectations. Over the past year, these consequences have started to receive official statistical confirmation, causing headaches even for Russia’s economic and financial policymakers, led by the central bank. Or, as Ruben Enikolopov from Pompeu Fabra University, an expert on the Russian economy, put it in a podcast: “The drinking binge is still going on, but the hangover isn’t far away.”
By “drinking binge,” he was referring to the massive injection of state money into the war effort, which is nothing unusual for a so-called wartime economy—it is the normal state of affairs. But, of course, this comes at a cost, as we now see in Russia’s case. Official inflation hovers around 9%, but many independent economists argue that it is actually much higher. The SITE Institute in Stockholm, for instance, estimated in its autumn analysis that real inflation is closer to 16%, which aligns more closely with the price increases felt by the average Russian. This drastically changes the perspective on GDP, the primary measure of economic activity when adjusted for inflation. In reality, Russia’s economy in 2024 has experienced a significant decline in real economic activity rather than the officially recorded growth. The credibility of these estimates is further supported by the response of the Russian central bank, which systematically raised its key interest rate throughout the past year, reaching 21%—the highest level since the collapse of the Soviet Union.
This alone is highly indicative: such an extreme tightening of monetary policy is a response to extraordinary inflationary conditions. Yet even this has not yielded results. While the central bank is trying to reduce the amount of rubles in circulation, the federal government, under Putin’s orders, is doing the exact opposite—expanding the military-defense budget, which will account for over 30% of all budget expenditures and nearly 10% of GDP in 2025. This money isn’t just going toward tanks, cannons, and ammunition but also toward payments to so-called “contractors”—volunteers who, upon signing a contract with the Russian Ministry of Defense, become the primary source of new troops on the front. This is the price the Kremlin appears willing to pay to keep feeding the war machine with fresh soldiers while avoiding another highly unpopular and politically risky mass mobilization.
Dutch Disease, but Worse
The so-called “Dutch disease” is a well-documented socioeconomic phenomenon in which the discovery of a resource—most commonly natural resources—leads to a sudden surge in national income. However, as a result, other economic sectors suffer as human and financial capital are drained toward the booming industry, ultimately negating the initial benefits. This is often accompanied by increased corruption and weak rule of law, as seen in many resource-rich but underdeveloped countries in Africa, Latin America, and elsewhere.
While Russia is by no means one of the poorest countries, it has never been immune to Dutch disease. Oil and gas revenues have long been the backbone not only of its exports but of the entire economy (before the war in Ukraine, the energy sector accounted for over 30% of GDP) and, most importantly, federal budget revenues (up to 50%). For a long time, the main indicator of Russia’s financial health and the ruble’s exchange rate was the global price of crude oil.
But even that has changed with Russia’s aggression against Ukraine. Now, oil and gas are no longer the sole pillar of Russia’s macroeconomic stability—due to wartime needs, the military-industrial complex has emerged as a serious “competitor.” This competitor is sucking up everything around it like a vacuum. The war absorbs labor, which is already in short supply due to demographic decline, the expulsion of millions of Central Asian migrant workers, and battlefield casualties. The private sector simply cannot compete in wage hikes with (para)state industrial firms that are part of the military-defense complex and that, fueled by defense contracts, are poaching workers from all industries.
The war also drains private investment—market-driven investments are unsustainable when the key interest rate is 21% and commercial loan rates are around or above 30%. The direct result is a decline in industrial production and economic activity in non-military sectors, such as construction and real estate. This is why Russian bankers have become increasingly vocal in criticizing the interest rate hikes, which are suffocating the private sector (and why some major Russian bank failures in 2025 are not out of the question). Furthermore, state incentives, subsidies, and investments in science, research, and development have been eroded—while nominal budget allocations may be increasing, inflation is eroding them even faster. The same applies to healthcare and social transfers: in real terms, they are significantly lower than before the war, meaning Russian pensioners are among the first to feel the war’s economic impact.
How long will Russia suffer from this “double Dutch disease”? As long as the war machine keeps running, the Kremlin will have to keep printing new rubles for these sectors, further overheating the economy. A few will profit from this, but the majority of the population will bear the brunt. And paradoxically, even if a ceasefire were declared tomorrow, Russia’s war economy would not be able to stop immediately. Other economic sectors will be so depleted that they won’t be able to compensate for the drop in economic activity once the Kremlin stops its wartime money-printing spree.
Thus, Putin has driven Russia—not only into an aggressive, imperialist military adventure with no clear exit but also into an entirely new economic dependence. Russia is no longer just reliant on oil and gas rents. It is now dependent on war itself—war that has become both its ideological and economic imperative.
Published in January 2025.