Russia’s economy has had a turbulent few years since its invasion of Ukraine in February 2022. The sharp decline of the ruble’s value in recent weeks is just the most recent economic spasm.
The Russians are juggling the materiel and manpower demands of the long-running war, punitive Western sanctions, low oil prices, high interest rates, inflation, a labor shortage, endemic corruption, and much more besides.
President Vladimir Putin has a long list of economic concerns. But what is the Russian economy’s greatest vulnerability at the moment? Newsweek asked experts for their views. Here’s what they told us.
Sergey Aleksashenko, Co-Founder, Boris Nemtsov Foundation; Former Deputy Chairman, Central Bank of Russia; Former Chairman, Merrill Lynch Russia
Inflation, inflation, inflation. Consumer inflation is speeding up slowly and will erode the pensions and incomes of low-income families. Inflation that exceeds budgetary numbers will force the public sector to cut its investment plans.
The Central Bank of Russia believes it can freeze inflationary pressure by raising its rate, though I doubt it. Inflation is fueled by the “guns, not butter” policy that is not sensitive to the interest rate.
What is the Russian economy’s greatest vulnerability right now? Newsweek asked experts for their views.
What is the Russian economy’s greatest vulnerability right now? Newsweek asked experts for their views.
Photo Illustration by Newsweek/Getty Images
Elina Ribakova, Nonresident Senior Fellow, Peterson Institute for International Economics
Russia economy’s greatest vulnerability is overheating. It is like a property bubble, but now it is a morbid war bubble.
Budget money and subsidized credit are thrown at the military-industrial complex, but they lack investment, components, males of a working age that are being instead sucked into the war.
It also means a huge reallocation of resources towards an activity that won’t bring medium-term growth—war. Like with any bubble, it will burst. It is more likely to burst when oil hits $40-50 per barrel.
Dr. Alexander Libman, Professor of Russian and East European Politics, The Institute for East European Studies, Free University of Berlin
The main vulnerability of the Russian economy appears to be the shortage of the labor force.
Russia is now in the state of full employment; there are hardly any possibilities for increasing the output, since it would require new workers—and they are simply not available. Emigration and recruitment of soldiers in the Russian army decrease the labor supply.
Importantly, this is not a vulnerability potentially leading to a collapse of the Russian economy; but labor shortage is likely to put an end to the period of economic growth, pushing Russia into stagnation.
Maximilian Hess, Fellow, Foreign Policy Research Institute
The Kremlin’s greatest vulnerability would be losing its oil exports.
But Western policymakers won’t proceed down this path given the potential risks to global prices and thus their own markets (unless somehow Saudi Arabia can be convinced to run up production dramatically).
Realistically, Putin’s greatest vulnerability is that Russia remains in a stagflationary environment over the next year and that the economic outlook from there turns even more negative.
But while sanctions are vital to ensuring Russia’s war machine is limited in the extent of devastation it can cause across Ukraine, we should not look to them to magically defeat Putin or cause him to abandon his megalomaniacal war in the short term.
Nevertheless, maintaining them and tweaking them to be ever more effective is paramount to effectively mitigating against the threat of Putin’s aggression.
Dr. Janis Kluge, Deputy Head of Research Division, Eastern Europe and Eurasia, German Institute for International and Security Affairs (SWP)
Russia is very vulnerable to a drop in export revenues. If the U.S. decides to sanction Russian LNG exports or even oil exports, this could be painful for Russia.
As Russia’s reserve assets are mostly frozen by sanctions, the central bank cannot mitigate a drop in export earnings, so the ruble would drop much further, Russia would experience a recession and inflation would soar.
If global oil prices decline significantly, this could happen as well.
Dr. Vladislav Inozemtsev, Director, Center for Post-Industrial Studies; Special Advisor to MEMRI’s Russia Media Studies Project
I would say that Russia’s weakness—as well as its strength—lies in the actions undertaken by the ruling bureaucracy.
In 2024, the dissociation between the financial authorities and the top leadership has significantly increased compared to, would one say, 2022.
If the government undertakes both market and non-market actions (like another selloff of currency proceeds, a freeze of the tariffs of state-own monopolies, and increasing pressure on the banks for lowering the deposit rates), it may succeed in another round of adjusting the economy to war-time realities (similar to one that was made in 2022).
If it decides to stick only to liberal market measures, the economy may face dangerous imbalances.
Sergei Guriev, Dean and Professor of Economics, London Business School
The fiscal situation. Sanctions work and force difficult decisions (raising taxes and interest rates). But Russia continues to circumvent oil sanctions. If the West is serious about defunding Putin’s war machine, sanctions enforcement should be tightened.
Vladimir Milov, Former Russian Deputy Minister of Energy; Economist and Opposition Politician
As to vulnerabilities, it’s easier to ask if the Russian economy has any strength left.
The inflation/interest rate spiral is killing business confidence, as most Russian enterprises can’t survive for too long with current extreme interest rates. Russia is currently 12th in the world by central bank interest rate, we may well enter the worst 10 countries after December 20.
On top of that, rapid depletion of the state’s financial reserves, wild budget deficits, massive tax hikes effective from January 1 that would further undermine investment and business confidence, plus sanctions, etc.
Russia survived for nearly three years since the full-scale invasion of Ukraine due to accumulated reserves and military-driven economic bounce-back, but there are no miracles, sanctions and international isolation are finally beginning to bite.
I agree with the central bank that the root problem of inflation is the output gap, supply’s inability to catch up with demand—which is a direct result of supply constraints driven by war and sanctions (labor shortages, lack of access to technology and investment).