Russia is running out of money

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Greetings and happy new year to Free Lunch readers — we hope your break was enjoyably restful or enjoyably productive, as you prefer it.

Everyone is still agog at the US raid in Venezuela and the rendition of its dictator. Many of my colleagues have insights to offer on the political and economic ramifications of this first proof that the new US national security strategy, and its revival of the Monroe doctrine, was meant seriously. You can find them all here.

But I don’t want us to take our eyes entirely off the ball in the eastern hemisphere, where much will depend on what happens in the Russian war against Ukraine. And that will, to a large extent, depend on the resources available to the two sides. That’s why the EU decision last month to fund Ukraine’s needs for the next two years was so important. But it’s time to take stock of the Russian economy. So today I provide a round-up of four recent research reports, all out in the past six weeks, that shine a light on the best up-to-date understanding of how Russia is faring economically.

Trying to get a true picture of the Russian economy could involve asking questions from at least two perspectives. First, how well is the aggregate Russian economy doing, really? Second, whatever the aggregate developments, how do they affect specific sectors, regions and individuals differently? Both of these matter for the political sustainability of the Russian state’s war economy, and hence for President Vladimir Putin’s ability to continue to fight his war.

Four reports give answers to one or the other of these questions. I highly recommend reading in full the papers for Bruegel, for PeaceRep, a consortium of UK universities, and for the Peterson Institute. The fourth report, from Corisk and Nupi, two Norwegian think-tanks, is mostly about Ukraine and the economic consequences for Europe of possible outcomes, but also looks at Russia.

The Bruegel report, by Marek Dabrowski, uses public data to establish that even taking Russian information at face value, there are strong signs of strain at the aggregate level. In particular, it is clear that financing the assault on Ukraine is forcing the Russian government to make harder and harder choices.

Start with the budget. Even as total budgetary revenue recovered to its pre-2022 norm as a share of GDP by 2024 (about 35 per cent), the government is increasingly having to raise domestic taxes to make up for a falling contribution from oil and gas sales. Dabrowski reports (see his chart after the quote):

In 2024, [taxes on hydrocarbon rent] amounted to 30.3 percent of the federal budget revenue and 15.6 percent of the consolidated budget revenue. According to preliminary data for the first three quarters of 2025, these shares declined to 24.5 percent and 12.2 percent, respectively.

[At the same time there has been] an increase in the corporate income tax rate from 20 percent to 25 percent, steeper progression of the personal income tax rate away from the previous single flat rate of 13 percent, higher land and real estate taxes, higher excises and higher tax rates for small businesses. In 2026, the VAT rate will increase from 20 to 22 percent.

Combine this with the big increase in the share of the budget spent on the war, and it is clear that public services and private disposable income must be being dramatically squeezed.

The squeeze has until now been moderated by deficit borrowing and covert money-printing through forced bank lending to military industries. But as both the Bruegel report and the PeaceRep report highlight, the liquid part of the Russian government’s savings fund, the National Welfare Fund, has fallen to a fraction of its pre-2022 high and would now hardly suffice to fund one year’s budget deficit. With the deficit rising, very little access to international credit and most of its foreign exchange reserves blocked, the government has few available sources of money left.

The upshot is that Moscow has to raise ever more financing at home, undoubtedly having to increase financial repression to succeed. The covert monetisation I reported a year ago has been part of this, and it seems the financing challenge is getting greater. As the Bruegel report points out, quasi-fiscal operations such as making state-owned enterprises finance battalions and having the NWF prop up banks and industrials have been part of the mix.

To repeat, this is based on public and official data. If this looks bad, imagine what the reality must be like. The PeaceRep report zooms in on this, arguing that inflation has been understated in official figures. That is likely to be true, but by how much? The others use pre-2022 relationships between official inflation, alternative price data and central bank interest-rate setting to estimate a true inflation rate, and find it to be about twice the official rate.

The implication is that real growth has been much weaker than the rate which has allowed Putin to boast about the resilient economy. Rather than the official rates of more than 4 per cent real growth in 2023 and 2024, the report estimates that the Russian economy shrank in real terms in both years, leaving it 1.5 per cent smaller last year than before the full-scale invasion of Ukraine. (Back in September, the Stockholm School of Economics also looked at alternative inflation measures to estimate even bigger falls in GDP.)

Now go behind the aggregate figures, and the question is who pays the cost of Putin’s murderous imperialism and who benefits. The PeaceRep report finds that only about 20 per cent of the population is better off in material terms because of the war. That leaves four-fifths of Russians worse off. And on average, real wages are down 5 per cent since the full-scale invasion rather than the double-digit growth in official figures.

The Peterson Institute paper digs into how the war economy affects different regions of Russia. (The paper, by Yuriy Gorodnichenko, Iikka Korhonen and Elina Ribakova, is also worth reading for its excellent summary of the aggregate developments in the Russian economy since 2021 — from mobilisation of previously underused resources, to a war economy with Keynesian growth effects, to a slowdown as supply constraints began to bite.)

The authors include the following striking chart. It shows that regional wage differences fell steadily in Russia from the start of the century, when an oil boom produced strong if shallow growth.

But this convergence stagnated completely after Putin’s first invasion of Ukraine in 2014, which the authors say could be because of how sanctions made it harder to access foreign capital and technology, which reduced efficiency. After the full-scale invasion in 2022, however, wages started to compress again. The natural interpretation is that the war economy intensified wage pressures in middle-income regions (disproportionately hosting military industries) and poor regions (disproportionately supplying soldiers). This is borne out by the fact that employment rates converged in the same fashion.

Paradoxically enough, Russia’s war economy reduced regional wage inequality at the same time as a peaceful high-pressure economy compressed wages in the US.

Strikingly, however, there is no similar convergence in investment rates between rich and poor Russian regions (if anything, the opposite). In other words, the war economy may have produced strong “extensive” growth, that is, growth from employing previously underused capital and labour to the full, but not “intensive” growth, which relies on sustained productivity increases. The implication is that neither the growth nor the convergence can continue on the same basis as before: extensive growth ultimately runs out of resources to add.

The picture is clear enough. The Russian economy is under enormous strain, and is running out of resources. A year ago I called it “a house of cards” — and while the house is still standing, I hold to that description. The policy implication is that sanctions are highly effective, despite their imperfect implementation and enforcement. The message for the west — what remains of it — is that the medicine is working, but the dose should be increased.

Russia is running out of money

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