{"id":682219,"date":"2026-01-08T12:47:21","date_gmt":"2026-01-08T12:47:21","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/682219\/"},"modified":"2026-01-08T12:47:21","modified_gmt":"2026-01-08T12:47:21","slug":"russia-is-running-out-of-money","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/682219\/","title":{"rendered":"Russia is running out of money"},"content":{"rendered":"

This article is an on-site version of the Free Lunch newsletter. Premium subscribers can sign up here<\/a> to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here<\/a>, or explore<\/a> all FT newsletters<\/p>\n

Greetings and happy new year to Free Lunch readers \u2014 we hope your break was enjoyably restful or enjoyably productive, as you prefer it.<\/p>\n

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<\/a>.<\/p>\n

But I don\u2019t 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\u2019s why the EU decision last month to fund Ukraine\u2019s needs for the next two years was so important. But it\u2019s 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.<\/p>\n

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\u2019s war economy, and hence for President Vladimir Putin\u2019s ability to continue to fight his war.<\/p>\n

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

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.<\/p>\n

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):<\/p>\n

\n

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.\u2009<\/p>\n

[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. <\/p>\n<\/blockquote>\n

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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.<\/p>\n

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\u2019s 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\u2019s 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.<\/p>\n

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<\/a> 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.<\/p>\n

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. <\/p>\n

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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<\/a> to estimate even bigger falls in GDP.)<\/p>\n

Now go behind the aggregate figures, and the question is who pays the cost of Putin\u2019s 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.<\/p>\n

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 \u2014 from mobilisation of previously underused resources, to a war economy with Keynesian growth effects, to a slowdown as supply constraints began to bite.)<\/p>\n

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. <\/p>\n

\"\"<\/p>\n

But this convergence stagnated completely after Putin\u2019s 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. <\/p>\n

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Paradoxically enough, Russia\u2019s war economy reduced regional wage inequality at the same time as a peaceful high-pressure economy compressed wages in the US. <\/p>\n

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 \u201cextensive\u201d growth, that is, growth from employing previously underused capital and labour to the full, but not \u201cintensive\u201d 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. <\/p>\n

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The picture is clear enough. The Russian economy is under enormous strain, and is running out of resources. A year ago I called it \u201ca house of cards\u201d \u2014 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 \u2014 what remains of it \u2014 is that the medicine is working, but the dose should be increased. <\/p>\n

Other readables<\/p>\n

\u25cf In my holiday column, I warned that your artificial intelligence \u201ccompanion\u201d is not your friend<\/a>. This week, my colleague Sarah O\u2019Connor explains<\/a> that large language models\u2019 alleged \u201cempathy\u201d is not what it\u2019s claimed to be.<\/p>\n

\u25cf Newly opened archives show Tony Blair\u2019s adviser argued that joining the euro<\/a> would eventually pay for the entire NHS from increased growth. It reminds me of the column I wrote a decade ago on why the UK would have fared better<\/a> inside the Eurozone \u2014 one of my columns that has got most people angry. And back to today: Bulgaria has just joined<\/a> the single currency as its 21st member.<\/p>\n

\u25cf New research finds that the US Supreme Court is not Robin Hood<\/a> \u2014 while its justices used to rule even-handedly between the rich and poor, they now favour the wealthier party to a dispute more than two-thirds of the time. <\/p>\n

\u25cf Tim Harford writes in praise of maintenance<\/a>.<\/p>\n

Recommended newsletters for you<\/p>\n

Chris Giles on Central Banks<\/strong> \u2014 Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here<\/a><\/p>\n

The AI Shift<\/strong> \u2014 John Burn-Murdoch and Sarah O\u2019Connor dive into how AI is transforming the world of work. Sign up here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"This article is an on-site version of the Free Lunch newsletter. Premium subscribers can sign up here to…\n","protected":false},"author":2,"featured_media":682220,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7655],"tags":[332],"class_list":{"0":"post-682219","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-russia","8":"tag-russia"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/115859557393204406","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/682219","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=682219"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/682219\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/682220"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=682219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=682219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=682219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}