With Vladimir Putin’s war of aggression in Ukraine approaching its third anniversary, the financial, technological, and demographic hurdles facing the Russian economy are more severe than is commonly understood. Contrary to what the Kremlin would like others to believe, time is not on Russia’s side.
STOCKHOLM –Since 2014, and especially since 2022, Russia’s economy has been subjected to severe international sanctions. Yet assessments of their impact vary greatly. Russian President Vladimir Putin and his cronies boast that the sanctions make Russia stronger, but they incessantly call for all restrictions to be lifted. At the same time, many claim that the sanctions have had little impact, while others argue that this is because the sanctions are too timid.
My own view is that the current sanctions regime shaves off 2-3% of GDP each year, condemning Russia to near stagnation. Moreover, the situation will get only worse for Putin, perhaps even impeding his campaign of aggression against Ukraine.
At the Yalta Europe Strategy Conference in Kyiv on September 14, Kyrylo Budanov, a Ukrainian general, reported that Ukrainian military intelligence has obtained Russian documents suggesting that the Kremlin wants to sue for peace at the end of 2025 for economic reasons. Whether true or not, this scenario would make sense. The financial, technological, and demographic hurdles facing the Russian economy are more formidable than is commonly understood, and Putin’s war has already made history for both its cruelty and its stupidity.
Regardless of the outcome on the battlefield, Russia will be the biggest loser. Wars are costly, and the Russian economy has grown by only 1% per year, on average, since it illegally seized Ukrainian territory in 2014. Russian GDP has slumped from $2.3 trillion in 2013 to $1.9 trillion in current dollars. No longer a superpower, Russia is what the late US Senator John McCain memorably called “a gas station masquerading as a country.” In fact, its unreliability has reduced its credibility as an energy supplier. The only sectors of the Russian economy that are growing are the military and related infrastructure, where state-owned companies sell to the state at (probably inflated) administered prices. The rest of the economy is flat at best.
This is exactly what previously happened in the Soviet Union, where the economist Grigory Khanin and journalist Vasily Selyunin detected hidden annual inflation of about 3% per year. One indicator of this today is that the Russian central bank maintains an interest rate of 19%, while claiming that annual inflation is only 9.1%. Nobody should believe such figures. Most likely, the authorities are repackaging inflation as real growth.
Hidden inflation also suggests that Western financial sanctions are far more effective than many observers appreciate. Yes, Russia’s total foreign debt fell from $729 billion at the end of 2013 to only $303 billion at the end of March 2024, and its public debt is only 14% of GDP. But this does not help it much, because it cannot borrow abroad. Instead, it must live on tax revenues and reserves, and half of its foreign-exchange reserves have been frozen in Western jurisdictions since February 2022. Meanwhile, the liquid reserves in Russia’s national wealth fund have shrunk to $55 billion – or 2.8% of GDP – as of March 2024, from a peak of $183 billion in 2021, and most of the remainder has been invested and is not liquid.
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Owing to these constraints, Russia has had to limit its annual budget deficit to 2% of GDP year since its full-scale invasion (2022-24). With a GDP of $1.9 trillion, such deficits cost about $40 billion per year, implying that state reserves should run out next year, as Budanov indicated. Though Russia is raising its personal and corporate income taxes, this will not help much in a stagnant economy, and the government cannot sell many bonds domestically.
Western technology sanctions also continue to bite. Not only is Russia extremely isolated, but the mass emigration of its educated young people, Soviet-like repression, and Putin’s kleptocracy have aggravated its technological backwardness. The Kremlin has managed to alleviate the worst effects by purchasing sanctioned Western technology from China, Turkey, and Central Asian countries; but the West has gradually closed off these channels through secondary sanctions.
At the same time, Russia’s arms exports have collapsed, because it needs all of them for its own use. Much to its shame, the Kremlin has been forced to import artillery shells from its even more backward neighbor, North Korea. While Russia’s production has continued, its arms have proven substandard. It is worth remembering that Nazi Germany’s own arms production peaked in July 1944 despite months of intense Western bombing. Ultimately, it is quality, not quantity, that can make the difference.
Putin is also running out of soldiers. The US estimates that 120,000 Russian soldiers have been killed, and another 180,000 injured. Although Putin has just decreed that the Russian military must add 180,000 troops, Russia’s reported unemployment rate of 2.4% suggests that its manpower is already severely constrained. Moreover, given that more than a million healthy Russians fled the country in 2022 alone, many argue that Putin would not dare to call for another major mobilization.
Including all the hidden costs, Russia will probably spend about $190 billion, or 10% of GDP, on the war this year, and that figure presumably represents the peak, given the constraints imposed by Western financial sanctions. Whenever Russia can no longer finance a budget deficit, it will have to cut public expenditures, and its non-military outlays have already been pared to the bone.
By comparison, Ukraine has held Russia in a stalemate by spending about $100 billion per year on the war – half from its own budget, and half in kind through arms donated from abroad. Considering that Russia pays its soldiers (and the families of dead soldiers) much more, and that its arms are substandard, Ukraine could win the war if it had an additional $50 billion per year, as well as a green light to bomb military targets inside Russia.
The West can secure that sum by seizing the $300 billion of frozen Russian sovereign assets. That money is critical to Ukraine’s ability to fend off the aggressor and restore its territorial integrity.
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For almost a year, many hoped that Israel's war with Hamas would not spread beyond Gaza. But attacks on northern Israel by Hezbollah in southern Lebanon, and now the decision by both groups' backer, Iran, to fire ballistic missiles at Israel, has made a regional conflict all but inevitable.
explains why the fighting between Israel and Hamas has escalated into a regional conflict involving Iran.
STOCKHOLM – Since 2014, and especially since 2022, Russia’s economy has been subjected to severe international sanctions. Yet assessments of their impact vary greatly. Russian President Vladimir Putin and his cronies boast that the sanctions make Russia stronger, but they incessantly call for all restrictions to be lifted. At the same time, many claim that the sanctions have had little impact, while others argue that this is because the sanctions are too timid.
My own view is that the current sanctions regime shaves off 2-3% of GDP each year, condemning Russia to near stagnation. Moreover, the situation will get only worse for Putin, perhaps even impeding his campaign of aggression against Ukraine.
At the Yalta Europe Strategy Conference in Kyiv on September 14, Kyrylo Budanov, a Ukrainian general, reported that Ukrainian military intelligence has obtained Russian documents suggesting that the Kremlin wants to sue for peace at the end of 2025 for economic reasons. Whether true or not, this scenario would make sense. The financial, technological, and demographic hurdles facing the Russian economy are more formidable than is commonly understood, and Putin’s war has already made history for both its cruelty and its stupidity.
Regardless of the outcome on the battlefield, Russia will be the biggest loser. Wars are costly, and the Russian economy has grown by only 1% per year, on average, since it illegally seized Ukrainian territory in 2014. Russian GDP has slumped from $2.3 trillion in 2013 to $1.9 trillion in current dollars. No longer a superpower, Russia is what the late US Senator John McCain memorably called “a gas station masquerading as a country.” In fact, its unreliability has reduced its credibility as an energy supplier. The only sectors of the Russian economy that are growing are the military and related infrastructure, where state-owned companies sell to the state at (probably inflated) administered prices. The rest of the economy is flat at best.
This is exactly what previously happened in the Soviet Union, where the economist Grigory Khanin and journalist Vasily Selyunin detected hidden annual inflation of about 3% per year. One indicator of this today is that the Russian central bank maintains an interest rate of 19%, while claiming that annual inflation is only 9.1%. Nobody should believe such figures. Most likely, the authorities are repackaging inflation as real growth.
Hidden inflation also suggests that Western financial sanctions are far more effective than many observers appreciate. Yes, Russia’s total foreign debt fell from $729 billion at the end of 2013 to only $303 billion at the end of March 2024, and its public debt is only 14% of GDP. But this does not help it much, because it cannot borrow abroad. Instead, it must live on tax revenues and reserves, and half of its foreign-exchange reserves have been frozen in Western jurisdictions since February 2022. Meanwhile, the liquid reserves in Russia’s national wealth fund have shrunk to $55 billion – or 2.8% of GDP – as of March 2024, from a peak of $183 billion in 2021, and most of the remainder has been invested and is not liquid.
Secure your copy of PS Quarterly: The Climate Crucible
The newest issue of our magazine, PS Quarterly: The Climate Crucible, is here. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Premium now.
Subscribe Now
Owing to these constraints, Russia has had to limit its annual budget deficit to 2% of GDP year since its full-scale invasion (2022-24). With a GDP of $1.9 trillion, such deficits cost about $40 billion per year, implying that state reserves should run out next year, as Budanov indicated. Though Russia is raising its personal and corporate income taxes, this will not help much in a stagnant economy, and the government cannot sell many bonds domestically.
Western technology sanctions also continue to bite. Not only is Russia extremely isolated, but the mass emigration of its educated young people, Soviet-like repression, and Putin’s kleptocracy have aggravated its technological backwardness. The Kremlin has managed to alleviate the worst effects by purchasing sanctioned Western technology from China, Turkey, and Central Asian countries; but the West has gradually closed off these channels through secondary sanctions.
At the same time, Russia’s arms exports have collapsed, because it needs all of them for its own use. Much to its shame, the Kremlin has been forced to import artillery shells from its even more backward neighbor, North Korea. While Russia’s production has continued, its arms have proven substandard. It is worth remembering that Nazi Germany’s own arms production peaked in July 1944 despite months of intense Western bombing. Ultimately, it is quality, not quantity, that can make the difference.
Putin is also running out of soldiers. The US estimates that 120,000 Russian soldiers have been killed, and another 180,000 injured. Although Putin has just decreed that the Russian military must add 180,000 troops, Russia’s reported unemployment rate of 2.4% suggests that its manpower is already severely constrained. Moreover, given that more than a million healthy Russians fled the country in 2022 alone, many argue that Putin would not dare to call for another major mobilization.
Including all the hidden costs, Russia will probably spend about $190 billion, or 10% of GDP, on the war this year, and that figure presumably represents the peak, given the constraints imposed by Western financial sanctions. Whenever Russia can no longer finance a budget deficit, it will have to cut public expenditures, and its non-military outlays have already been pared to the bone.
By comparison, Ukraine has held Russia in a stalemate by spending about $100 billion per year on the war – half from its own budget, and half in kind through arms donated from abroad. Considering that Russia pays its soldiers (and the families of dead soldiers) much more, and that its arms are substandard, Ukraine could win the war if it had an additional $50 billion per year, as well as a green light to bomb military targets inside Russia.
The West can secure that sum by seizing the $300 billion of frozen Russian sovereign assets. That money is critical to Ukraine’s ability to fend off the aggressor and restore its territorial integrity.