Russia’s Economic Woes Deepen Amid War in Ukraine
Russia is far from an unstoppable force of nature. The autocrats who run it rely on a war economy that is unsustainable and shows serious cracks. Democracies should take advantage by increasing the economic pressure. It is we who have the momentum.
Contrary to Vladimir Putin’s narrative, and some people’s belief, sanctions do work. Even when they do not prevent certain goods and technologies from entering or—in the case of oil and gas—leaving Russia, they certainly make logistics more cumbersome. That increases costs.
Witness the rise in Russian consumer prices, which are up by more than a third since the end of 2021. This is due mostly to the rise in import costs and the country’s labour shortage translating into high nominal wage inflation.
Demographic Crisis Hits Russia
Owing to a low birth rate, high mortality and an exodus of Russians who oppose Mr Putin or just want a better life elsewhere, Russia‘s population is shrinking, ageing and losing its best talent. The senseless war in Ukraine, with hundreds of thousands of casualties, is not helping.
To combat inflation and capital flight, the central bank has raised its key interest rate to 21%. Double-digit interest rates push up the interest expense of the public sector, incentivise businesses to place liquidity in deposits rather than in investments, and eat into profits. Yields on BBB-rated corporate bonds have climbed to levels that point to a surge in bankruptcies.
Economic Outlook Remains Bleak
In 2024 Russia‘s GDP is expected to decline significantly due to the ongoing war and economic sanctions. Most forecasters expect barely any growth in 2025 as Russia runs out of labour and other resources. Despite all this, Russia can maintain the current level of military production, even if it means cutting back on everything else.
Military spending is eating up the budget and Russia has to fund its deficit through borrowing. With little to no access to international capital markets, Russia borrows domestically. New debt is absorbed by domestic banks, which place the government bonds at the central bank for cash. Essentially, the central bank is printing money to finance the government’s spending on the war.
Shadow Fleet Undermines Sanctions
Russia uses rusting, non-insured tankers to covertly carry Russian oil around the world, undermining the EU and G7 oil-price cap on Russian crude and petroleum products. Following the latest damage to undersea cables in the Baltic sea, affecting several coastal states, Finland recently seized a Russia-linked oil tanker. The vessel appears to be part of Russia’s shadow fleet and is suspected of intentionally damaging undersea infrastructure.
Several measures for limiting the use of the hazardous fleet are in the works. In December, 12 European countries, including my own, announced that their maritime authorities will start requesting proof of insurance from suspected shadow vessels as they pass through the English Channel, the Danish Straits or other strategic waterways.
Original Article: Time is not on Russia’s side, argues Finland’s foreign minister — Economist