As the war in Ukraine goes into a stalemate, the domestic situation with Russia also enters into great uncertainty. The Red Square military parade’s shrinking size and internal security threats symbolize a bigger, deeper problem within the nation. The Russian economy is also facing significant challenges. The interest rate remains significantly high, a symbol of an overheating economy, while the talk of further raising the interest rate continues to brew.
Although President Putin claims the Russian economy remains stable with a concerning inflation rate, the ongoing war has unavoidably damaged it. Many signs indicate that Moscow may suffer a lethal economic collapse shortly. The fundamental flaws in the Russian economy meant Moscow could not afford the war in Ukraine from the beginning. The long-term effects of the sanctions further drag down the economy. The spilling impact of the ongoing war, from irresponsible government spending to the manpower shortage, further indicates the final dooming moment for Moscow.
Although Russia is still growing in GDP, The economy is not in a firm shape. The inherently flawed economy could not sustain long-term warfare for the Kremlin. Before the war, Russia relies on the export of energy and raw materials for financial resources. Indeed, there has been a trade surplus for the Russians over the years; the fluctuating international energy prices still crucially impact the annual income of Russia. The 2014 oil price dip and its aftermath prove Russia’s insatiable income status as the Russian economy suffered a recession. Russia’s reliance on imported manufactured goods indicates an unbalanced industrial distribution since the Soviet times. Moscow’s economic structure is not suited for a long war.
Also, the cost of modern warfare was a bill Moscow could not pay for. One of the most prominent examples in this case is Russia’s military actions in 2015 in Syria. The war has quickly drained Russia’s storage of ammunition. The cost itself is four million US dollars per day. This is just the Air Force operation on a relatively smaller scale. The bill for the current war in Ukraine could only be significantly more enormous as more troops and more operations are required on the frontline.
The fragile economy also reflects on the military expenditures. Russia’s military expenditure remained at a low level until 2022. The low spending meant that some vital upgrades could not be fully initiated. The most advanced tanks, such as T14, were only considered for deployment until the beginning of the Russia-Ukraine war. The Russian Navy and Air Force are also falling behind in equipment upgrades. Looking at the Victory Day parade in the past years, it becomes apparent that Russia lacked the storage and production capacity to bulk up its military. This still relates to the flaws embedded in Russia since the beginning.
The sanctions proved to have a long-term effect on Moscow’s economy. The initial impact of sanctions has been questioned since all the economic indicators were stable in Russia. Yet, the long-term effect of the sanctions only started to show much later. Russia’s exports have declined significantly. Its oil and natural resources must be sold to other buyers below the market prices. These methods strained Russia’s ability to generate revenue. Meanwhile, Russia’s access to foreign currency was also restrained as sanctions were introduced, forcing the Moscow Exchange to suspend trading in Euros and US Dollars. The sanctions limited Russia’s ability to mobilize financial resources to go into the war.
The threats of secondary sanctions also forced other countries to limit their trade relations with Russia. Chinese banks, for example, have already stopped issuing US dollar letters of credit to Russians since the beginning of the war. Smaller Chinese banks have also stopped accepting transactions based on the Chinese Yuan with Russia. These are all based on the fear of secondary sanctions from the US. Russia’s trade with Central Asia is also under tight scrutiny. Kazakh and Uzbek companies have already been hit by sanctions related to Russia. The tight scrutiny also meant that Russians faced more difficulties using Central Asian banks for transactions. Russia’s international trade channel shrinks further as more parties collaborate with the sanctions.
The spilling effect of war itself further evaporates Russia’s thin economic resources. These spilling effects include the lack of manpower and uncontrolled government spending. These effects could damage the Russian economy both now and in the future.
The uncontrolled government spending makes the Russian economy grow on the surface. The military expenditure has increased significantly since the war started. Defense spending could make up to 40% of Russia’s expenditure in 2025. The government also provided generous subsidies to companies, from transportation to oil refineries, to sustain the economic activity. Moscow’s transfer payment to other parts of the nation is also significant. For regions like Chechnya, Moscow subsidies are the lifeline of regional fiscal capacity. All of these expenses eat up Russia’s vital economic resources. Moscow has already increased taxes to fund its war. The irresponsible spending could only drag Russia into a financial quagmire.
The spilling effect of war also led to a lack of manpower in the economy. Sustaining an economy requires manpower. As Russia reports that 73% of the companies are experiencing labor shortages, the future production capacity and growth become exceptionally uncertain. Since the beginning of the war, almost one million Russians left the country to live abroad. These Russians are highly educated and hold key knowledge for the function of the economy. These combined elements could sound the alarm for the future of the
Putin and the Moscow government wanted to create the image that Russia is still that polar bear that the world feared for years. However, the war in Ukraine revealed the actual color of the Russians. Moscow’s money bag is far shallower than the world thought. From the beginning, the flawed economy and the long-lasting effects of the sanctions had already hindered Russia’s potential in the war. The impact of war on the economy almost announced the doom of Russia’s economy. The numbers on the surface may seem stable, but Moscow may undergo an economic collapse soon.
