Yet, apparent cracks are appearing in Russia’s economic armor that could hobble its war machine in Ukraine. Acknowledging that international sanctions are coming, the Russian government is girding itself for a huge shrinkage in cash to pursue its military aggression. Economic experts have predicted that cuts to Russia’s budget and military lending will dramatically affect the quality of Russia’s fighting forces. These forces have come under fire already for being overly dependent on technology and for under-resourcing their forces.
Russia’s economy was growing at an amazing 4 percent or more. But all of this growth is still very much propped up by oil and gas export revenue. The budget deficit soared to an unbelievable $51 billion in just the first eight months of the fiscal year. All of which begs some serious questions about how sustainable all this current growth really is. Economy Elvira Nabiullina, central bank governor, cautioned that the current economic expansion is unsustainable. She pointed out that every non-defense sector shrunk on average 5.4 percent this year.
As Russia ramps up its military campaign, launching record numbers of missiles and drones against Ukrainian cities, the risks associated with its economic strategies are becoming clearer. Resource support for the war effort is expected to decrease 15 percent in 2025. This cut includes state-directed lending to manufacturers of arms.
Economic Growth and Oil Dependency
Russia’s economy continues to depend on export revenues from oil and gas. This heavy reliance exacerbates risks to long-term sustainability, as seen patterns of waning domestic demand and international sanctions aimed at these industries.
Nabiullina elaborated that the government has used up all its reserves to compensate for lack of growth in other sectors, but these reserves have run their course. “We grew for two years at a fairly high rate because we used available reserves – labor force, production capacity, capital in the banking system, and funds from the National Welfare Fund,” she noted. But she cautioned that a lot of those resources are used up now, for real.
Leading experts on our economy agree that this economic model is deeply precarious. Maximilian Hess stated, “The Russian economy is not at the point of collapse despite the pressures that it faces because the Kremlin continues to get steady foreign income from oil.” He admitted that dependence on these revenues makes Russia vulnerable to the vagaries of global markets.
Defense Industry Challenges
Russia’s defense industry is facing an “unbridgeable gap in terms of technological advancement and capacity,” leaving it ill-equipped to meet the demands of an ongoing war. Analysts have noted that the Kremlin has successfully prolonged costly military campaigns all while avoiding a devastating contraction of its economy. The fiscal burden of these welcome activities is becoming an ever-larger weight.
Some of Russia’s largest industrial companies are showing signs of distress, even furloughing workers as they struggle to meet production demands. As the government continues to funnel bank credit for the war in Ukraine, other sectors are starting to suffer. “By a tactic of a thousand cuts, these effects start to build upon one another,” warned Olena Yurchenko, an economist focusing on Russian defense capabilities.
This increasingly desperate situation is exacerbated by skyrocketing import prices and shortages for materials essential to career and gear sustaining military operations. According to Yurchenko, “Prices on average are higher by at least 30 to 50 percent,” and for products with military applications, costs can increase by as much as 70 to 80 percent.
Sanctions and Future Outlook
The new sanctions are set to make implementation all the more challenging. The more international pressure builds, the less Russia can afford everything it needs to fund its military campaign. In response to these pressures, Russia has sought unconventional solutions, such as selling oil to China at discounted rates for prepayment.
This is not a sustainable long-term play. Some experts even go as far as predicting that unless Russia makes major cuts or finds new revenue streams, the country’s reserves could be exhausted by 2026. Supporters, including many global health and development leaders, are witnessing an increasing recognition among world leaders. They understand that taking approach the management of Russian assets just won’t cut it.
Anna Wieslander emphasized the severe implications of Russia’s military tactics: “We can see that through the way Russia conducts its war in Ukraine, hitting civilians and infrastructure to a degree that it has not done before.” The global community is now faced with a complex decision on how to respond effectively while mitigating further humanitarian crises.
