Ukraine, Russia War And Putin’s Economic Policy

For nearly three years, Russia has waged its unnecessary and unsuccessful war in Ukraine. Throughout the invasion, Russian forces have destroyed dozens of cities and villages.

They have bombed residential areas, cultural centers, schools, places of worship, and other nonmilitary targets. The Russians have displaced one-fourth of Ukraine’s population, and they have killed thousands of Ukrainian citizens.

Russia’s military incursion into Ukraine has failed in its initial aim to overrun the country and subjugate its citizens in just a few days, but it has nonetheless been devastating for Ukrainians.

To condemn the Russian Federation for its behavior, the international community has come together to support Ukraine. A primary method of punishment that Ukraine’s partners and friends have pursued against Russia is the implementation of sanctions.

Several Russian banks have been removed from SWIFT, the international financial messaging system. Thousands of companies have terminated or suspended business operations in Russia.

Hundreds of Russian oligarchs, politicians, and government officials have had their assets frozen or seized, and several countries around the world have reduced their consumption of Russian gas.

Since the full-scale invasion of Ukraine, the Russian economy continues to steadily collapse. The Russians lost billions of dollars due to international sanctions on Russian businesses, gas companies, and trade. Despite these losses, however, the Kremlin has continued its full-scale invasion.

Meanwhile, the Kremlin faces the mounting challenge of sustaining the war effort and funding social and infrastructure programs. Simultaneously maintaining low inflation and a stable ruble is proving increasingly unsustainable.

By 2025–2026, the fiscal and social challenges now on the horizon could fully metastasize into a crisis.

The cracks in the Russia’s economy are becoming more visible. By the third quarter of 2024, GDP growth had slowed to 3.1 percent, down from 4.1 percent in the previous quarter.

While industries linked to defense production continue to grow, their pace is far below last year’s levels. Other sectors are faltering: extractive industries face declining production due to lower hydrocarbon export prices and, while agriculture has also lost momentum.

Also, facts point to slowing business activity and rising inflation expectations among both businesses and households.

In November 2024, several economic indicators simultaneously revealed that Russia’s economy was not as healthy as the official data suggested.

On November 27-28, 2024, the RUB/USD exchange rate exceeded 115, the RUB/EUR – 120, and the RUB/CNY rate surpassed 15 (the worst levels since March 29, 2022).
The stock market fell to a 2.5-year low (the worst RTS index value since February 2022). The RGBI bond index dropped below 97 (the lowest level in its entire recorded history).

Inflation went through the ceiling: weekly inflation from November 26 to December 2, 2024, reached 0.5%, while monthly inflation for November stood at 1.7%, marking the worst figures since April 2022.

Unemployment has hit a record low of 2.3 percent, leaving an estimated 1.6 million jobs unfilled. In practical terms, the domestic economy cannot meet the demand driven by aggressive state and household spending, necessitating greater reliance on imports.

But resources are stretched thin as stagnant oil and gas revenues, coupled with energy sanctions, limit budgetary inflows.

Also, two critical indicators highlight the instability of Russia’s economy: inflation, which has reached almost 9 % since the beginning of 2024, and a key interest rate of

21 %, which so far has done little to temper price growth.

The surge in inflation is fueled by domestic demand, primarily driven by state spending and rising wages among Russians. Domestic production struggles to meet this demand, necessitating higher imports and, consequently, increased reliance on foreign currency.

How we said before, this dynamic has weakened the ruble, which in late November suffered its sharpest drop, falling nearly 25 percent from its summer 2022 peak. The government’s options to stabilize the ruble are limited.

Russia’s foreign exchange reserves remain frozen due to sanctions. Compounding the challenge is the absence of foreign investors since 2022 and the capital controls introduced in 2023, which have undermined the effectiveness of monetary policy as a tool for exchange rate stabilization.

READ ALSO: 20 Most Influential Politicians

External assistance seems unlikely. Despite its substantial trade relationship with Russia, China has shown little urgency in stepping into the role of a technological partner. For the Kremlin, this leaves the economy precariously balanced, with no clear pathway out of its structural vulnerabilities.

The structure of Russia’s market economy is steadily losing its flexibility under the weight of war and a centralized decisionmaking system that prioritizes control over dynamism.

Meanwhile, the high key interest rate (21%) has significantly reduced corporate profits by driving up borrowing costs. Companies with heavy debt burdens face a dramatically increased risk of bankruptcy. Simultaneously, the Kremlin and the government are embracing a dirigiste approach to fiscal and monetary policy, increasingly dictating economic outcomes from above.

Also, the authorities have stopped publishing critical economic data, including figures on foreign trade, oil production and exports, and the financial health of banks and corporations.

Putin’s obsession with the war in Ukraine has been costly. Throughout the war, the Russian government has spent tens of billions of dollars’ worth on defense equipment and weapons. Russia has also increased its national defense spending to record numbers while slashing spending on other government services, including medicine.

A sudden collapse akin to the 1990s is very likely: the Moscow doesn’t have the resources to maintain a minimum level of order and control. The current signs show that Russia will face an “economic collapse trap” and this suggests that 2025 will be a difficult year for Russians and the economy.

Meanwhile, the main reason for all of Russia’s economic problems is the barbaric war against Ukraine that Putin started.