Putin has a thriving war economy – but a significant problem

3.6 percent growth this year – some politicians in this country would certainly like to see such rates. Because Germany’s economy is in absolute stagnation, according to them The prognosis the International Monetary Fund (IMF). Russia’s economy Meanwhile, growth is expected to be strong in 2024, as strong as last year.

of Russia own statistics also shows a clear upward trend. According to official data, gross domestic product, in rubles, rose from 36.9 trillion to 46.2 trillion rubles between the first quarter of 2022 and the second quarter of 2024 – a sharp jump of over 25 percent.

Figures from the IMF underline Russia’s economy at full steam, while Germany’s economy is limping. In the coming year, local growth is expected to rise to 0.8 percent, but will still remain behind Russia’s projected economic increase (1.3 percent) – although the West continues to impose massive sanctions on the state.

In the video: Now Russians are feeling the effects of Putin’s radical war economy

The Kremlin wants to significantly increase military spending again

The secret – and the big disadvantage – of this growth: the war economy initiated by the Kremlin. This is the only way Vladimir Putin can continue his war. But it is becoming more and more expensive. And the Kremlin wants to rely less on oil and gas for financing.

This is shown by new budget plans, reported by the independent Russian business magazine “The Bell“ reported. Government spending on the military is expected to increase by 25 percent to around $140 billion this year – and remain at this record level for at least three years, according to the magazine.

At the same time, the Kremlin wants to achieve a budget deficit of less than one percent of GDP, “and not rely on unexpected revenues from oil,” as the plans show. In fact, this financial feat should not be financed by raw materials, but by taxes.

Russia continues to export oil heavily – but the forecasts are divided

According to The Bell, Moscow only expects revenue of almost eleven trillion rubles ($115 billion) from oil and gas exports next year, 370 billion rubles less than this year. By 2027, revenues are expected to fall below the ten trillion ruble mark.

The Ministry of Economic Affairs, on the other hand, expects more income from the energy business, as a projection from September shows, provided by the news agency Reuters is present. On the one hand, Russia wants to export a little more oil than before, but on the other hand, the Kremlin is benefiting from the rising global price of crude oil.

Although the sanctions impose a price cap of $60 per barrel, the ministry expects an average sales price of $70 per barrel. The price of oil is currently around $74.

Moscow can still go into heavy debt, but only domestically

Nevertheless, the Kremlin apparently prefers to rely on significantly higher tax revenues. According to “The Bell”, revenue is expected to increase by 18.4 percent in the coming year, and by more than 6.5 percent in each of the two years after that. The higher tax revenues result from solid economic growth, but also from increased tax rates overall.

In addition, the magazine explains, Putin’s regime still has the option of becoming more indebted. The debt-to-GDP ratio is just 18 percent. However, the sanctions are also responsible for this. Russia can only borrow domestically, including from the state-owned banks themselves.

But potential investors within Russia are not necessarily willing to grant Moscow new debt. When it comes to borrowing so far this year, the Finance Ministry is lagging behind target, the magazine writes.

The weak ruble is driving up inflation and key interest rates

One problem: the weak ruble. With the exception of the weeks immediately following the invasion of Ukraine, Russia’s currency has never been weaker. One euro currently costs a whopping 108 rubles. Even before the war, the exchange rate was around 80 rubles per euro.

The ruble is also becoming weaker and weaker against currencies such as the Chinese renminbi – which is why exports there are earning less and less, at least in the local currency. At the same time, the exchange rate makes imports more expensive, which fuels inflation. That’s why the Russian central bank recently raised the key interest rate to an enormous 21 percent.

That’s exactly why, The Bell explains, Russian investors aren’t particularly keen on granting Moscow more debt. In addition, due to the high level of interest rates, debt service itself is putting more of a burden on the Ministry of Finance.

Experts expect “significant shortages” of materials – despite the war economy

But even if financing the conflict itself wasn’t a problem, Putin’s war economy has its limits, as a detailed analysis by the journal “Foreign Policy ” explained.

“No matter how many workers it shifts to the defense industry, the Kremlin cannot expand production enough to replace the weapons lost on the battlefield,” write authors Marc DeVore and Alexander Mertens, both of whom teach at universities also work in defense strategy think tanks.

Half of the artillery shells used already come from North Korean production. “At some point in the second half of 2025, Russia will experience significant shortages in several weapon categories,” the experts predict.

This will most likely be the case with large-caliber guns. Russia loses an average of 100 tanks and around 220 artillery pieces per month. The country only has two so-called radial forges with which the gun barrels can be manufactured. Monthly output per forge: just ten runs.

The market leader for such forges is the Austrian company GFM, which is why Russia cannot simply order more. The allies Iran and North Korea also do not have the necessary guns. Only China could help Russia overcome this deficiency once it arises.

Because of his “military Keynesianism,” Putin cannot simply make peace

Russia is also facing similar bottlenecks in armored personnel carriers and artillery shells – and also in the workforce itself, which also inhibits the development of further capacities. “Because Russia’s economy is practically at full employment, defense companies are struggling to get any workers,” DeVore and Mertens write.

This in turn drives up wages in the country’s industry, and thus inflation even further. “Paradoxically,” the experts explain, “these are the same factors that limit Russia’s war economy and also prevent the country from easily making peace.”

Russia’s economic performance is “a product of military Keynesianism.” Gigantic but unsustainable spending on the defense industry supports employment and growth, experts say. However, this is at the expense of the private sector, which is unable to finance investments due to high interest rates and is finding fewer and fewer skilled workers.

Warmonger Putin actually only has one option

When the war is over, demobilization will free up hundreds of thousands of workers who are not needed by either the ailing private sector or the suddenly out-of-business military industry – a recipe for political instability, according to DeVore and Mertens. But Russia cannot wage war with Ukraine permanently.

In order not to risk a recession in the end, Putin only has one option, the experts explain: “Instead of demobilizing and slipping into bankruptcy, the Russian leadership could instead use its military power to secure the necessary economic resources – in other words , further conquests or at least the threat of them.”

There are historical precedents for this, such as Napoleon in 1803 or Saddam Hussein’s attack on neighboring Kuwait in the 1990s. In both cases, the autocrats wanted to avoid having to demobilize their sophisticated armies. In any case, Putin is now stuck in his war economy – and is therefore likely to try everything politically to keep it going.

What is needed are “finally watertight” sanctions

However, all of this does not mean that sanctions do not work. The impending shortage of guns is evidence of this. At the same time, the punitive measures must be made “finally watertight”, for example

LBBW chief economist Moritz Krämer

recently demanded.

“Russia’s economy turned out to be more resilient than many thought, including me. This is partly due to the porous sanctions. Kyrgyzstan in particular has proven to be a hub for alternative options,” writes Krämer. Germany’s currently exploding exports to the country would bear witness to this.

It is therefore high time to close these loopholes and also put the country on the EU sanctions list. “It won’t destroy Russia’s economy, but it could destabilize the regime if the supply of German cars and French handbags dwindles.”

Here are two PAA-style questions related to the text:

##⁣ Determining Russia’s Economic Resilience: An Interview Framework

This framework breaks ⁤down the‍ complex topic of the Russian economy under​ sanctions into thematic sections, encouraging discussion and diverse perspectives.

**Section 1: Revenue Streams and Fiscal Policy**

* **Question:** ‍The ⁢article highlights​ a ⁢potential shift in Russia’s revenue reliance, moving away from reliance on oil and gas and towards increased taxation. What are the potential long-term⁢ implications of this strategy, both​ positive and ⁤negative, for the ‌Russian economy?

* **Question:** Can Russia truly achieve a budget deficit below ​1%‌ of GDP without relying on unexpected oil revenues, given the current sanctions and global economic climate? How realistic is this target?

**Section 2:‍ The Limits of Wartime ‌Economics**

* **Question:** The article suggests that Russia’s⁣ influx of domestic debt isn’t a⁣ sustainable ‌solution in the long run. What other options might Putin consider for financing the war, and what are the potential ⁢risks ‍and benefits of each?

* **Question:** “Military Keynesianism” is described as a driver of economic growth ⁤in Russia, but also as a factor preventing‌ a peacekeeping solution. Is this a sustainable strategy for Putin in the long term? ⁤What are the potential social​ and political consequences?

**Section 3:‌ Weapon Production Bottlenecks and Future of the Conflict**

* **Question:** ⁣The article predicts significant shortages in ​Russian weapon production​ by​ mid-2025. How accurate do​ you think this prediction is, and what impact⁢ could these shortages have on Russia’s ⁣ability to wage war?

* **Question:**⁢ The⁢ authors ‌suggest that Putin may resort to further conquests to secure economic resources. How likely is this⁤ scenario, and what international ramifications could it ⁣have?

**Section ⁤4: The effectiveness of Sanctions and Future Strategies**

* ‍**Question:** While the⁤ article acknowledges the impact of sanctions ​on Russia,‌ it also highlights loopholes that need to be addressed. What concrete steps can be taken to make sanctions more effective in achieving their ‍desired outcome?

* **Question:** What other economic levers could ⁤the international community use to pressure⁣ Russia​ to end the war? Are there any ‍potential unintended consequences to consider?

**Section ⁤5: The Long-Term Impact on the Russian Economy and ‌Society**

* **Question:** Beyond the immediate impact of the war, what long-term structural changes do you anticipate in the Russian economy?

* **Question:** How might the ⁢current ​situation affect the lives of ordinary Russians in the years to come? ⁢What ⁤are ⁤the ⁢social and political implications of ‍these changes?‍

This framework encourages thoughtful‍ conversation and debate on the complexities of the Russian economy⁣ and the challenges it⁤ faces in the context of ‌war and international sanctions.