Key takeaways
Table of Contents
- The expenditure in wartime conceals important underlying weaknesses in the Russian economy.
- The growth of GDP reported by the Kremlin is probably overestimated due to too low inflation and unreliable economic data.
- The Russian budget deficits are under pressure, with potential financial risks in the banking sector.
The war economy of Russia is confronted with increasing instability, according to a report from the Stockholm Institute of Transition Economics (site). In the report, which has been drawn up for discussions between the Ministers of Finance of the European Union, it is emphasized that although the Russian economy appears to be relatively stable on the surface, there are important underlying weaknesses and imbalances.
The report warns that the stability of the Russian economy is largely due to expenditure in wartime in the short term, but that this approach is untenable in the long term. It is based on opaque financing methods, disrupts the allocation of resources and draws tax reserves. Contrary to what the Kremlin claims, the time does not work in favor of Russia.
European skepticism about Russian economic figures
Despite the imposition of 16 sanction packages aimed at crucial Russian energy exports since the start of the war in February 2022, the EU has received claims from Moscow about economic growth. Russia is proud of a GDP growth of 4.3 percent for 2024, after a growth of 3.6 percent in 2023. Torbjörn Becker, the presenter of the site report for the EU Ministers of Finance,, however, was skeptical about these figures.
Becker pointed out to the discrepancy between the inflation figure specified by Russia (9-10 percent) and the policy rate used by the Central Bank of 21 percent. He stated that such a big difference indicates that Russia probably estimates inflation too low, which leads to an overestimation of the real GDP.
Russian budget under pressure due to falling energy exports
Becker also pointed to the tense Russian budget as a result of falling income from the export of oil, gas and coal in combination with escalating military editions. Despite the enormous war efforts, Russia has reported an annual budget deficit of 2 percent since the start of the invasion.
Becker suggested that a large part of the war financing runs through the banking system, so that the officially specified budget deficits may be doubled. He warned that this practice contributes to the financial risks within the banking sector due to high credit growth, a precursor that is often observed before banking crises.
International response
European Economic Commissioner Valdis Dombrovskis joined the findings of the site report and emphasized the unreliability of Russian economic data and the underlying vulnerability of the Russian economy. He emphasized the continuous efforts of the international community to limit Russia’s assets to continue his war against Ukraine.
The European Union today issued its 17th sanction package against Russia, as part of the continuous efforts to weaken the economic capacity of Russia and to make the continuation of the war against Ukraine.
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