Putin’s money machine malfunctions – The Economist
30 April 12:35
From Kaliningrad to Vladivostok, changes in the Russian economy are being felt. After so many years of resilience in the face of a full-scale war, the Russian economy has finally begun to sink. This is stated in the article “Vladimir Putin’s money machine is malfunctioning” by The Economist, "Komersant Ukrainian" reports.
According to an index developed by Goldman Sachs, since the end of last year, Russia’s annual economic growth has fallen from about 5% to almost zero. The Russian development bank VEB also shows similar trends in its monthly growth estimates, and a high-frequency measure of business turnover compiled by Sberbank, Russia’s largest lender, also shows a decline. Although the Russian government is more restrained in its assessments, in early April the central bank of Russia acknowledged that
“a number of sectors recorded a decline in production due to falling demand.”
These worrisome indicators for Russia come after three years of its economy outperforming almost all forecasts thanks to a combination of a fiscal boom, high commodity prices, and militarization. After the full-scale invasion of Ukraine in 2022, economists predicted that annual GDP would decline by up to 15%. In fact, however, GDP declined by only 1.4% that year, before growing by 4.1% in 2023 and 4.3% in 2024. Consumer confidence has approached record highs. As the author of the article notes, when it began to look like Donald Trump might give Putin what he wants to end the war in Ukraine, some expected Russia’s economy to accelerate even more in 2025.
So far, however, the opposite is true. Russia’s economy has slowed down, according to The Economist.
Structural transformation is complete
The article identifies three reasons for the sudden slowdown. The first is related to what the Russian central bank euphemistically calls the “structural transformation” of the economy. The economy used to be Western-oriented and accepting of private enterprise (with certain restrictions), but since 2022 it has become an East-oriented military economy. This transformation required huge investments not only in arms and ammunition factories, but also in new supply chains that allow for more trade with China and India (as well as more domestic production). By mid-2024, real fixed capital expenditures were 23% higher than at the end of 2021.
According to the Russian central bank, this adaptation is now complete. Military spending shows a similar trend. Julian Cooper of the Stockholm International Peace Research Institute (SIPRI) estimates that military spending will grow by only 3.4% in real terms this year, a sharp deceleration from the 53% increase last year. The weakening of “structural transformation” spending means slower growth, but that shouldn’t bother Putin if it frees up investment for productive use.
“As strange as it may sound, given the macroeconomic realities, we don’t need this kind of growth yet,”
– he said in December.
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Central bank policy is working
Thesecond factor, the article says, is monetary policy. Russian inflation has been exceeding the central bank’s 4% annualized target for several months, even exceeding 10% in February and March. One of the reasons for this is active military spending, but also a labor shortage caused by conscription and emigration of skilled workers. Nominal wages grew by 18% last year, forcing companies to raise prices. In response, the central bank tightened restrictions. on April 25, it decided to keep the prime interest rate at 21%, the highest level since the early 2000s.
The bank’s extremely tight stance is finally starting to show results. High rates have encouraged capital inflows into the ruble; a stronger currency, in turn, makes imports cheaper. Russians’ expectations for inflation over the next 12 months are softening, from a recent peak of around 14% to around 13%. High-frequency data show that inflation is gradually declining. The flip side of disinflation is slower growth. Instead of spending money, Russians are putting it into savings accounts. High interest rates further discourage capital investment.
But oil prices make the difference
As the author notes, if this were the whole story, Putin might be satisfied. For the Russian government, a small, gradual slowdown might be a price worth paying if it means taming inflation. However, the problem is that the slowdown is neither gradual nor small. This is because in recent weeks a third factor has begun to dominate all the others – the external environment has deteriorated. With the escalation of America’s trade war, global growth forecasts have fallen, and so have oil prices. Economists are particularly concerned about China, the largest buyer of Russian oil. The IMF has lowered its expectations for China’s GDP growth in 2025 from 4.6% to 4%.
The fall in oil prices is causing Russia various problems, the author of the article argues. They have affected the stock market, where oil companies account for a quarter of capitalization. The MOEX index, which tracks the share price of the 50 largest companies, has fallen by a tenth of its recent peak. With export revenues declining, the drop in oil prices is having a direct impact on the real economy. Already, the state treasury is experiencing difficulties: in March, tax revenues from oil and gas fell by 17% year-on-year. And on April 22, Reuters reported, citing official documents, that the government expects a sharp slowdown in oil and gas sales this year.
In conclusion, The Economist ironically notes that while Donald Trump may be well disposed toward Putin, he has dealt him a severe blow with his trade war.
