The Russian Economy Faces An Uncertain Future

What is the latest thinking on the Russian economy? The answer for much of the conflict has been straightforward; sanctions against Russia have been less effective than hoped, Russian resilience (supported by effective economic and financial policy) has been greater than expected, yet the long term damage to the Russian economy will certainly be severe. However, the victory of President Trump in the US election has opened at least a sliver of a possibility that the Russian economy might become a bargaining chip in cease-fire negotiations.

Military Keynesianism for Russia

Russia has pursued what analysts are calling “military Keynesianism,” the floating of an economy by high spending on defense. Russia has maintained generous bonuses for soldiers who enlist, and robust benefits for wounded soldiers and the families of dead soldiers. Russia has also increased the productivity of its defense industrial base, keeping employment and wages high. This, along with exceptionally professional policy by the managers of the Kremlin’s financial and economic machinery, has ensured that the Russian economy has remained both afloat the productive in the face of war and sanction.

And yet Russia is enduring costs. Russia has managed to maintain economic growth by dipping into its reserves of foreign currency and by selling commodities at discount rates. Yet interest rates and inflation are both very high. Several hundred billion dollars of foreign currency holdings are gone, possibly never to be returned. As Pierre Marie Meunier points out, Russia is on the slow, inexorable path to bankruptcy, although its progress down that path might be slow indeed.

Implications for the Ukraine War

But Russia’s financial system does not appear to be its center of gravity. Russia remains able to buy weapons and to supply goods and benefits to its citizens, allowing it to continue the war at the front and avoid domestic discontent. And to be clear, the Russian government has determined to pay the costs of the war, mortgaging future prosperity in order to maintain a degree of normalcy at home. Financial exigency may never push Russia out of the war, but it will have long-term effects.

The war has sparked a transformation of Russia’s economy, and not in a direction that Putin wanted. Less productive, less innovative, more dependent on resource extraction, and more dependent upon its commercial and financial connections with China. High interest rates will reduce domestic technological innovation. Lack of access to Western capital (and to the most advanced Western technology) notwithstanding the extent of Chinese support will similarly impose a Soviet-style innovation environment.

In the short term, spending tons of money on the military (and on a raft of associated social programs) can keep an economy moving forward and can maintain popular support for a regime. In the long term the piper must be paid.

Putin and the Russian Economy: Headed for Trouble?

Putin knows this, which is why he made no effort to undertake a Soviet-style transformation of the Russian economy before the war, and why he sought a short, decisive conflict with Ukraine. Even if economic constraints don’t push Russia from the war, they could help impact the nature and timing of a settlement with Ukraine. The victory of President Trump in the US election has once again opened the question of whether a cease-fire might be achieved in the conflict. Given President Trump’s hostility to Europe and more broadly to the instruments of global economic management, it is quite possible that the United States could explore the relaxation of sanctions as part of an arrangement with Russia to end the war.

Tu-160. Image Credit: Creative Commons.

Avoiding the worst financial outcome and giving the Russian economy a bit of breathing space might well appeal to President Putin. It has largely been assumed that the sanctions regime that the US and the EU constructed in 2022 would remain for the foreseeable future, absent a highly unlikely Russian decision to end the war and withdraw from Ukraine.

President Trump, an altogether more transactional thinker on diplomatic and economic questions, might take an alternative approach to negotiations that would put issues on the table that Russia might possibly find deeply interesting. This is not a path to the recovery of Ukraine’s lost territory or to a just settlement, but Russian economic vulnerability opens at least a glimmer of light for the possibility of a negotiated end to the war.

About the Author: Dr. Robert Farley

Dr. Robert Farley has taught security and diplomacy courses at the Patterson School since 2005. He received his BS from the University of Oregon in 1997, and his Ph. D. from the University of Washington in 2004. Dr. Farley is the author of Grounded: The Case for Abolishing the United States Air Force (University Press of Kentucky, 2014), the Battleship Book (Wildside, 2016), Patents for Power: Intellectual Property Law and the Diffusion of Military Technology (University of Chicago, 2020), and most recently Waging War with Gold: National Security and the Finance Domain Across the Ages (Lynne Rienner, 2023). He has contributed extensively to a number of journals and magazines, including the National Interest, the Diplomat: APAC, World Politics Review, and the American Prospect. Dr. Farley is also a founder and senior editor of Lawyers, Guns and Money.