Economic Challenges in Russia
Russia’s economy is facing significant challenges due to its ongoing conflict with Ukraine and economic war with the West. The country’s Economy Minister, Maxim Reshetnikov, has acknowledged that Russia is "on the brink of a recession." This admission comes after years of economic strain caused by the conflict and Western sanctions.
Internal Conflict and Economic Management
There is an ongoing conflict within the Kremlin regarding the management of the economy. Reshetnikov has called for a lowering of the central bank interest rate to counter the economic downturn. However, Central Bank Governor Elvira Nabiullina has sought to maintain high interest rates to combat inflation, which has been running at an annualized rate of 10% this year. The true consumer inflation rate is even higher, but the Kremlin has managed to keep the headline statistics in check through changes to the consumer price index.
Impact of the War on the Economy
The war in Ukraine has had a significant impact on Russia’s economy. The country’s decision to weaponize energy supplies following the 2022 invasion led to a surge in global oil and gas prices. However, the cut-off of gas sales to Europe has resulted in substantial losses for Gazprom, a major Russian energy company. The Kremlin’s expanding defense budgets and growing labor shortages in the wartime economy have further compounded the problems.
Pressure to Boost Growth
There is growing pressure on Nabiullina to prioritize boosting economic growth over controlling inflation. The central bank has decreased its base rate from 21% to 20% this month, but other Putin allies are calling for further rate cuts to below 15%. The goal is to maintain popular support as the war’s costs become increasingly difficult to ignore.
Global Linkages and Sanctions
Russia’s economic trajectory remains heavily dependent on its global linkages. Despite the loss of gas profits, the country’s oil exports continue to fuel its war machine, with 2024 export volumes exceeding pre-war levels. The West has sought to target the price at which Russia sells its oil, rather than the volume of sales, through the G7+ Oil Price Cap. However, this cap has largely failed, with countries like China and India ignoring or evading it.
Effectiveness of Sanctions
The effectiveness of sanctions in limiting Russia’s oil revenues has been limited. The US has created doubt over its willingness to police Russian sanctions, while Europe and the UK have sanctioned Russian "shadow fleet" vessels involved in evading the cap. However, these measures have not had a significant impact. Brussels officials have proposed lowering the price cap to $45 a barrel, but this plan was put on hold due to oil price spikes caused by Israel’s attack on Iran.
Conclusion
The economic war between Russia and the West is increasingly one of attrition, with both sides attempting to outlast each other. Russia’s economy is vulnerable, but a crisis is unlikely without a change in approach to sanctions. To hold Putin accountable and support Ukraine, the West must consider limiting the volumes of Russian oil sales, rather than just the price. This would require the West to take a hit to its own economy, but it could ultimately lead to a more significant impact on Russia’s ability to wage war.
