ECONOMY
‘The Russian Economy, Despite All Its Problems, Can Sustain Putin’s Military Adventure’
July 28, 2025
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Vladislav Inozemtsev
Cofounder and expert at the Center for Analysis and Strategies in Europe (CASE) in Nicosia, Cyprus - Yevgeny SenshinJournalist
In an interview with Republic, Vladislav Inozemtsev argues that the Russian economy has vast resources, like massive household and corporate deposits at banks, and the system is relatively stable. The main threat is a further ramp-up of military spending, but Inozemtsev believes Putin realizes this and will only increase defense expenditures in line with inflation or by less.
The original interview in Russian was published in Republic. A shortened version is being republished here with their permission.
Today, some experts claim the Russian economy is on the verge of recession. Others say it can continue to grow without entering a downturn. Still others believe the recent decline in GDP signals the beginning of a technical recession. How would you assess these differing views?
I do not believe there is a recession. The main focus of discussion right now is the quarter-over-quarter GDP growth for the first quarter, which, according to the Central Bank, was negative. At the same time, Rosstat reported a 1.4% year-over-year increase, which suggests that production is still growing.
I believe the second quarter will show a result close to zero, around 0.5-0.7% [year-over-year] growth. Overall, the economy has almost come to a standstill versus last year, which was successful by all indicators. This is due to extremely high interest rates and the end of the growth in fiscal stimulus. Federal spending is not increasing and, for example, subsidized mortgages, which supported construction, have not been available for a year now.
Today, some experts claim the Russian economy is on the verge of recession. Others say it can continue to grow without entering a downturn. Still others believe the recent decline in GDP signals the beginning of a technical recession. How would you assess these differing views?
I do not believe there is a recession. The main focus of discussion right now is the quarter-over-quarter GDP growth for the first quarter, which, according to the Central Bank, was negative. At the same time, Rosstat reported a 1.4% year-over-year increase, which suggests that production is still growing.
I believe the second quarter will show a result close to zero, around 0.5-0.7% [year-over-year] growth. Overall, the economy has almost come to a standstill versus last year, which was successful by all indicators. This is due to extremely high interest rates and the end of the growth in fiscal stimulus. Federal spending is not increasing and, for example, subsidized mortgages, which supported construction, have not been available for a year now.
“As a result, industry and construction are struggling, which in turn is weighing on the metallurgy, fuel and coal sectors.”
Duma Budget Committee Chair Andrei Makarov noted at the Petersburg Economic Forum in June that Russia’s investment climate is ranked 126 out of 133 in the world and lamented that in the last 25 years the country had failed to create decent conditions for business. Source: YouTube
A weak global backdrop makes the picture only bleaker. The gap in performance among sectors is now very big. Some are unlikely to recover. I do not believe any rescue plan can change the situation in the coal industry, which is suffering from the near-total loss of external demand. Still, I do not see a broad-based decline. The alarming comments voiced at the St Petersburg Economic Forum (SPIEF), in my view, represent serious pressure from business and economic officials on the Kremlin.
They are sounding the alarm, and rightly so, but this is an effort not to get out of a recession but to avoid one. That is why I remain relatively calm in my assessment of the economy.
Calm? But you just said the coal industry cannot be saved, construction is in serious trouble and many other sectors are also struggling. Is that not alarming?
It is, of course, alarming. But the Russian economy has already weathered many crises.
When I wrote about construction last year, I was fairly sanguine. I said I did not see any reason to expect a collapse in real estate prices, as property remains one of the most important forms of investment for Russians. In the end, prices have not collapsed. In some cases, such as in Moscow, they have even continued to rise slowly over the past year.
As for coal, prices have fallen, and there are shipping problems. The coal industry has always been profitable only because of subsidies from Russian Railways.
What other sectors are falling? Automotive production. Here everything is pretty clear cut. The market is oversaturated with Chinese cars, which were welcomed into Russia under the impression that they would save the industry. That is one part of the story. The other part is that prices for Chinese vehicles are now falling, while Russian automakers are raising theirs. We have seen them calling: save us from competition. This means output will decline, as in terms of quality, Chinese cars and Russian ones are worlds apart.
There is another issue that will become a major topic in the autumn: agriculture. Due to poor weather, the harvest this year has been weak (see Russia.Post here).
The Russian economy is quite capable of surviving in a state of zero growth.
They are sounding the alarm, and rightly so, but this is an effort not to get out of a recession but to avoid one. That is why I remain relatively calm in my assessment of the economy.
Calm? But you just said the coal industry cannot be saved, construction is in serious trouble and many other sectors are also struggling. Is that not alarming?
It is, of course, alarming. But the Russian economy has already weathered many crises.
When I wrote about construction last year, I was fairly sanguine. I said I did not see any reason to expect a collapse in real estate prices, as property remains one of the most important forms of investment for Russians. In the end, prices have not collapsed. In some cases, such as in Moscow, they have even continued to rise slowly over the past year.
As for coal, prices have fallen, and there are shipping problems. The coal industry has always been profitable only because of subsidies from Russian Railways.
What other sectors are falling? Automotive production. Here everything is pretty clear cut. The market is oversaturated with Chinese cars, which were welcomed into Russia under the impression that they would save the industry. That is one part of the story. The other part is that prices for Chinese vehicles are now falling, while Russian automakers are raising theirs. We have seen them calling: save us from competition. This means output will decline, as in terms of quality, Chinese cars and Russian ones are worlds apart.
There is another issue that will become a major topic in the autumn: agriculture. Due to poor weather, the harvest this year has been weak (see Russia.Post here).
The Russian economy is quite capable of surviving in a state of zero growth.
“That was the case for several years after Crimea. During that period, people got used to stagnant living standards and nothing catastrophic happened.”
This is an important factor that allows Putin to maintain the status quo even without economic growth.
Between 2014 and 2020, Putin essentially taught Russians not to expect growth. In this context, wage growth in 2022-24 was an exception. At that time, much of the economically active population saw a noticeable increase in earnings. Now we are returning to a state of no growth. If that is actually the case, it is no problem. It does not call the stability of the system into question. It does not undermine its ability to wage war. It is a completely normal state for Russia.
The Russian economy has significant resources that are invisible to the naked idea. There is, in fact, a great deal of money. Households hold RUB 60 trillion in deposits. Companies also have large deposits. Banks are well capitalized – though they lend mostly to affiliated businesses, as they are deeply wary of defaults, which are now rising and account for about 4% of all loans issued, a fairly high number (the share of overdue credit card debt is even higher, at 10-11%, but these loans make up only a small part of assets.)
But the biggest source of uncertainty remains the war. It is the key factor shaping economic development, or the lack thereof. Spending keeps rising, but there is no prospect of victory or a clear end to the conflict. People do not understand what lies ahead. So, naturally, they are not investing. For that to change, there must be at least some clarity.
Suppose Putin says: no more negotiations, in six months we are taking Lviv, we will mobilize a million men. That would be terrible, of course, but it would at least provide a degree of clarity.
Or suppose he says: we will go no farther, we are doing a deal with Trump for an indefinite truce. In that case, economic growth would resume very quickly. I do not agree with the view that an end to the war would blow up the “military Keynesianism” model. Any sign of peace or improving relations with the West would give the economy a major boost.
Between 2014 and 2020, Putin essentially taught Russians not to expect growth. In this context, wage growth in 2022-24 was an exception. At that time, much of the economically active population saw a noticeable increase in earnings. Now we are returning to a state of no growth. If that is actually the case, it is no problem. It does not call the stability of the system into question. It does not undermine its ability to wage war. It is a completely normal state for Russia.
The Russian economy has significant resources that are invisible to the naked idea. There is, in fact, a great deal of money. Households hold RUB 60 trillion in deposits. Companies also have large deposits. Banks are well capitalized – though they lend mostly to affiliated businesses, as they are deeply wary of defaults, which are now rising and account for about 4% of all loans issued, a fairly high number (the share of overdue credit card debt is even higher, at 10-11%, but these loans make up only a small part of assets.)
But the biggest source of uncertainty remains the war. It is the key factor shaping economic development, or the lack thereof. Spending keeps rising, but there is no prospect of victory or a clear end to the conflict. People do not understand what lies ahead. So, naturally, they are not investing. For that to change, there must be at least some clarity.
Suppose Putin says: no more negotiations, in six months we are taking Lviv, we will mobilize a million men. That would be terrible, of course, but it would at least provide a degree of clarity.
Or suppose he says: we will go no farther, we are doing a deal with Trump for an indefinite truce. In that case, economic growth would resume very quickly. I do not agree with the view that an end to the war would blow up the “military Keynesianism” model. Any sign of peace or improving relations with the West would give the economy a major boost.
“Right now, it is uncertainty that is holding the economy back, not allowing it to operate in a state of zero growth, which it is capable of doing.”
Chinese Chery car on a Moscow street. Source: VK
Whether or not there is a technical recession of half a percent makes little difference.
You mentioned the banking sector. How do you assess the outlook for deposits, which this year have become perhaps the most attractive way for Russians to preserve their savings? How long can this continue?
The Russian government is quite rational in its economic decision-making. Can it borrow in the domestic market? Absolutely. The Ministry of Finance has demonstrated this clearly. The small cut to the key rate on June 6 led to a nearly 2.5 percentage point drop in government bond yields. And [Finance Minister Anton] Siluanov said in June that the government plans to borrow RUB 500 billion a month.
So, there is no problem with where or from whom to borrow. The government has the ability to raise debt. Moreover, a deficit of 1.7% of GDP is not the same as 5.0% – it is manageable. There are tools to cover the shortfall and finance expenditures. There is no default on the horizon.
The same applies to deposits. Deposits remain the main source of funding for banks. All the talk about freezing deposits is pure panic.
Recall that Putin’s strategy since October 2022 has been to make sure the public “does not know” that a war is going on. Officially, it is just a “special military operation,” being conducted somewhere far away by professional soldiers and volunteers. Meanwhile, ordinary people can go on living their lives, going to the movies, dining out, traveling.
If the government suddenly announced that it needed to freeze deposits to defeat Ukraine, this would trigger a major shift in public perception. It would mean that Putin had failed, that the economy would be sacrificed for a reckless idea and that the promise of a stable and comfortable life had been abandoned.
For 25 years, Russians have learned to trust their banks. Various guarantees have been put in place. And now the state is going to destroy all of that? For what – for a deficit of just 1.5% of GDP? That is an absurd proposition.
You mentioned the warnings voiced at SPIEF. I will also quote a recent comment by German Gref, who said 2026 could be difficult, adding: “a lot will depend on geopolitics…” This is a clear reference to the war. Perhaps these are not just warnings, but signs of unrest within the elite. Could this influence political processes?
Discontent has been simmering for a long time. We are moving in a very dangerous direction. We can keep going like this for quite a while, just like it took the Soviet Union years to collapse. But the longer we go, the more devastating the outcome is likely to be.
Russian business today finds itself in a contradictory situation. Recently, it was announced that Sberbank would pay out a record RUB 787 billion dividend for 2024. That is an astronomical sum – it exceeds all overdue consumer loan payments in Russia.
Yet Gref is out there telling us how tough things are for them? The bank’s profits grow every year because interest rates are so high. So his complaints are disingenuous.
The same goes for [Andrei] Kostin at VTB. Neither Sberbank nor VTB is at risk of collapse – the Central Bank will always bail them out if necessary.
But there is another part of the business community, and that is where the real problems lie. When [Severstal CEO Alexei] Mordashov says that metallurgical output has dropped by 15%, he is telling the truth. Only about 6-7% of metal production goes to defense. Around half of it went to construction, but construction has come to a standstill. Naturally, output of steel and other products is falling. These firms are under serious pressure.
Coal miners are in even worse shape. Whole towns and regions depend on them. So when business leaders say, “you are crushing us with high interest rates,” they are not exaggerating.
You mentioned the banking sector. How do you assess the outlook for deposits, which this year have become perhaps the most attractive way for Russians to preserve their savings? How long can this continue?
The Russian government is quite rational in its economic decision-making. Can it borrow in the domestic market? Absolutely. The Ministry of Finance has demonstrated this clearly. The small cut to the key rate on June 6 led to a nearly 2.5 percentage point drop in government bond yields. And [Finance Minister Anton] Siluanov said in June that the government plans to borrow RUB 500 billion a month.
So, there is no problem with where or from whom to borrow. The government has the ability to raise debt. Moreover, a deficit of 1.7% of GDP is not the same as 5.0% – it is manageable. There are tools to cover the shortfall and finance expenditures. There is no default on the horizon.
The same applies to deposits. Deposits remain the main source of funding for banks. All the talk about freezing deposits is pure panic.
Recall that Putin’s strategy since October 2022 has been to make sure the public “does not know” that a war is going on. Officially, it is just a “special military operation,” being conducted somewhere far away by professional soldiers and volunteers. Meanwhile, ordinary people can go on living their lives, going to the movies, dining out, traveling.
If the government suddenly announced that it needed to freeze deposits to defeat Ukraine, this would trigger a major shift in public perception. It would mean that Putin had failed, that the economy would be sacrificed for a reckless idea and that the promise of a stable and comfortable life had been abandoned.
For 25 years, Russians have learned to trust their banks. Various guarantees have been put in place. And now the state is going to destroy all of that? For what – for a deficit of just 1.5% of GDP? That is an absurd proposition.
You mentioned the warnings voiced at SPIEF. I will also quote a recent comment by German Gref, who said 2026 could be difficult, adding: “a lot will depend on geopolitics…” This is a clear reference to the war. Perhaps these are not just warnings, but signs of unrest within the elite. Could this influence political processes?
Discontent has been simmering for a long time. We are moving in a very dangerous direction. We can keep going like this for quite a while, just like it took the Soviet Union years to collapse. But the longer we go, the more devastating the outcome is likely to be.
Russian business today finds itself in a contradictory situation. Recently, it was announced that Sberbank would pay out a record RUB 787 billion dividend for 2024. That is an astronomical sum – it exceeds all overdue consumer loan payments in Russia.
Yet Gref is out there telling us how tough things are for them? The bank’s profits grow every year because interest rates are so high. So his complaints are disingenuous.
The same goes for [Andrei] Kostin at VTB. Neither Sberbank nor VTB is at risk of collapse – the Central Bank will always bail them out if necessary.
But there is another part of the business community, and that is where the real problems lie. When [Severstal CEO Alexei] Mordashov says that metallurgical output has dropped by 15%, he is telling the truth. Only about 6-7% of metal production goes to defense. Around half of it went to construction, but construction has come to a standstill. Naturally, output of steel and other products is falling. These firms are under serious pressure.
Coal miners are in even worse shape. Whole towns and regions depend on them. So when business leaders say, “you are crushing us with high interest rates,” they are not exaggerating.
“In my view, the business community is broadly dissatisfied. They see what is coming: if defense spending continues to grow, taxes will increase.”
"This is Summer" is a Moscow project running from June 1 through September 14 with festivals, performances, exercises, concerts and competitions.
Source: VK
Source: VK
Development programs are stalled, import substitution is failing and demand for many goods is falling. Because of the high interest rates, people are putting money in the bank instead of spending it on goods and services.
The economy cannot withstand, for the fourth year in a row, 30% annual growth in military spending. Officials are beginning to voice concern, too. They are talking openly about a possible recession and zero growth – look at [Minister of Economic Development Maxim] Oreshkin. This shows that both the business community and the economic bloc of the government understand the seriousness of the situation. They are trying to get through to the Kremlin with a simple message: “pump the brakes.”
When Putin said military spending needed to be curbed, I saw that as a response to these complaints. Perhaps a very disingenuous one. Putin is not to be trusted. In recent years, the Finance Ministry has repeatedly drafted budgets penciling in reduced defense spending, only for it to increase year after year.
What do you expect this year and next?
In our “Reliable Rear” report, we stressed that economic problems, sanctions, restrictions or inflation will not make Putin end the war in Ukraine or slash defense spending. The economy, despite all the problems, can sustain his military adventure. It will hold up, provided spending remains at current levels.
But it is a different case if military expenditures are raised further, to RUB 17-19 trillion. I do not believe the economy could absorb that. Putin needs to have a serious conversation with the military: continue the war, but within the current budget. That is RUB 13.5 trillion. Maybe add 5-6%, so perhaps RUB 14.5 trillion. But RUB 18 trillion? That is not feasible.
My forecast for 2026 is that Putin will increase military spending in nominal terms, but not beyond the rate of inflation. Somewhere in a range of RUB 14-15 trillion. If it stays within that range, the economy will not face serious problems. Tax revenues will also rise with inflation.
The key rate will likely be cut to 15% by the end of this year and to 12-13% next year. That will give business some breathing room. It will not transform the situation, but it will help prevent it from worsening. In short, 2025-26 will be a period of near-zero growth. Household incomes may grow slightly. But there will be no collapse.
We are plateauing. The economy is in wartime mode. There is no need to ask, as Kostin has, where defense output is going. It is being “consumed” by the Ukrainian armed forces in enormous quantities.
Before 2027, nothing bad will happen to the economy. As long as Putin does not go too far. Neither sanctions nor falling oil prices are a serious threat. And proposals like Senator Lindsey Graham’s of 500% tariffs are just rhetoric.
The Russian economy is capable of adapting to many things. We have seen this. There will be no growth – this is a sort of strategy. Can the government implement it? I believe it can.
The economy cannot withstand, for the fourth year in a row, 30% annual growth in military spending. Officials are beginning to voice concern, too. They are talking openly about a possible recession and zero growth – look at [Minister of Economic Development Maxim] Oreshkin. This shows that both the business community and the economic bloc of the government understand the seriousness of the situation. They are trying to get through to the Kremlin with a simple message: “pump the brakes.”
When Putin said military spending needed to be curbed, I saw that as a response to these complaints. Perhaps a very disingenuous one. Putin is not to be trusted. In recent years, the Finance Ministry has repeatedly drafted budgets penciling in reduced defense spending, only for it to increase year after year.
What do you expect this year and next?
In our “Reliable Rear” report, we stressed that economic problems, sanctions, restrictions or inflation will not make Putin end the war in Ukraine or slash defense spending. The economy, despite all the problems, can sustain his military adventure. It will hold up, provided spending remains at current levels.
But it is a different case if military expenditures are raised further, to RUB 17-19 trillion. I do not believe the economy could absorb that. Putin needs to have a serious conversation with the military: continue the war, but within the current budget. That is RUB 13.5 trillion. Maybe add 5-6%, so perhaps RUB 14.5 trillion. But RUB 18 trillion? That is not feasible.
My forecast for 2026 is that Putin will increase military spending in nominal terms, but not beyond the rate of inflation. Somewhere in a range of RUB 14-15 trillion. If it stays within that range, the economy will not face serious problems. Tax revenues will also rise with inflation.
The key rate will likely be cut to 15% by the end of this year and to 12-13% next year. That will give business some breathing room. It will not transform the situation, but it will help prevent it from worsening. In short, 2025-26 will be a period of near-zero growth. Household incomes may grow slightly. But there will be no collapse.
We are plateauing. The economy is in wartime mode. There is no need to ask, as Kostin has, where defense output is going. It is being “consumed” by the Ukrainian armed forces in enormous quantities.
Before 2027, nothing bad will happen to the economy. As long as Putin does not go too far. Neither sanctions nor falling oil prices are a serious threat. And proposals like Senator Lindsey Graham’s of 500% tariffs are just rhetoric.
The Russian economy is capable of adapting to many things. We have seen this. There will be no growth – this is a sort of strategy. Can the government implement it? I believe it can.
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