Russian War Economy - Has the Truth Escaped?

Anyone who takes the trouble to seriously study the real impact of military budgets and wartime economies will realise that the Russian economy is increasingly based on trickery, statistical manipulation and propaganda. Official GDP figures are fabricated to maintain the illusion of stability and progress. When Moscow publicly admits the possibility of a recession, it is because the internal situation has already passed the point of propaganda dissimulation. Finance Minister Anton Siluanov himself recently acknowledged the need to increase taxes and the possibility of a contraction, but was quickly forced to “amend” his statements. The same Siluanov who suggested that tax increases might not be enough, before claiming that he had misspoken when the Kremlin almost spat out its coffee upon hearing someone tell the truth, immediately went on to state that “Russia is not in a recession, it is in a planned economic slowdown”. Delicious, especially because the alternative left to Siluanov, if he didn't correct his frankness, would be to accidentally trip and fall out of a window on the 12th floor of a building, but the truth is simple: the money is running out.

The Russian Finance Minister, who stated at the Sberbank morning panel during the St. Petersburg International Economic Forum that the Russian budget was facing significant turbulence, then stated in an interview with official TV that European sanctions were affecting the EU more than Russia, whose economy remained stable thanks to solid reserves, low debt and a controlled deficit. The problem that undermines the narrative is that Siluanov was joined in his analysis by Sberbank Chairman German Gref, who described the economy as an “ideal storm” due to high interest rates and low productivity, adding that the appreciation of the ruble was worsening the budget deficit, probably requiring new market financing by the end of the year. It remains to be seen which of the “allies” would be willing to finance them if necessary! Confiscating the assets of Abramovich and other corrupt oligarchs is a useful idea that they can follow, at least from what they have left, or, keeping the irony, talk to the president of the New Development Bank, Dilma Rousseff.

The Russian banking system is technically bankrupt. The country’s largest bank, Sberbank, admitted at the forum that it would not extend a single ruble of credit to new businesses in 2024. Credit has dried up because banks have been forced to redirect their resources to support the war industry. Official interest rates are around 20%, but in practice corporate financing operates between 24% and 34%, economically unbearable figures. The construction industry, traditionally a barometer of economic dynamism in any civilized country, is collapsing: steel production has fallen by 4% in just one year, and domestic consumption of steel for construction has fallen by 24%. Factories, housing and infrastructure are stagnating or in many cases completely stopping.

Real inflation is around 30 to 35%, much higher than the manipulated official figures. Although the Kremlin denies it, the food situation is critical and the situation is even more dramatic. In an attempt to contain the chaos, the regime directly subsidizes salaries in the military sector. Recruitment bonuses, inflated salaries and large death compensations are paid, which is a testament to the state of the art that the war has led to. This cycle generates artificial consumption that, instead of relieving the economy, only fuels an unsustainable inflationary spiral.

The shortage of workers in some sectors is real, but it does not represent economic growth, especially since thousands of companies in the civil sector have closed their doors. The wave of layoffs is not yet fully reflected in the official unemployment statistics, but it is only a matter of time. In the meantime, more than 1.7 million young Russians – qualified and mostly against the war – have fled the country. They are contributing to the growth of other economies, while Russia is losing its human and technical future. Not to mention the thousands of young people who are lost every month in the relentless meat grinder of the battlefront.

Faced with this progressive collapse, the Kremlin has responded with desperate measures: expropriating private companies in an attempt to obtain immediate liquidity. Recent cases include the largest cereal exporter, Domodedovo airport and a major metallurgical company. The goal? To try to raise $13 billion. It is pure confiscation, in the good old Soviet style, disguised as strategic nationalization.

The war, which Putin wants and the Kremlin has sold as a catalyst for the growth of the defence sector, is proving to be a self-imposed trap. When the conflict ends, and sooner or later it must, hundreds of thousands of military and civilian workers will return to a job market that no longer exists. Civilian industry is on the verge of decimation, exports remain blocked by sanctions, and the state will be bankrupt. Many of the loans granted to arms factories and other war industries will never be repaid. These companies, dependent on a single customer, the state itself, will be left without demand. Russia’s allies may once again be buyers, but they are fewer and fewer allies and more and more junk on offer. The banks will collapse as these loans are not paid back. Savings will evaporate in a financial system without reserves or confidence.

Oil, the Kremlin’s traditional lifeline, has not served as a shield. Not even the conflict between Israel and Iran has caused prices to rise sustainably; quite the opposite. Volatility continues, and energy revenues alone are no longer enough to sustain an economy in an induced coma.

Unaware of this, the Kremlin continues to “pump up” its reports: in the first quarter, oil and gas revenues fell by 10%, the budget deficit increased by 183% compared to last year, and every fifth ruble (20.8%) spent by the treasury was not backed by real revenues. According to the ministry’s forecasts, “finance continues to write novels”; the price of Ural oil, which was $70 in January, will not rise above $53 by the end of the year, but, as already mentioned, Moscow, which does not want to raise taxes in order not to anger business, will have to invest even more in the National Welfare Fund and also reduce government spending. Does this mean that Putin will fire fewer missiles at Ukrainian hospitals, schools and critical infrastructure? No, the Russians will become poorer.

The biggest irony? Russia’s war economy is not even effective. There are no modern factories, arms production is lagging behind, and there is a shortage of components, know-how and machinery. China, as much of a “strategic partner” as it claims to be, does not provide cutting-edge technology, and the available alternatives are obsolete. Russia is manufacturing the past with the tools of the past.

The end is written. The question is no longer “if” but “when.” And when the crash comes, it may not be the result of sanctions or defeats on the battlefield. It will be an internal collapse, visible in empty pockets, closed factories and empty supermarket shelves. Russia will not be destroyed by the West – it will be destroyed by itself. And if and when it does, no one will come to its rescue. Nor should they, because there are regimes that only learn through pain. And that pain has already begun!