High spending on war and the impacts of western sanctions are positioning Russia’s economy in an increasingly delicate situation, although Moscow tries to hide to the maximum significant losses.
This scenario that arises can force dictator Vladimir Putin to sit at the negotiating table with President Donald Trump, something he has avoided since the republican leader, who has put as one of his government priorities to close his long east European conflict.
A report published by the Stockholm Institute of Transition Economics (website) and presented to European Union (EU) ministers in May places the economic data released by the Russian government, arguing that, although still relatively stable, the country’s economy is superficially resilient with “structural weaknesses” growing each year, while Putin raises military spending to historical levels.
This year, official Kremlin’s official expenses reached 6.3% of GDP, the highest level since the Cold War. The folder has a cost of 32% of the entire annual federal budget available.
“The fiscal stimulus of the war economy has maintained the economy to light in the short term, but the dependence on opaque financing, the distorted allocation of resources and the reduction of tax reserves make it unsustainable in the long run. Unlike Kremlin’s narratives, time is not on the side of Russia,” says the report of the Stockholm Transition Institute.
The statistics presented by the Moscow regime indicate that its gross domestic product (GDP) grew 4.3% last year, after a 3.6% increase in 2023 during the first year of Ukraine invasion.
However, one of the authors of the EU report, Torbjorn Becker, warned in a meeting with European ministers that the annual numbers released by Russia are not reliable, as Putin regime is probably underestimating increasing inflation, which directly affects GDP calculations.
Becker explained to reporters in May: “Russia claims that inflation is between 9 and 10%. Why would they have a 21% basic interest rate in the Central Bank? Which traditional central bank would have a basic interest rate basically 11.50 percentage points above the inflation rate? If any of our central banks would do something like this, it would be out of the next day.”
According to the evaluation of experts in the report, the increase in war spending – which may be above the information that reaches the public – and the drop in formal coal, oil and Russian gas indicates that the country is recording a budget deficit of at least 2% of GDP each year.
Becker also pointed out that much of the Russian war machine financing goes through the banking system, which, “if we add to tax numbers, their tax deficits would be approximately twice as much as official statistics show.”
Last week Putin announced his intention to gradually reduce military spending in the coming years.
According to the dictator, he is still dialoguing with the Ministries of Defense, Economics and Finance about this possibility, “but, in general, everyone is thinking of this direction.” In his statements, Putin accused Europe of provoking a “arms race” after the NATO announcement about a 5% spending agreement in defense of the military alliance. “So who is preparing for some kind of aggressive action? We or them?” He asked at the time.
Will Russian economic situation take Putin to the trading table with Trump?
On Sunday (29), Kremlin spokesman Dmitry Peskov warned that it is impossible to force Russia to negotiate. “Only logic and arguments can lead Russia to the negotiating table. It is impossible to press Russia with any kind of strength,” he said.
However, the parallel economic data and the position of the Putin regime in allied conflicts, such as Iran, show that the dictator is not interested in taking risks and missing opportunities for dialogue with the United States.
Days after the US attack on Iranian soil last week, Kremlin’s spokesman said the escalation of tensions in the Middle East will not affect the incipient relationship for normalization of dialogue between Russia and the United States.
“These are different things. We maintain our partnership relationships, a strategic partnership with Iran, but we are also committed to restoring our relationships with the US. Both communications are very important,” Peskov told Russian state television at the time.
On the 24th, days after the operation in Iran, Trump reported that he talked to Putin, who offered him help to deal with the situation in the Middle East, to which the American replied that he preferred better moscow cooperation regarding the end of the war in Ukraine.
“Vladimir (Putin) called me and said, ‘Can I help you with Iran?’ I said, ‘No, I don’t need help with Iran, I need help with you,'” the Republican told journalists aboard the Air Force One on his way to The Hague to participate in the NATO summit last week.
“I would like to reach an agreement with Russia,” Trump emphasized, who had called the Kremlin boss more than a week before the attack, in a conversation in which he also pressed him to end the war in Ukraine.
Since before his return to the White House, Trump has defended the total ceasefire in the hostilities in the war that Russia wages in Ukraine, to what has unsuccessfully sought an understanding between Moscow and Kiev.
Last week, Putin stated that the conflict with Ukraine is different from the conflict between Israel and Iran, in which Trump helped negotiate a ceasefire.
“We do not seek the capitulation of Ukraine, we insist on recognizing the reality created on the ground,” Putin said in an economic forum in St. Petersburg last Friday.
As with Iran, which had no other way other than negotiating a ceasefire with Israel, Russia may be treading a similar course, in which the doors are closing and an agreement mediated by Trump may be the best – or unique – solution.
