LONDON — Russia’s economy, strained by massive fiscal stimulus, skyrocketing interest rates, persistent inflation, and Western sanctions, is teetering on the edge of a sharp slowdown after three years of war. Yet, an unexpected lifeline may have emerged from Washington.
U.S. President Donald Trump is pressing for a swift resolution to the Ukraine conflict, sidelining European allies and Ukraine in early talks with Russia while pinning blame on Kyiv for Moscow’s 2022 invasion—moves that hand Russia political wins and could unlock significant economic relief.
Oleg Vyugin, a former deputy chairman of Russia’s central bank, outlined Moscow’s dilemma: either scale back ballooning military spending as it pushes for Ukrainian territory, or sustain it and face years of sluggish growth, high inflation, and declining living standards—each option fraught with political peril.
While government spending typically fuels growth, pouring resources into non-productive missile production at the expense of civilian sectors has overheated the economy. Interest rates at 21% are choking corporate investment, and inflation remains untamed.
“Russia has economic incentives to negotiate a diplomatic end to the war,” Vyugin said. “It’s the only way to stop diverting scarce resources into dead-end uses and avoid stagflation.” Though defense spending—about a third of the budget—won’t drop overnight, a potential deal could ease other pressures, pave the way for sanctions relief, and lure Western companies back.
“They won’t halt arms production cold, fearing a recession and the need to rebuild the military,” said Alexander Kolyandr, a researcher at the Center for European Policy Analysis. “But demobilizing some troops would ease labor market strain.”
War-driven recruitment and emigration have slashed unemployment to a record 2.3%, exacerbating shortages. Inflation could also cool if peace prospects soften U.S. enforcement of secondary sanctions on nations like China, simplifying and cheapening imports, Kolyandr noted.
Signs of Relief
Russian markets are already reacting. The rouble hit a near six-month peak against the dollar on Friday, lifted by hopes of sanctions easing. After a slight dip in 2022, the economy has roared back, with 4.1% growth in 2024. But officials predict a drop to 1-2% this year, and the central bank sees no basis yet to lower rates. On February 14, Governor Elvira Nabiullina held rates at 21%, noting that demand has outpaced production capacity for too long, triggering a natural slowdown.
Rampant fiscal stimulus—evidenced by a January deficit of 1.7 trillion roubles, up 14 times from last year—complicates efforts to balance growth and inflation. Nabiullina stressed the importance of sticking to the government’s deficit plan, while the finance ministry, eyeing a 1.2-trillion-rouble shortfall for 2025, reworked its budget three times last year.
Winners and Losers
The war has been a mixed bag for Russians. Military-linked workers have seen wages soar due to stimulus, while others grapple with surging prices for essentials. Some firms, like Melon Fashion Group, have thrived amid shifting trade patterns and less competition, with revenues climbing and store sizes doubling since 2023, the company told Reuters.
But high rates are a hurdle for many. “At these lending rates, launching new projects is tough,” said Elena Bondarchuk, founder of warehouse developer Orientir. “The investor pool has shrunk, and those left are at the mercy of bank terms.”
Internal documents reviewed by Reuters flag falling oil prices, budget woes, and rising corporate bad debt as top risks. Trump’s overtures—offering concessions on Ukraine while threatening harsher sanctions if talks falter—add a twist. “The U.S. holds major economic sway, which is why Russia’s eager to engage,” said Chris Weafer, CEO of Macro-Advisory Ltd. “Washington’s message is clear: ‘Cooperate, and we’ll ease sanctions; refuse, and we’ll tighten the screws.’”
