Is Russia's economy headed for trouble?

The last several weeks I have focused more on the international aspects of the war in Ukraine, as well as the effects of the election in the United States. I want to a take a break from that, mostly, this week and focus on what’s going on inside of Russia.  

The Russian economy has seen better days. The sanctions have not had the devastating effect that many predicted but they are having some effect. One clear sign of this is that the Russian Central Bank raised its key policy rate to 21% in the last weeks of October. The goal in raising the rate is to control inflation. What is causing the inflation? 

The government is spending tremendous amounts of money on its war. In 2024 the government military spending will reach approximately 6% of GDP and is scheduled to increase next year to account for 40% of the total budget! In addition, the government has paid out massive (upwards of $30,000 in some cases) signing bonuses to those who enlist and to the families of those who have died. One estimate earlier this year is that these payouts were close to 1.5% of Russia’s total GDP. In addition, Russia could pay up to $200 million a year for North Korean troops. 

Consequently, as the chart above from Trading Economics shows, Russia’s National Wealth Fund Assets are diminishing. It is unlikely the government can keep up this rate of spending for much longer given the financial and economic sanctions in place.  

Russia’s economy is growing because of this massive influx of money but it is papering over severe economic problems. For example, production in many other sectors have declined due to resources being diverted and a labor shortage. The labor shortage is three-fold. First, the number of working-age men that have left and been forced to fight and die in Ukraine reduces the number of workers contributing to production. Second, many workers have left Russia for other countries. One estimate is that over 800,000 Russians have left since the war began. 

Third, immigration levels to Russia have declined severely. One obvious reason for this is that Russia is not as open to western countries as it was before 2022. In addition, many Ukrainians worked inside of Russia and, understandably, are not anymore. But the largest reason for the decline of immigration is the Russian response to the terrorist attack against the Crocus City Hall terror attack earlier this year. In 2023 approximately half of labor migrants were from Tajikistan, and after Russian authorities blamed Tajiks for the attack immigration was mostly cut off. For many Central Asian immigrants in Russia, they also experienced harassment and violence, curbing any further immigration.   

So, Russia is facing a looming financial crisis related to inflation, military spending, and debt. They are also facing a decline in production in many industries, particularly non-defense related. And they are facing labor shortages, mostly because their illegal invasion of Ukraine accelerated existing population decline and prevented the immigration that offset that demographic decline. These three trends could come together to cause real problems over the next year for the Russian economy. Add to this a decrease in social welfare spending and an unstable footing for domestic banks and things could escalate quickly. 

I was a young, 21-year-old college student in Russia in 1998 when there was a financial crisis, causing banks to collapse and the government almost to fall. It was the result of labor shortages due to a demographic crisis as well as Russians leaving Russia. It was also the lingering result of massive Soviet spending on the war in Afghanistan. In addition to the Russian State Duma almost dissolving, the largest protests since the fall of the Soviet Union occurred in 1998. I was also able to witness those in Moscow, which is probably what sparked my interest in Russian protests. 

Thinking about this made me wonder if there were signs of increased protest activity over the last few months in response to worsening economic conditions. I did a quick search on ACLED’s website and what I found is presented above. First, spike in protests after the invasion in 2022 shows the dissatisfaction of many in Russian society with the decision. The steady decline since then, however, is depressing. Likely the result of increased repressive measures by the government, people leaving the country and then just general acquiescence.  

In the last four months though, you have seen a small increase in protest activity. It could be nothing, but it could also be some early signs of the toll of the economic issues. I have long since stopped being optimistic about the ability of Russian society to assert itself in a way that would stop the war and Putin. But you never know. These types of events are always unlikely until they happen, after which they seem inevitable. Hopefully we are living through such a time. 

Switching gears quickly, Trump has announced many of his cabinet picks this week. The picks relevant to the war in Ukraine are Marco Rubio for Secretary of State, Pete Hegseth for Defense Secretary, Michael Waltz for National Security Adviser, John Ratcliffe for CIA Director and Tulsi Gabbard for Director of National Intelligence. None of these are great news for continued support for Ukraine. Rubio and Waltz both want the U.S. to focus more on China and are willing, perhaps even eager, to cut off aid to Ukraine in order to accomplish this. I honestly don’t know what Hegseth thinks about Ukraine, only that he is an unserious person heading up the Department of Defense, which is not good news either. 

Without a doubt, the worst pick of the bunch above is Gabbard. She supported Putin’s war in Syria while she defended the atrocities committed by Syria’s leader, Bashar Al-Assad. She also defended Putin’s decision to invade Ukraine. In addition, she is also an unserious person being placed in a serious position. With Hegseth at Defense, Gabbard as the DNI and Matt Gaetz (heaven help us) as the Attorney General, American allies will rightly be reluctant to share any intelligence. Add to this the ambiguous role of Elon Musk, who was on a call with Trump to Zelensky and met with the Iranian envoy to the UN, there are many opportunities for intelligence to leak out of this administration.