Russia’s economy has managed to avoid collapse despite punishing Western sanctions after the full-scale invasion of Ukraine. But reality is catching up to Russian President Vladimir Putin, and his approach looks increasingly unsustainable.
Putin raged during a meeting at the Kremlin this month that manufacturing, industrial production and construction are all in negative territory. His economy contracted for the first two months of this year.
Moscow is getting a bump from the surge in oil prices caused by the Iran war and the closure of the Strait of Hormuz, but the dynamic is fluid.
After going into recession in 2022, Putin managed to stabilize his economy through a combination of control, coercion and fear. The Kremlin imposed strict limits on moving money outside the country. Exporters were pressured to convert foreign currency into rubles. Foreign investors faced restrictions in exiting their capital and had to leave assets behind or sell at losses.
Russia ramped up defense spending and pressured companies to expand production for the war effort. To control inflation, the Kremlin leaned on businesses to cap price increases. Inflation is currently running at 5.9 percent, according to the central bank.
All those anti-growth policies kept the economy afloat in the medium-term. But the limitations — and the damage — are now coming into view.
Unable to freely move money abroad, capital stayed trapped in Russia unable to maximize returns. Companies instead hoarded cash or moved it overseas using more opaque methods. The strong ruble, propped up artificially, made Russian exports more expensive on the global market. And while defense manufacturing output has risen, production of consumer goods slowed or declined.
To finance the full mobilization, Putin has repeatedly raised taxes. He increased the value-added tax from 20 percent to 22 percent and lowered the threshold so that more small- and medium-sized enterprises are required to pay it. This has “pushed hundreds of thousands of businesses to the brink,” the Financial Times reportedthis week, with only a quarter of small and medium enterprises in the country expressing confidence they’ll be able to continue operating.
To crackdown on tax avoidance, Putin is now moving to increase fines by up to 15-fold for businesses that don’t use cash registers.
Compounding the challenges, Russia is experiencing a shortage of labor for the first time in its modern history. Many skilled workers have fled the country to avoid being drafted to fight in Ukraine, which has produced well over a million Russian casualties. Others have been forced into the armaments industry.
Putin has responded to bad economic news as autocrats usually do — by trying to suppress the free flow of information. The Kremlin hasreduced the disclosureof important indices, like trade flows and company finances. Thousands of internet sites are blocked. A 2024 law criminalizes the spreading of “false information,” which is whatever the government decides it is. And with the media largely under state control, there is little accountability and no independent scrutiny.
The lesson from Russia is that a modern economy can be made to function under the strain of war and isolation. But not indefinitely.
