Vladimir Putin\u2019s wartime economy has been resilient in the face of Western sanctions triggered by his invasion of Ukraine, but it\u2019s hitting a wall and U.S. pressure on the energy sector could cause a recession, according to experts.<\/p>\n
Massive defense spending has propped up growth, kept factories humming, and pushed unemployment lower, while Moscow has relied on allies like China for goods no longer available from the West.<\/p>\n
\u201cBut the country has exhausted its reserves of manufacturing capacity and manpower,\u201d Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center\u00a0and former Russian central bank advisor, wrote in Foreign Affairs<\/a> on Monday.<\/p>\n \u201cTo produce substantially more equipment or recruit and train far more soldiers, Moscow would have to shift to a more comprehensive war footing by directing all available resources toward military needs, as it did during\u00a0World War II, or commandeering civilian production lines for military purposes.\u201d<\/p>\n Such a mobilization would require Moscow to order car plants, for example, to exclusively produce military vehicles. But the Russian government hasn\u2019t resorted to those measures because it doesn\u2019t want to create shortages of consumer goods and risk social unrest, she added.<\/p>\n Meanwhile, production bottlenecks, labor shortages, tighter government spending, and the lack of Western technology are increasingly causing strains in the economy, Prokopenko said.<\/p>\n GDP growth is slowing sharply, tracking at just 1.1% so far this year, down from 4.1% in 2024 and 3.6% in 2023. That\u2019s partly because all the money Moscow spends for its war on Ukraine has few lasting benefits.<\/p>\n \u201cIn effect, defense spending functions like a disposable-goods economy: factories operate at full capacity, workers earn wages, and demand for inputs surges, but the output is designed to vanish almost immediately,\u201d she explained.<\/p>\n Not only do weapons and equipment get obliterated on the battlefield, but payments for dead and injured soldiers will continue to weigh on the Kremlin\u2019s budget even after the fighting ends.<\/p>\n Such spending contrasts with government outlays on infrastructure that help improve an economy\u2019s long-term potential.<\/p>\n \u201cThis cycle sustains employment and industrial activity in the short term but generates no lasting assets\u2014such as highways, power plants, or schools\u2014or productivity gains, leaving the economy busier yet poorer with each passing year of war,\u201d Prokopenko wrote.<\/p>\n Russian recession warnings<\/p>\n And U.S. sanctions announced Wednesday on Russian energy giants Rosneft and Lukoil<\/a> could push the economy over the edge. <\/p>\n That\u2019s as oil and gas revenue, which is the Kremlin\u2019s main source of funds, has been falling amid low energy prices, forcing Russia to rein in its budget. The two companies account for about half of the country\u2019s oil exports, and Rosneft alone contributes about 17% of Russia budget revenue.<\/p>\n While they can still find ways to sell their crude, it will require more work-arounds that add to costs while some customers may balk over fears of secondary sanctions. <\/p>\n \u201cAs for Russia itself, the hit to energy revenues could tip the economy into recession,\u201d Capital Economics said in a note on Thursday.<\/p>\n It\u2019s possible a recession has already arrived. Last month, data from Russia\u2019s central bank showed\u00a0GDP shrank on a sequential basis<\/a> in the first and second quarters, meeting the definition of a so-called technical recession.<\/p>\n Also last month, Sberbank<\/a>\u00a0CEO German Gref, one of Russia\u2019s top banking chiefs, said the\u00a0economy was in \u201ctechnical stagnation,\u201d<\/a>\u00a0And in June, Economy Minister Maxim Reshetnikov warned that\u00a0Russia was\u00a0\u201con the brink\u201d\u00a0of a recession<\/a>.\u00a0<\/p>\n To be sure, much depends on U.S. execution of its new sanctions, while markets weigh whether the measures are another example of President Donald Trump\u2019s negotiating strategy of escalating to de-escalate. <\/p>\n Indeed, Capital Economics said it\u2019s hard to see Trump sticking with a policy that would raise U.S. gasoline prices. <\/p>\n But even if Russia suffers a recession, analysts see a low probability that it will be enough to bring Putin to the negotiating table and end his war on Ukraine.<\/p>\n \u201cRussia\u2019s economic problems have not had much bearing on Putin\u2019s war aims so far, and the Kremlin will want to resist being strong-armed into a deal by the US,\u201d Capital Economics said. \u201cBut the economic costs for Putin for continuing the war are likely to ratchet up.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Vladimir Putin\u2019s wartime economy has been resilient in the face of Western sanctions triggered by his invasion of…\n","protected":false},"author":2,"featured_media":101081,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,32978,219,111,139,69,8105,8565,22454,9663],"class_list":{"0":"post-101080","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-economic-sanctions","10":"tag-economy","11":"tag-new-zealand","12":"tag-newzealand","13":"tag-nz","14":"tag-russia","15":"tag-sanctions","16":"tag-ukraine-invasion","17":"tag-vladimir-putin"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/101080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=101080"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/101080\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/101081"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=101080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=101080"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=101080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}