European Union finance ministers were presented with a stark assessment this week: Russia’s economy is deteriorating far more rapidly than Moscow’s official figures suggest. Commissioned by the EU and authored by the Stockholm Institute of Transition Economics (SITE), the report warns that Russia’s “war economy” has masked deep structural imbalances that now threaten its long-term stability.
According to the SITE analysis, Moscow’s shift to wartime spending has provided a short-lived boost to output through opaque financing mechanisms and massive budget injections. However, beneath the surface, fiscal buffers have shrunk, resource allocation is heavily distorted, and debt-funded military expenditures have driven annual budget deficits to levels far above those officially reported. “Contrary to Kremlin narratives, time is not on Russia’s side,” the report cautions, noting that current resilience is largely superficial.
Rising Deficits, Shrinking Reserves
In its most recent budget update, Russia revised its 2025 deficit forecast to as much as 1.7 percent of GDP—more than triple the government’s initial target—after slashing energy revenue projections by nearly a quarter amid a prolonged slump in oil prices. To plug the gap, Finance Minister Anton Siluanov confirmed plans to draw down some 447 billion roubles (around USD 5.5 billion) from liquid reserves held in the National Wealth Fund, marking the first significant use of this rainy-day fund since 2022.
Even after tapping reserves, analysts note that the liquid component of the fund has been halved since the outset of the Ukraine war, falling to roughly USD 39 billion from over USD 112 billion two years earlier. When combined with approximately EUR 210 billion in central bank assets immobilized under Western sanctions, Moscow’s accessible buffers are perilously low.
Oil and gas exports have historically underpinned up to half of Russia’s federal budget proceeds. Yet global crude prices have dipped to four-year lows, prompting the finance ministry to cut its 2025 hydrocarbon revenue outlook from RUB 10.94 trillion (5.1 % of GDP) to RUB 8.32 trillion (3.7 % of GDP). This reduction has not only widened deficits but also undermined the government’s ability to self-finance its military campaign without resorting to extra borrowing or foreign currency interventions.
Inflation Figures Mask True Costs
Moscow claims annual inflation of around 9–10 percent, even as the Central Bank of Russia maintains an extraordinarily high policy rate of 21 percent—behavioral economists argue such a policy rate is incompatible with the reported inflation rate. SITE’s Torbjörn Becker highlighted to EU ministers that understated inflation leads to overstated real GDP growth, casting doubt on official claims of 4.3 percent expansion in 2024.
Market indicators support this skepticism: the ruble has weakened against major currencies, Russian bond yields remain elevated, and consumer price pressures appear higher than reported. Regional banks, heavily exposed to government borrowing, are reporting rapid credit growth—a classic precursor to banking sector stress. “These are all indicators we look at to predict banking crises,” Becker noted.
International credit agencies have long viewed Russia as a high-risk sovereign. Since early 2022, both Fitch and S\&P downgraded Russian debt multiple notches into junk status, warning that sanctions and the war effort could precipitate default. This constrained access to external financing, forcing Moscow to rely ever more on domestic banks and its dwindling reserve pool to shore up public spending.
Capital Flight and Financial Risks
Despite capital controls, Russia continues to see significant private capital outflows. Analysts estimate that high-net-worth individuals and domestic corporations have shifted funds abroad via informal channels, eroding already thin foreign exchange buffers. The SITE report highlights that much of the war machine’s financing flows through these non-transparent banking channels, potentially doubling the true fiscal deficit once off-balance-sheet military spending is accounted for.
International Monetary Fund projections underline the broader slowdown: the IMF’s World Economic Outlook update in January forecast Russia’s real GDP growth to drop from an estimated 3.8 percent in 2024 to just 1.4–1.5 percent in 2025—a stark contrast to the Kremlin’s 2.5 percent target. Consumer price growth is expected to decelerate only gradually, keeping real incomes under pressure.
Western sanctions—now in their 16th package—continue to bite, targeting energy exports, financial transactions, and key technology imports. While Russia has sought alternative trading partners and new payment mechanisms, these workarounds are costly and reduce export revenues. EU officials stress that maintaining sanctions unity is crucial to prevent Kremlin from accessing frozen central bank assets. Any political fissures, for example within the EU over sanction renewals, could allow Russia to reclaim blocked funds, undermining the pressure needed to rein in Moscow’s war spending.
Under the Surface: Structural Weaknesses
Beyond immediate financial strains, the SITE report underscores Russia’s long-term challenges: a declining working-age population, underinvestment in non-hydrocarbon sectors, and pervasive governance risks. The war has diverted resources away from infrastructure, healthcare, and education, stunting productivity gains. Western embargoes on high-tech goods threaten Russia’s industrial base, forcing reliance on outdated equipment and eroding competitiveness.
European Economic Commissioner Valdis Dombrovskis echoed the SITE findings, telling reporters that “the Russian economy is not performing as well as official statistics suggest,” and underscoring that the bloc’s objective remains limiting the Kremlin’s capacity to sustain its aggression.
As the war enters its fourth year, EU ministers face a sobering reality: Russia’s current economic stability is a mirage, propped up by war-time stimulus and dwindling reserves. Without a shift away from military primacy and meaningful structural reforms, the Kremlin’s fiscal foundations risk collapse, with far-reaching implications for global energy markets and geopolitical stability.
(Source:www.apnews.com)
According to the SITE analysis, Moscow’s shift to wartime spending has provided a short-lived boost to output through opaque financing mechanisms and massive budget injections. However, beneath the surface, fiscal buffers have shrunk, resource allocation is heavily distorted, and debt-funded military expenditures have driven annual budget deficits to levels far above those officially reported. “Contrary to Kremlin narratives, time is not on Russia’s side,” the report cautions, noting that current resilience is largely superficial.
Rising Deficits, Shrinking Reserves
In its most recent budget update, Russia revised its 2025 deficit forecast to as much as 1.7 percent of GDP—more than triple the government’s initial target—after slashing energy revenue projections by nearly a quarter amid a prolonged slump in oil prices. To plug the gap, Finance Minister Anton Siluanov confirmed plans to draw down some 447 billion roubles (around USD 5.5 billion) from liquid reserves held in the National Wealth Fund, marking the first significant use of this rainy-day fund since 2022.
Even after tapping reserves, analysts note that the liquid component of the fund has been halved since the outset of the Ukraine war, falling to roughly USD 39 billion from over USD 112 billion two years earlier. When combined with approximately EUR 210 billion in central bank assets immobilized under Western sanctions, Moscow’s accessible buffers are perilously low.
Oil and gas exports have historically underpinned up to half of Russia’s federal budget proceeds. Yet global crude prices have dipped to four-year lows, prompting the finance ministry to cut its 2025 hydrocarbon revenue outlook from RUB 10.94 trillion (5.1 % of GDP) to RUB 8.32 trillion (3.7 % of GDP). This reduction has not only widened deficits but also undermined the government’s ability to self-finance its military campaign without resorting to extra borrowing or foreign currency interventions.
Inflation Figures Mask True Costs
Moscow claims annual inflation of around 9–10 percent, even as the Central Bank of Russia maintains an extraordinarily high policy rate of 21 percent—behavioral economists argue such a policy rate is incompatible with the reported inflation rate. SITE’s Torbjörn Becker highlighted to EU ministers that understated inflation leads to overstated real GDP growth, casting doubt on official claims of 4.3 percent expansion in 2024.
Market indicators support this skepticism: the ruble has weakened against major currencies, Russian bond yields remain elevated, and consumer price pressures appear higher than reported. Regional banks, heavily exposed to government borrowing, are reporting rapid credit growth—a classic precursor to banking sector stress. “These are all indicators we look at to predict banking crises,” Becker noted.
International credit agencies have long viewed Russia as a high-risk sovereign. Since early 2022, both Fitch and S\&P downgraded Russian debt multiple notches into junk status, warning that sanctions and the war effort could precipitate default. This constrained access to external financing, forcing Moscow to rely ever more on domestic banks and its dwindling reserve pool to shore up public spending.
Capital Flight and Financial Risks
Despite capital controls, Russia continues to see significant private capital outflows. Analysts estimate that high-net-worth individuals and domestic corporations have shifted funds abroad via informal channels, eroding already thin foreign exchange buffers. The SITE report highlights that much of the war machine’s financing flows through these non-transparent banking channels, potentially doubling the true fiscal deficit once off-balance-sheet military spending is accounted for.
International Monetary Fund projections underline the broader slowdown: the IMF’s World Economic Outlook update in January forecast Russia’s real GDP growth to drop from an estimated 3.8 percent in 2024 to just 1.4–1.5 percent in 2025—a stark contrast to the Kremlin’s 2.5 percent target. Consumer price growth is expected to decelerate only gradually, keeping real incomes under pressure.
Western sanctions—now in their 16th package—continue to bite, targeting energy exports, financial transactions, and key technology imports. While Russia has sought alternative trading partners and new payment mechanisms, these workarounds are costly and reduce export revenues. EU officials stress that maintaining sanctions unity is crucial to prevent Kremlin from accessing frozen central bank assets. Any political fissures, for example within the EU over sanction renewals, could allow Russia to reclaim blocked funds, undermining the pressure needed to rein in Moscow’s war spending.
Under the Surface: Structural Weaknesses
Beyond immediate financial strains, the SITE report underscores Russia’s long-term challenges: a declining working-age population, underinvestment in non-hydrocarbon sectors, and pervasive governance risks. The war has diverted resources away from infrastructure, healthcare, and education, stunting productivity gains. Western embargoes on high-tech goods threaten Russia’s industrial base, forcing reliance on outdated equipment and eroding competitiveness.
European Economic Commissioner Valdis Dombrovskis echoed the SITE findings, telling reporters that “the Russian economy is not performing as well as official statistics suggest,” and underscoring that the bloc’s objective remains limiting the Kremlin’s capacity to sustain its aggression.
As the war enters its fourth year, EU ministers face a sobering reality: Russia’s current economic stability is a mirage, propped up by war-time stimulus and dwindling reserves. Without a shift away from military primacy and meaningful structural reforms, the Kremlin’s fiscal foundations risk collapse, with far-reaching implications for global energy markets and geopolitical stability.
(Source:www.apnews.com)