Donald Trump’s assertion that Russia’s economy is on the brink of collapse has been met with scepticism from economists, who describe the situation as more nuanced. While Moscow faces its toughest economic period since the early days of the invasion, few analysts predict an imminent collapse, and Vladimir Putin is unlikely to adjust his war plans in the short term.
Maria Shagina, a senior fellow at the International Institute for Strategic Studies, noted that the Kremlin now faces a genuine trade-off between military spending and civilian investment. However, she added that for the Kremlin, the choice will always favour military expenditure, even as a widening deficit, soaring defence outlays, and shrinking revenues make that choice harder.
Russia’s finance ministry projects GDP growth of less than 1% for 2024-25, down from earlier forecasts of 2.3-2.5%. German Gref, CEO of Sberbank, acknowledged that the economy has entered “technical stagnation.” To bolster state coffers, Moscow announced a VAT increase from 20% to 22%, reversing one of Putin’s earlier promises. Defence spending now accounts for about 40% of total state outlay, surpassing Europe’s combined defence budgets.
The federal budget deficit reached 4.9tn rubles ($61bn) between January and July, exceeding the full-year target, and is forecast to hit 4.6tn rubles ($55bn) by 2026. Two-thirds of the national welfare fund has been spent. This contrasts with the first two years of the war, when massive state spending stimulated the economy, with 4-5% annual growth and record-low unemployment.
Economist Vladislav Inozemtsev argued that the wartime boom has run its course, as Russia cannot sustain a 30% annual increase in military spending. The government is expected to cut spending across sectors, including infrastructure, healthcare, and housing. However, many in Ukraine believe Western sanctions have failed to deliver a crippling blow, as Russia has redirected energy exports to India, China, and Turkey, and exploited parallel imports for critical goods.
