Russia faces a crisis regardless if Putin ends or continues the war in Ukraine, economist says

If Russia’s war continues, the economy looks on track for a “severe recession” and long-running stagnation, Mertens said

Russia’s overheated economy is almost certainly headed for a crisis no matter what Vladimir Putin does, according to a Ukrainian economist.

Alexander Mertens, a professor of finance and economics at Kyiv’s International Institute of Business, issued a grim forecast about Russia’s economic future in the midst of the nation’s third year of its war against Ukraine.

If Russia continues the war, the economy looks on track for a “severe recession” and long-running stagnation, Mertens said. However, if the war stops, the economy is in trouble trouble, given how much war spending has pumped up growth amid a shortage of capital and workers, Mertens wrote in an op-ed for the Atlantic Council on Thursday.

“The current state of the Russian economy is far from critical but it does present Putin with a dilemma. He currently appears intent on continuing the war indefinitely while hoping to outlast the West and exhaust Ukraine. Alternatively, he could seek to move toward a settlement of some kind. However, there is a very real danger that either option could end up plunging Russia into a serious economic crisis,” Merten said.

Merten pointed to the field of red flags for Moscow’s economy since it began its invasion of Ukraine.

For one, while Putin has rebuffed the impact of Western sanctions, the restrictions are clearly having an impact on Russia’s trade and finances, with the nation’s energy revenue falling by nearly a quarter 2023.

Russia’s sovereign wealth fund is also shrinking. Around 44% of liquid assets in the Russian National Welfare Fund were depleted from the start of the invasion to December 2023, according to data from Russia’s finance ministry.

The nation is also suffering from a severe worker shortage and a looming demographic crisis, which have been exacerbated by the one million Russians estimated to have fled the country in the early days of the war.

Russia’s central bank, meanwhile, raised interest rates to 21% in October, a sign policymakers are scrambling to get inflation — which clocked in well above target at 8.6% — under control.

“While Kremlin officials and many international analysts insist that the Russian economy remains in remarkably good shape, the country’s longer-term economic outlook is becoming increasingly precarious,” Merten said. “Taken together, these negative factors are likely to contribute to a period of slower growth, if not stagnation.

And yet, Russia can’t easily stop the war without shutting off one of the key engines of its economy: its hefty defense budget. The nation allotted a record 6% of GDP to defense spending in 2024.

That’s been a major factor behind Russia’s solid economic growth, Merten said, with real GDP in the nation on track to expand another 3.6% this year, according to International Monetary Fund estimates.

“If Putin opts to maintain his uncompromising push for an historic victory in Ukraine, it is not clear that Russia has the resources to wage a prolonged war on the present scale. In this scenario, current warning signs such as rising inflation and labor shortages could eventually become major problems,” Merten said.

He continued: “If he seeks a settlement and withdraws the Keynesian crutch of today’s vastly inflated military spending, the economic repercussions could be dire. The Russian economy is not yet close to collapse, but it is increasingly dependent on wartime conditions and faces growing risks of overheating.”

Other experts have said Russia looks to be facing a Catch-22 situation, with the nation neither being able to afford winning or losing the war. Over the long-term, its economy could be de-industrialized or face a long-term stagnation, economists previously told B-17.