The Trump administration’s perplexing approach to potential peace talks between Russia and Ukraine continues to shock and awe with its incoherence, causing ricochet effects. However, behind Moscow’s proud complaints that any European peacekeeping presence would be considered tantamount to NATO aggression, the fiction of a strong wartime economy is quietly unraveling.
In January, Maxim Reshetnikov’s team at MinEkonomiki published annualized GDP growth figures of 3% but conspicuously omitted estimates of seasonally adjusted month-on-month growth, which, per their existing methodology, was close to 0%. Private consumption grew 4.6% in annual terms, according to Dmitry Belousov’s number crunchers at TsMAKP, but declined 0.8% monthly. Rosstat showed January industrial production fell 3.2% in monthly terms, accounting for seasonality—a decline in annualized growth from 8.2% in December to 2.2% for January. Only petrochemicals showed growth, while automotive manufacturing and construction, two crucial consumer indicators, posted 3-month downward corrections of over 6%.
January typically sees more activity from outgoing late-year government and state enterprise procurements, making the slowdown even more remarkable when examining TsMAKP’s industrial figures. Not only did industrial output post its worst month since March of last year, but measures excluding predominantly military sectors fell below levels last seen in March-April 2023. While not yet a definitive trend, it underscores the difficult position the Bank of Russia faces. On February 27, Nabiullina held the key rate at 21% while signaling a willingness to raise rates further, hoping to convince the market that pressure from the presidential administration, cabinet, business, and wartime industries isn’t overriding policy considerations.
Holding rates steady has been made easier by Trump’s return to the presidency and market belief that sanctions won’t be as strict or may even be repealed. The ruble, which ended 2024 around 110 to the US dollar, now trades below 90, significantly reducing the relative cost of imports and fitting within the 80−90 band Andrei Belousov has convinced Putin and other advisors is optimal. However, with high inflation in Russia showing no signs of slowing—given the Bank of Russia’s communication and weakening consumer demand—policymakers find themselves in a pickle. Any ruble strengthening undercuts the competitiveness of consumer-facing businesses that have fattened their margins despite higher costs, thanks to a weaker currency. Even if military producers pay less for semiconductors, chips, and other inputs in absolute terms, the competitiveness of consumer businesses competing against imports is affected.
Current exchange rates are roughly where they were last summer, but with inflation clearly running higher than official figures, the ruble’s purchasing power at home is declining. Inflation for January-February was officially 2.09%. Light vehicle sales plunged 25% last month, with further falls of 15−30% expected in March. The Far Eastern division of RZhD noted a 1.9% year-on-year decline in shipments for January-February, with shipments of construction materials falling nearly 32%, oil and petroleum products dropping 12.8%, and coal—the single largest bulk good—falling 3.1%. For the first time since the end of 2023, unemployment technically rose (just 0.1%) to 2.4% in January. Something is clearly happening, and it can’t be explained away by claiming high interest rates aren’t forcing households to save or consume less because high inflation means they’re not high in «real» terms. People are paid and spend in nominal terms, not adjusted for inflation, and domestic industries are feeling the war economy’s corrosive effects on consumption.
Tracking Germany and Europe’s newfound will to invest in defense and Ukraine’s war effort with a wobbly US administration should take center stage in the coming weeks and months. The Russian economy is tiring from the war’s exertions. These pressures are intensified by a Saudi-led agreement among eight OPEC+ members, including Russia, to increase oil output and begin reversing 2.2 million barrels per day of cuts through September 2026. Oil markets took a hit, with Brent crude swiftly falling from the mid to upper 70s to under $ 70 a barrel. As prices crawl closer to $ 60, the balancing act becomes more difficult for Putin’s negotiating team. Preventing the budget deficit from exceeding 1.5−2% of GDP will hinge more on real-term cuts to non-war spending and higher taxes.
Arguments that Russia has plenty of space to borrow are accurate but miss a key detail: the economy’s capacity to expand its output of goods and services is more limited than ever. Import prices for key goods like semiconductors or dual-use civilian and military goods are significantly elevated by higher logistics costs, insurance, longer routes, limited capacity on the national rail network, and more. The availability of labor and sources of labor productivity shrink every month due to age/demography, casualties at the front, high interest rates that cripple business investment for firms not using state-backed or subsidized loans, and now, evidently, weakening consumer demand that justifies investment in the first place. Even Rosstat’s claims of record inward migration to Russia since 1995 are colored by a decision to alter the methodology by which migration is recorded, turning a surplus of perhaps 100−150,000 (some reflecting wartime displacement from Donbas) into over 550,000.
More quietly, the pressure of debts has reappeared at the regional level from the additional costs of contract soldiers’ bonuses paid to hit recruitment targets. Anton Siluanov and MinFin have written off more than 1 trillion rubles worth of regional debts from 79 regions. Last July’s decision to write off two-thirds of budget credits released to regional entities—where at least 50% of the credit went toward utilities investments—is a ticking time bomb nationally. Tens of trillions of rubles’ worth of investments into aging, often Soviet-era capital stock aren’t taking place, becoming less reliable as those with informal knowledge of how they were built or maintained grow older and die off. Yet net internal debts owed to the federal government total only 3 trillion rubles.
The lesson isn’t that the regime is pinching pennies—it certainly is—but that regional governments borrow so little from the federal government compared to the economy’s size. Regional governments collect largely pro-cyclical revenues linked to incomes and consumption that typically follow the business cycle. Surging wages from the war economy would increase these revenues in nominal terms, but regional governments aren’t borrowing much more directly from the federal center, theoretically leaving them at the mercy of commercial lenders charging high interest rates unless MinFin subsidizes them. Either debts are piling up less visibly, Siluanov is starving regions of necessary funding for their mandates, or regional officials lack confidence that revenues will keep growing, so they avoid borrowing.
The best signal is MinEkonomiki’s focus, under Reshetnikov, on reforming bankruptcy proceedings. The Russian Union of Industrialists and Entrepreneurs is lobbying frantically to forestall a system that might allow creditors to manage insolvency to their benefit—a sore point given high interest rates. Reshetnikov himself acknowledged the cooling economy, telling the Duma committee on economic policy on March 4, «We now see signs of [the economy’s] cooling, especially looking at leading indicators.» Moscow has every reason to spurn negotiations as long as possible to secure battlefield gains, but don’t be fooled.
Regime confidence in sustaining the war isn’t the same as believing things won’t become more difficult at home. The war «boom» for most of the population is largely a fiction when scrutinizing the data. The only thing worse than strong growth with high inflation is a broad, deepening consumer recession with high inflation. Things break slowly, then all at once. Watch consumer indicators closely alongside the Kremlin’s statements on war negotiations.
