Bank of Russia Chair Elvira Nabiullina’s appearance at the Exchange Forum of the Moscow Exchange threw cold water on the idea of an economic recovery. «Now we have a worsening of external conditions, you can say, on an almost constant basis—for exports and for imports. Unemployment is at 2%.» In other words, there are simply not enough people to do all the necessary work for the first time in Russia’s modern history, and this structural deficit requires completely different thinking and new assumptions for policy parameters. Coupled with the pro-inflationary risks from the ongoing commodity shock linked to conflict in the Gulf, interest rates aren’t coming down any time soon. These realities aren’t news. But what makes these public admissions notable is that Putin is demanding explanations from the cabinet as to why growth didn’t hit targets in Q1 and how to return the economy to growth. He, of course, won’t like the answer.
The exhaustion of the myth of technocratic competence has been a long time coming. What we mean by the concept of technocratic competence, however, merits some scrutiny. For many insiders, journalists, and people orbiting the social world that these government officials inhabit, the usual line has been that these are smart, serious, and engaged people who are preventing things from getting worse. It’s a self-serving narrative that positions complicity as heroic. More fundamentally, it avoids a more uncomfortable truth: competence is weaponized by a system that breeds collective incompetence due to a lack of executive will, interest, or capacity to discipline interest groups except in extreme cases. Put another way, nobody is actually looking out for the public interest, and in such a system, «preventing things from getting worse» is impossible. Now that the kill-to-wounded ratio has flipped at the front and death counts are climbing to record highs, preserving a modicum of stability merely extends the miserable circumstances that policymakers are being browbeaten to address.
As established in previous articles, the oil windfall is not going to arrest the current recession and will structurally worsen the challenge of inflation. Pushing further into the question of how state officials ‘stabilize’ the economy—assuming the Kremlin will give them some leeway in the face of the demands of the war—the regime’s inability to resolve long-standing ideological divides is telling. Ironically, the statists who wish to mobilize the economy for war directly have a point. Market mechanisms will not work to sustain the war at its present intensity without breaking too many things as incomes and investment fall.
Because of the fractured ideological capture of Putin and his closest aides—that they impose persistently orthodox assumptions to the point of absurdity—policy proposals exist halfway between reality and surreality. It is not just that mobilization is a political risk too extreme to consider, though the internet shutdowns are beginning to strain this assumption. It is that officials cannot even imagine ideas of any substance because of their own ideological blinders on top of their political constraints. Things are so bad that someone calling for a war economy might actually have a better argument for how resources can be most efficiently allocated to navigate entry into and exit from crisis. None of this changes the likely outlook of years of falling incomes and living standards, with a decline of unclear duration. But it exposes why the regime’s distorted capacities to govern are so disastrous in the present situation: systems must be more capable of picking losers and outright inflicting pain, not just finding elaborate means of redirecting resources through the path of least resistance while identifying increasingly unbelievable outside forces to blame.
The latest economic data confirms Nabiullina’s warning of a much worse future. For Q1, the total square footage of housing built declined by 28.2% year-on-year. For the quarter, payments into sectors covering consumer demand fell 6.4% compared to the previous quarter, and payments into intermediate demand sectors fell 9.8%. Services inflation is still running above 8% on an annual basis—proof that labor market tightness is changing the underlying structure of price increases—and while staples and discretionary goods inflation are closer to the 4% target, those prices will increase with rising energy costs. Even demand for freight capacity for export fell 16% in Q1, which may tick up as commodity prices rise but will ultimately be constrained by labor shortages, available shipping capacity, and impending demand destruction globally. Demand for space in warehouses fell 35% in Q1 year-on-year, and nearly 2.5 times more deals took place in Q1 2025 than the prior year. Wherever you look, the market is telling us that consumers are in trouble, the recession may not be deep but is likely prolonged, and costs keep rising relentlessly, if at a slower pace than in 2023−2024.
None of this means the war effort is necessarily in trouble. A growing number of Russians are finally admitting they aren’t winning the war, at least not by any perceptible metric legibly communicated by the regime. What it does mean is that «enough» isn’t enough. Whatever is being done to stabilize things is not only failing to do so; it is actively worsening the problem of resource and capital allocation in wartime. Those who once claimed military Keynesianism was driving wartime growth are, for the most part, silent on this issue. In truth, military Keynesianism was never tried. Markets are simultaneously distorted by interventions such as credit subsidies or wartime bonuses and so dependent on the cost of capital, which will perpetually be high given labor shortages and other supply constraints. They are increasingly inefficient at achieving the stated targets the Kremlin wants to see.
The war has shattered many shibboleths about the Russian economy, none more convincingly than the belief that the state couldn’t afford to spend more on stimulus or development in the peacetime preceding it. You go to war with the state capacity and technocracy you have, not the state capacity and technocracy you wish you had. On both counts, total mobilization would be more effective at addressing the bottlenecks and disruptions to come, especially if we return to escalation in the Gulf. It would not be costless, nor would it lift living standards. But it’s psychologically inconceivable for now because markets have one incredibly useful function for the regime: they give life to the often false belief that one’s circumstances are within their control, even when they transparently are not. Russian technocrats dispensed with this illusion a long time ago.
