Russian Economy Overheating

The Russian economy is not doing well.

Russia has pursued what analysts are calling “military Keynesianism,” the floating of an economy by high spending on defense. Russia has maintained generous bonuses for soldiers who enlist, and robust benefits for wounded soldiers and the families of dead soldiers. Russia has also increased the productivity of its defense industrial base, keeping employment and wages high. This, along with exceptionally professional policy by the managers of the Kremlin’s financial and economic machinery, has ensured that the Russian economy has remained both afloat the productive in the face of war and sanction.

And yet Russia is enduring costs. Russia has managed to maintain economic growth by dipping into its reserves of foreign currency and by selling commodities at discount rates. Yet interest rates and inflation are both very high. Several hundred billion dollars of foreign currency holdings are gone, possibly never to be returned. As Pierre Marie Meunier points out, Russia is on the slow, inexorable path to bankruptcy, although its progress down that path might be slow indeed.

No one would characterize Ukraine’s current situation as “good.” The Russians are taking Ukrainian territory and are taking back Russian territory in the Kursk salient. Russia can evidently draw upon not only its own vast reserves of equipment but also on North Korean industry and manpower, a reality that Kim Jong Un may someday come to regret. But it’s become way too common for folks to argue “a war causing catastrophic losses to an already demographically-challenged country is good for the economy, actually!” Apart from the losses at the front Russia is paying an enormous economic price to fight this war, a price that will badly damage Russia’s economic health for a decade and possibly more.

Unfortunately, despite this damage Russia can probably outlast Ukraine, the now-liberal use of ATACMS notwithstanding. But the promise of future damage to the Russian economy is certainly leverage, and to the extent that Ukraine needs to start thinking seriously about a ceasefire (which it certainly does with the impending arrival of Trump), Kyiv needs to be weighing every source of leverage it still has available.

Related links:

• On the sanctions regime.
• On Russian weapon stocks.
• On the overheating Russian economy.
• On Russia’s catastrophic losses at the front.
• On Russia’s failure to create an alternative financial system.