- The Russian economy could begin to face major challenges over the next year and a half, think tank researchers write.
- Putin faces a political “trilemma” as the country navigates the third year of war in Ukraine.
- “The Russian economy is now stable despite and thanks to Western sanctions.”
Russia’s economic strength could last another year and a half before starting to weaken, according to the Carnegie Endowment for International Peace.
The Washington DC-based think tank highlighted the nation’s show of defiance during the invasion of Ukraine, with the Russian economy still strong despite rising military costs and Western trade restrictions. The International Monetary Fund has predicted that the country will grow faster this year than all other developed economies, including the United States.
This is partly because Russia has managed to find ways to circumvent sanctions, Carnegie Endowment researchers said, such as selling its oil to its allies while importing Western products through third countries. .
“A paradoxical situation has emerged: the Russian economy is now stable despite and thanks to Western sanctions,” Alexandra Prokopenko, a researcher at the Carnegie Russia Eurasia Center, wrote in a report. “But this hard-won stability is not eternal. In the best case scenario, the current agreement will probably start to disintegrate within eighteen months due to growing imbalances and possible social problems,” Prokopenko warned .
Russia faces a political “trilemma,” with three major issues facing the nation as it navigates its third year of war in Ukraine. For Putin, the problem boils down to financing the Russian military, maintaining the standard of living of Russian citizens, and maintaining the stability of the economy – three goals that are becoming increasingly difficult for Russia to achieve, according to Prokopenko.
Signs of weakness have already begun to surface. The Kremlin plans to spend a record amount on its military this year. This could weigh on the country’s economy, as defense spending is “generally unproductive”, and it is unclear whether the war between Russia and Ukraine will end soon, Prokopenko said.
Living conditions could also begin to deteriorate. While economists say Russians are living mostly normal lives for now, inflation has soared, prompting the central bank to raise interest rates up to 16%. If the central bank succeeds in reducing inflation, it will eat into workers’ incomes as the economy begins to contract.
Falling income could also impact Russians’ ability to repay their loans, increasing the risk of debt distress, the think tank said.
“This increases the risk of social discontent: no one will be happy to accept a salary reduction,” Prokopenko added.
And while Russia has the tools to keep its economy stable and avoid a recession for now, economists warn of a bleak future given the country’s labor shortage, of declining productivity and increasing isolation from the rest of the world.
“In an economy subject to political imperatives, there are few incentives for sustainable development. Sooner or later this will harm the well-being of ordinary Russians. In other words, temporary solutions and a decline in living standards will add to political and economic tensions. the economic difficulties facing the Kremlin,” Prokopenko said.
Experts have warned of short-term social unrest in Russia, especially as living standards continue to deteriorate. The country could see massive unrest by the end of the year, three economists told Business Insider, especially if the West continues to strengthen sanctions against Moscow.
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