Russian economy analyst Iwona Wiśniewska discusses how Russia is funding its war despite economic challenges, but warns of future consequences.
Russia’s Economic Capacity
It’s far from collapse. If waiting for Russia to run out of money for the war is someone’s strategy to end it, that’s not a good strategy. Despite everything, Russia’s economic potential is very large, and half the world cooperates with it. Yes, current low oil prices and sanctions are serious blows, translating to low budget revenues. The Kremlin has little money in its coffers, but funds for the war will be found.
Financing the War
Please don’t misunderstand me. The Kremlin is currently very difficult. It faces numerous economic challenges. However, it has space to continue financing the war, though it is shrinking. The war is a priority. In the last four years, the Kremlin has reduced spending on everything else to have money for it. At the same time, it has maintained system stability, so as long as possible, it has tried to limit passing burdens onto society.
Money was taken from people’s pockets mainly indirectly, for example by abandoning mortgage subsidies, reducing healthcare or social spending. And primarily through inflation. Only now has the Kremlin reached deeper into people’s pockets by raising VAT. Meanwhile, businesses have been treated less subtly for a long time, with taxes regularly increased.
Social Impact and Passivity
From the beginning, the Kremlin has been conducting the war so that society feels it relatively little. Costs were mainly shifted to the mentioned business and the middle and upper classes. The poorest were provided with means to survive. Pensions and social benefits are indexed to official inflation, giving the poor the feeling that the state is at least partially compensating them for the costs they bear.
Society is becoming poorer, but gradually. However, the Kremlin primarily has an efficient apparatus of repression and propaganda. Thanks to them, society remains completely passive despite economic difficulties. There is no reaction to rising food, medicine, or rent prices that would threaten the Kremlin.
Short-Term vs Long-Term Perspective
It’s impossible to predict whether the economy will force the Kremlin to step back. If the war ever ends, it will be primarily as a result of the Kremlin’s political calculation, recognizing that the war is too costly and the elite is losing too much from it. It will not be a decision by society or a revolution with mass protests.
For now, the authorities are convinced that they will soon achieve their goals because the West will withdraw support for Ukraine. This timeframe is short, about a year or two, which is related to the policy the Kremlin is pursuing. Putin makes decisions about the war from a short-term perspective, believing Ukraine is exhausted and the West is ready to compromise on Russia’s terms.
Infrastructure and Demographic Challenges
Russia faces significant infrastructure problems, with a catastrophic state of infrastructure exposed by this winter. These are decades of neglect after the collapse of the USSR, compounded by the effects of war. Frontline losses and migration have deepened Russia’s demographic problems. There is a technological regression and shrinking income.
Public finances are in a very difficult situation. Last year, 45% of the federal budget went to military departments, mainly the army conducting the war, compared to about 23% in 2021. This means the Kremlin is allocating fewer funds to economic development, infrastructure, and human capital. Expenses for servicing public debt are also increasing because since 2022, the budget has been implemented with a deficit, and the Kremlin, cut off from foreign capital markets, must take expensive loans on the domestic market.
Call for Western Action
Regimes like North Korea and Iran have shown that limits of endurance can be enormous. However, Russia is currently in a really difficult situation. The most important thing is that we cannot wait for the Kremlin to run out of money. Russia is not resilient; it is strong because of our, the West’s, weakness.
The West can still significantly accelerate the end of this war by increasing sanctions pressure on Russia and more strongly supporting Ukraine, thereby removing the Kremlin’s hope for quick victory. The psychological factor in this war is very important. Its course strongly depends on how Vladimir Putin perceives reality. For us, the most important thing is to make him recognize that maintaining his power requires focusing on internal problems in Russia, not on imperial illusions.
