Neither guns nor butter: What does Russia's war economy look like?

Ivan Valiushko

expert of the National Institute for Strategic Studies

First, UN Secretary-General António Guterres attended the BRICS summit in Kazan, Russia. Apparently, a photo op and hugs with Putin weren't enough (granted, it's part of the job to deal with villains), so he proceeded to have a cozy chat with Russian Prime Minister Mikhail Mishustin at the UN Climate Change Conference in Baku. There, Azerbaijani President Ilham Aliyev described oil and gas as "gifts from God," implying that all these "green transitions" are unnecessary. Resource-rich Russia has redirected its energy exports — at least partially — toward China and India, compensating for losing the European market. Bolstered by petrodollars, the Russian army continues to press Ukrainian defenders out of Donbas.

To an uninformed observer far removed from the realities on the ground, all of this could appear as part of a cohesive global order narrative crafted in Valdai, Putin's town of residence. In this version, Russia's economy is so robust that it provides both "guns and butter," and sanctions remain inconsequential. Under such a "powerful protector," it's not shameful but intriguing to be an ally — a narrative not just about Ukraine but Russia's place in the world at large. This is precisely the illusion the Kremlin's propaganda machine aims to create, tirelessly repeating Putin's monstrous lies and embedding them even in children's minds. This illusion is easy to believe if one relies solely on Russian assessments. Yet behind the shiny façade lie crumbling walls and stalagmites of waste piling up outside the windows.

Russia manages to simultaneously wage war "against the entire West" and maintain domestic control, relying heavily on oil and gas exports — the Kremlin's most vital source of revenue. These energy exports are the lifeblood of Russia's economy. Over the past decade, they have accounted for 35–50% of the federal budget. Naturally, they also finance the aggression, but Moscow shrouds the war in secrecy by classifying critical statistics. This forces international analysts to rely either on secondary sources or accept Russia's data at face value, enabling the Kremlin to manipulate figures to its advantage.

Fooled the Sheikhs, will fool the rest…

Since 2016, Russia has been part of the expanded OPEC+ group of oil-producing nations established in response to falling oil prices to balance production and consumption. Group members voluntarily agreed to daily production quotas. Russia's quota is 8.98 million barrels daily, but it hasn't kept its word, producing and selling more than agreed. How do we know? Customs declarations and tanker traffic data reveal the truth. Does OPEC know? Absolutely. Can Russia be punished for this deceit? It can, and signals suggest it will be, but refer back to the previous paragraph for now.

With no reliable overall data, we focus on specifics. Every Russian business outlet, news agency, talk show, and even chat-room pundit competes to prove the strength of Russia's economy using purchasing power parity (PPP), citing World Bank data. By PPP, Russia's GDP ranks fourth globally — a position it reached in 2021 and still holds. Propagandists usually emphasize that this is despite war expenditures and sanctions. However, the disconnect between PPP and reality is humorously illustrated by The Economist's Big Mac Index, which has compared hamburger prices worldwide since 1986. That a Big Mac is cheaper in Ukraine than in the US doesn't indicate Ukrainian wealth.

Russia presents the world with whatever narrative suits its agenda — showcasing strength while concealing weaknesses. Putin can claim that "Russia's economic growth slowed slightly in the third quarter, but GDP will increase this year." Meanwhile, Russia's Ministry of Economic Development echoes: "GDP growth slowed slightly in Q3, but the economy continues to grow." Both statements are technically correct. Industrial growth stands at 4.5%, the manufacturing sector has grown by 8.1%, machine building by nearly 20%, enterprises are swamped with orders, and unemployment remains at a record low of 2.4%. Salaries in the defense and war-support industries have surpassed those of bank employees, forming a new middle class, especially in the Russian provinces of Bashkortostan and Tatarstan.

To amplify the effect, propagandists circulate complimentary statements from various Western "experts" who seemingly "confirm" the Kremlin's narrative. One such voice has recently been Alexander Mercouris, described by the Kremlin-linked Roscongress Foundation as a "lawyer, analyst, and expert in international relations, law, and Russian economy, politics, and society." From London, he confidently declares that Russia will remain crisis-free for another decade, has overcome sanctions, and is developing at unprecedented rates. Alongside relentless self-promotion, the Kremlin's interest in such experts (including other figures like Scott Ritter from the UK, Alexander Rahr and Ulf Schneider from Germany, and Ghislain de Castelbajac and Christophe Gomart from France) lies in promoting a single idea: the West should change its stance toward Russia.

But here's a paradox: why call for its removal if Western pressure is so ineffective as claimed?

…but not everyone will believe it

To counter manipulations, the Swedish government tasked the National Institute of Economic Research with analyzing Russia's economic development. The resulting report goes beyond Russia's official figures, highlighting that the Russian government's reserves, which have been used to fund military expenditures, are rapidly depleting and may be exhausted within a year. After that, the Central Bank will be pressured to lower the key interest rate and might resort to printing more money, leading to high inflation and a weaker ruble. At least in the first part of their forecast, the Swedes hit the bullseye.

In July 2023, the Russian Central Bank's key interest rate stood at 7.5% annually, but it was raised eight times over the next 15 months. The current rate of 21%, under which commercial banks borrow, stifles the development of any legitimate business and makes homeownership an unattainable dream due to unaffordable mortgages. For the third time in two months, Sberbank raised mortgage rates — to 28.1% for the secondary housing market and 28.4% for the primary market. In other banks, mortgage rates have risen even more: Alfa-Bank offers rates of 28.49%, while VTB has gone up to 29.8%. It's worth recalling that affordable loans were one of the factors that improved Russians' living standards in the 2000s, laying the foundation for Putin's approval ratings as he both "crushed terrorists" and "lifted ordinary people out of poverty."

The unprecedentedly high rates indicate the scale of financial problems exceeding the credit crisis of 2008 and the ruble collapses of 2014 and 2022. Due to high inflation (they aimed for 4%, already at 6%, and projected to reach 8.5%), the rate might rise to 23% by December and even higher afterward. Vnesheconombank calculated that to curb inflation, Russia needs to have a rate of 52%. While unlikely (but highly desirable), businesses have decided to act preemptively.

The Russian Union of Industrialists and Entrepreneurs demanded that the Central Bank align its monetary policy with the government, while the Center for Macroeconomic Analysis and Forecasting, headed by Dmitry Belousov (brother of the defense minister), called for lowering the rate due to the risk of stagflation. The Central Bank insists on the inadmissibility of interference in its operations. Things escalated to the point where Russian Parliament Speaker Volodin urged against blaming all economic problems solely on the Central Bank's key rate. Economy Minister Reshetnikov dismissed disagreements with the Central Bank over the fight for economic growth.

However, the central arbiter remains above the fray, consistently trusting the regulator and its head despite business complaints. We wish someone would whisper to Putin that Governor of the Bank of Russia Elvira Nabiullina is to blame for all of Russia's economic woes and that the war is being lost because of her. If dismissed, her replacement might care so little about the Central Bank's independence from the Kremlin, government, parliament, pro-government think tanks, and industrial lobbyists that they would yield to business pressure, with all the negative consequences.

While we fantasize, the Central Bank's data shows that this autumn, the prices of education services, air and rail tickets, overseas travel services, milk, butter, medicines, electrical equipment, and even potatoes have sharply increased in Russia.

The power of persuasion

The "might of Russia and its army" has spawned two enduring memes that reflect not the actual state of affairs but the Kremlin's desired image. "100,500 tanks beyond the Urals" symbolizes the invincibility of an army supposedly supported by an endless stockpile — propaganda paints the weaponry and military equipment storage bases across the country, especially in regions with favorable climatic conditions, as inexhaustible. This reserve's size is impressive, but 1) quantity does not equal quality, and 2) everything that can be counted will eventually run out, as the vigilant OSINT community convincingly proves.

The second meme, closely tied to the first, relates to the cherished Russian-Soviet architectural tradition of megalomania: the notion of "infinite resources." This manifests in various ways, from a mobilization reserve of Bashkirs/Tuvans/Tatars/Buryats — ethnic groups within Russia — to complete import substitution and the self-sufficiency of the Russian economy. It, too, is not baseless but also has its limits, which are steadily approaching.

Both memes are connected to the war and directly affect it. One-time financial incentives from federal and regional budgets and other million-ruble payouts temporarily halted the decline in new contract recruits from April to July. However, motivating the horde with rubles is too expensive, even for the horde itself. The first signs of this were regulatory decisions imposing material liability on volunteer fighters for damage to military property and limiting maximum injury compensation to 3 million rubles (down from 8 million), contingent on the discretion of medical-social experts.

Aside from underscoring the system's disregard for its expendable cogs, these measures reveal a need for those very rubles: in the first case, they're taken away, and in the second, they're withheld. Such "optimization of man and machine" hardly aligns with the image of a bottomless treasury.

Despite everything, Russia has the resources to continue its war in the short term, regardless of domestic issues. Putin didn't spend 20 years of his life nurturing imperial ambitions just to abandon them over a food crisis. Butter is unhealthy in large quantities, potatoes can be imported, traditional remedies can replace modern medicine, church visits suffice, and milk will sour anyway, given the problems with electrical equipment. Moreover, an "overheated" economy for winter is seen as a good thing.

In the long term, inflation, a shortage of skilled labor, and the dependence of war expenses — not to mention the civilian budget — on oil prices will reveal the limits of Russia's resilience. Against this backdrop, it's crucial not to succumb to euphoria or inflated expectations — there's no imminent collapse of the entire colossus. However, it does stand on feet of clay.