Trump's tariffs "have kicked Putin in the teeth", causing Russia's economy to stop growing, says The Economist

Russia's annual economic growth has fallen from around 5% to zero since late last year, weighed down by inflation, military spending and lower oil prices amid tariffs introduced by US President Donald Trump.

Source: The Economist

Details: Russia's Central Bank reported in early April that several sectors have recently experienced a decline in production due to a sharp drop in demand.

Following Moscow's full-scale invasion of Ukraine in 2022, economists had predicted that Russia's GDP could shrink by as much as 15% annually. In reality, GDP fell by only 1.4% in 2022 and returned to growth in 2023–24.

What has triggered the sudden slowdown? Economists point to three main reasons:

The first factor is what the Russians call the "structural transformation" of the economy. Once oriented towards the West and allowing (albeit restricted) private business, Russia has, since 2022, shifted towards a wartime economy focused on the East.

This shift required colossal investment, not only in the production of weapons and ammunition, but also in establishing new trade routes with China and India. By mid-2024, real investment in fixed assets had risen by 23% compared to the end of 2021.

According to Russia's Central Bank, this phase is now complete. In 2024, military spending is expected to rise by just 3.4% in real terms, compared to a 53% surge the year before. This decline in spending on "structural transformation" is one of the reasons for slower economic growth.

The second factor is monetary policy. Inflation in Russia has remained well above the Central Bank's annual target of 4% for months, reaching over 10% in February and March. The main drivers are soaring military expenditure and a labour shortage caused by mobilisation.

Last year, nominal wages rose by 18%, prompting companies to hike prices. In response, the Central Bank maintained its key interest rate at 21% – the highest level since the early 2000s. These elevated rates attract capital inflows into the rouble, helping to strengthen the currency and reduce the cost of imports.

"High-frequency data suggest that inflation is edging down. The flipside of disinflation is slower growth. Rather than spending it, Russians are putting their money into savings accounts. High rates further discourage capital investment," The Economist reports.

The third factor has come to the fore in recent weeks – the deterioration of external conditions. Amid the escalation of the US trade war, global economic growth forecasts have dramatically deteriorated, followed by oil prices.

"Mr Trump may be well disposed towards Mr Putin, but with his trade war he has kicked him in the teeth," The Economist notes.

Falling oil prices are creating serious challenges for Russia. The impact is already visible in the state coffers: in March, oil and gas tax revenues dropped by 17% compared to the same month last year.

Background:

• In Russia, the risk is rising that the economy could slip into a technical recession before inflation is brought under control.
• Kremlin leader Vladimir Putin is growing increasingly concerned about the mounting problems in Russia's war-driven economy, at a time when Donald Trump is stepping up calls to end the war in Ukraine.

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