Bloomberg analyses how war against Ukraine is weakening Russia's economy
Bloomberg has published an analysis of how the war launched by Kremlin leader Vladimir Putin is weakening Russia's economy.
Source: Bloomberg
Details: Putin's war against Ukraine will soon enter its fourth winter and, as Bloomberg writes, Russians have been forced to accept its growing impact on almost every aspect of daily life.
Dozens of regions in central and southern Russia are now feeling the war's proximity as drones and sometimes missiles strike energy facilities and residential buildings.
Quote from Bloomberg: "Beyond the front lines, the rest of Russia, Moscow included, has started to feel the economic toll. From households cutting back on food spending to struggling steel, mining and energy companies, the country's economic engine is showing multiple fractures, and the earlier resilience spurred by massive fiscal stimulus and record energy revenues is being tested."
Details: Meanwhile, the scale of suffering is nothing like what Ukraine is enduring and is unlikely to compel Putin to end the war, but it does highlight the rising costs he is facing for launching the full-scale invasion in February 2022.
These consequences come just as the US is pushing to limit Moscow's oil and gas revenues as part of the Trump administration's efforts to secure a ceasefire. The momentum towards a deal is growing, negotiations are shifting to Moscow and US-Russian talks are said to be underway behind the scenes to design a package that would give the Kremlin the sanctions relief it seeks.
Bloomberg notes that this sharply contrasts with an earlier stage of the war, when Russia's GDP grew thanks to war-related investment, pushing wages up by almost 20% in 2024, which boosted consumer demand but also drove inflation.
In October last year, Russia's Central Bank raised interest rates to a record 21% to cool inflation and slow the overheated economy. However, despite a reduction in borrowing costs, the economy is increasingly feeling the delayed impact of tight monetary policy. In the process, deeper imbalances have emerged in a country that has shifted to a wartime footing but still maintains its civilian economic sector.
At the start of November, inflation fell to around 6.8%, but the main reason was weakening consumer demand, according to the latest report by the Centre for Macroeconomic Analysis and Short-Term Forecasting – a think tank led by the brother of Russia's defence minister. Russians are notably cutting spending on food, as shown by SberIndex, a Sberbank open data platform that tracks incomes, spending and business activity in real time. Sberbank is Russia's largest bank, providing a wide range of financial services to individuals and businesses.
According to an analysis by the Kommersant newspaper, sales of milk, pork, buckwheat and rice in Russia fell by 8-10% in September and October. X5 Group, the country's largest supermarket chain, reported revenue growth in the third quarter – mainly due to inflation – but its net profit fell by almost 20%, reflecting weaker demand and higher costs.
Russia's retail sector is also facing significant turmoil. According to local media, in the third quarter, 45% of all shops closed were fashion outlets, with nearly every second fashion store shutting down. Rossiyskaya Gazeta reports that the electronics market is seeing its sharpest drop in demand in 30 years as consumers delay major purchases.
Car sales fell by almost a quarter in the first nine months of the year due to the high cost of borrowing and an increase in the state recycling tax, which pushed prices up – especially for imported cars and electric vehicles – as the government seeks to boost budget revenue and support domestic manufacturers.
Quote from Bloomberg: "Then there's the direct impact of Ukrainian military action. Ukrainian drones now strike oil refineries and ports from the Black Sea to the Baltic coast with seeming impunity, sometimes travelling as far as 2,000 miles deep into Russia to targets in Siberia.
Those strikes have exacerbated a crisis in the domestic fuel market, leading to a spike in prices from the end of August. While gasoline prices inched lower in November, they remain high and shortages are still being felt in some regions."
Details: Many analysts still forecast moderate growth this year and next, but the Centre for Strategic Research, a Moscow think tank, concluded on 18 November that "there is almost no chance left to avoid a recession", as output has fallen in more than half of Russian industries.
Russia's steel industry is in crisis. According to leading steelmaker Severstal, total consumption has fallen by 14% this year, with demand down 10% in construction and 32% in mechanical engineering. The coal industry is also facing its toughest conditions in a decade, prompting major companies to cut production.
The banking sector is faring slightly better: the share of problematic corporate debt rose to 10.4% in the second quarter, reaching RUB 9.1 trillion (US$112 billion), while in retail lending it increased to 12%.
Economic growth slowed to 0.6% in the third quarter, falling short of forecasts. Meanwhile, the budget deficit reached 1.9% of GDP in October and is expected to rise to 2.6% by the end of the year, according to the Russian Finance Ministry.
Bloomberg calculations, based on data from Russia's Finance Ministry, show that crucial oil and gas revenues fell by more than one-fifth year-on-year in January-October, totalling RUB 7.5 trillion (US$96 billion). Lower oil prices, sanctions and a stronger rouble meant Russian producers received fewer roubles per barrel sold.
This was before the United States, frustrated by Putin's refusal to engage in peace efforts, unexpectedly imposed sanctions in October on Russia's leading oil producers – Rosneft and Lukoil.
While this tension is unlikely to divert Putin from his military goals, he is actively trying to persuade the US not to tighten economic pressure. In October, when President Donald Trump considered sending longer-range Tomahawk missiles to Kyiv and publicly voiced his frustration with the Russian leader, Putin sought to dangle the prospect of further peace negotiations. "Indeed, he was encouraged and advised on that call by Trump's own envoy, Steve Witkoff", Bloomberg said.
Without a deal, Russia's fuel shipments fell in the first half of November to their lowest level since the start of the invasion. Meanwhile, even Russia's trade boom with China has stalled.
As the deficit grows, the Russian government is increasing its debt through costly domestic borrowing. Value-added tax is set to rise next year and cover a broader base, affecting small businesses and ultimately consumers. This will add RUB 1.2 trillion (US$15 billion) to the state coffers. A technology levy on electronic components and devices will appear, and the tax on purchasing a car will increase.
After Putin promised Russians that taxes would not rise in 2023, the Kremlin instructed the media not to mention his name in coverage of the new levies, according to Meduza, a Latvia-based Russian media outlet banned in Russia.
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