The Russian war machine in Ukraine has seemed pretty unstoppable for the last four years. While paying for it has put a strain on the Russian economy, it hasn’t broken it, thanks mostly to Russia’s oil sales. Russia has been under sanctions for years which set a cap on how much it can charge for its oil but China and India were both happy to buy up that oil at a discount.
Now however there are signs that new sanctions put in place by President Trump last year are starting to have an impact. The seizure of Russian tankers by the US, part of its shadow fleet, are also having an impact.
The price of Russian oil, the country’s primary export, has declined under the weight of surging global supplies and Western sanctions related to the war. Last year, Russia’s oil and gas revenue fell by almost a quarter, according to the Finance Ministry. The Kremlin is resorting to tax increases and deficit spending to bridge the gap…
…with the economy stagnating and the Kremlin reaching the limit of what it can squeeze from it, the Russian people will have to bear more of the burden of a war whose costs exceed about $170 billion a year…
In October, President Trump imposed sanctions on Russia’s two largest oil companies, Rosneft, which is state-owned, and Lukoil, which is private. Those penalties significantly undercut the companies’ ability to sell crude. Since then, Russia has also faced stepped-up enforcement of restrictions against the illicit “shadow fleet” of tankers it uses to ship oil.
This month, the U.S. military seized a Russian-flagged vessel in the North Atlantic that had been used to carry Venezuelan oil.
With Russia now getting as little as $39 a barrel for its oil, it’s resorting to deficit spending which is set to triple this year.
Russia’s public deficit could balloon to almost triple the official target by end-2026 as a fall in Indian purchases of oil and growing oil trade discounts eat into revenues while spending may be higher than expected, a source close to the government told Reuters.
The source cited calculations by economists from a government-linked think tank, which are not planned for publication. They are the latest sign of growing strains on a Russian economy facing sanctions, high interest rates and labour shortages.
Putin himself has admitted he is sacrificing economic growth in an effort to keep inflation under control.
“Russia’s GDP grew by one percent last year. This is lower than the dynamics observed earlier, as we are well aware: in 2023 and 2024, growth was 4.1 percent and 4.3 percent, respectively,” Putin told a government meeting.
“But we also know that this slowdown was not simply expected, one could even say it was man-made: it was connected with targeted measures to reduce inflation,” Putin added.
The strain is already being felt but some Russian experts are predicting it could become a serious threat to Russia’s economy this summer.
Russian finance officials have been writing with increasing urgency to President Vladimir Putin to warn of a potential crisis by the summer, according to a person in contact with these officials and who spoke on the condition of anonymity because of the sensitivity of the subject…
One Moscow business executive said the crisis could hit in “three or four months” as signs appear that real inflation is spiraling far beyond the officially declared 6 percent despite interest rates being held at a high 16 percent. Signs of growing strain in the economy are the biggest numbers of closures of restaurants in Moscow since the pandemic and the forced layoffs of thousands of workers as costs grow, the executive said, also on the condition of anonymity.
There are other signs the economy has taken a turn as well:
Russian consumers became sharply more pessimistic about the economy in January, with the Bank of Russia’s survey-based expectations measures falling to their lowest levels in more than three years, according to The Moscow Times on February 3.
According to the Bank of Russia survey cited by the outlet, 28% of respondents said their material situation had worsened, and 53% complained of a “very strong” rise in prices.
A big surge of deficit spending is only going to make all of this worse.
Ultimately, what happens may depend on a decision by the European Union which is now considering a crackdown on Russia’s shadow fleet of tankers.
The European Union is considering imposing an outright maritime ban on services needed to ship Russian oil, such as insurance and transportation, as part of a new sanctions package marking four years of Russia’s war.
The ban would significantly ratchet up the sanctions imposed on Russian oil, replacing the current oil price cap system, and comes as 14 European nations including Britain, France and Germany warned last week they could intercept the shadowy fleet of tankers Russia created to help it evade sanctions operating in breach of international maritime law…
If enforced, the proposed measures could impact nearly a half of Russia’s oil exports, or about 3.5 million barrels per day, which head through European waters via the Baltic and Black seas, with crude shipments mostly bound for refineries in India, China and Turkey.
If the vote passes, this would further choke off Russia’s ability to sell its oil, meaning it would need to either raise taxes in a weak economy or increase its deficit spending even higher. There is of course another option. Putin could call an end to the war in Ukraine and ask for sanctions relief. So far, that doesn’t seem to be part of his agenda.
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