Russia on the brink: Economic turmoil echoes 1990s chaos

In recent days, Russia has been overwhelmed by negative economic data. There has been a significant collapse of the rouble both against the dollar and the yuan, and the central bank is compelled to maintain high interest rates to curb inflationary pressure and stabilise the economy.

Elvira Nabiullina, the head of the central bank, explained in the Russian parliament that maintaining the current course is necessary.

Piotr Arak, chief economist of Velo Bank and former head of the Polish Economic Institute, is not surprised by Nabiullina's words. "Inflation in Russia is still rising, and the long-term growth prospects look weak," he tells money.pl. "Interest rates are at 20%. In the US, we saw such levels a quarter-century ago, long before we were a NATO member," he adds.

- Elvira Nabullina, the financial strategist of the Russian government, recently admitted in the Duma that Russia faces stagflation. The unemployment rate is at 2.3% and continues to drop due to emigration and conscription. Inflation is at 8.5% year-on-year and 0.8% month-to-month, with declining retail sales dynamics. Economic growth is expected at 3.6% this year, but according to IMF forecasts, it will slow to around 1% per year in the coming years, the expert calculates.

He points to another significant factor.

According to Ukrainian special services, 2025 will be a critical year for Russia's financial resources, which will no longer have prospects for economic growth based on internal trade and military production, the economist emphasises.

Arak explains that the situation in Russia is partly a result of Western actions. As he says, the weakening rouble is a result of the still partially convertible currency and financial system being subject to additional Western sanctions.

"Investors reacted nervously after the US imposed new restrictions on Gazprombank. Until last week, it was the last major Russian bank not on the US blacklist. European clients no longer have a way to pay for Russian gas," our interlocutor points out.

He notes that the timing of the currency's weakening is not accidental. "The Biden administration is attempting, in its final weeks in the White House, to worsen Russia's situation before potential peace talks in 2025," Arak emphasises.

In his view, the effect of current sanctions overlaps with those introduced earlier.

Russia's energy revenues fell last year by almost a quarter, partly due to a price cap on Russian oil at $60 (€57) per barrel. The West aims to lower this cap further to levels of $40-45 (€38-43)because Saudi Arabia is vying for a dominant position in the oil market and prices are sufficiently low," the economist states.

Piotr Dzierżanowski, an expert on international economic relations at the Polish Institute of International Affairs, emphasises that after the invasion of Ukraine, Russia was forced into a fundamental reorganisation of its economy.

He admits that for a while, it was possible to keep negative effects under control thanks to the decisive policy of the central bank, although the government's policy often caused opposite effects. "Such actions cannot, however, last forever," Dzierżanowski tells money.pl.

According to the PISM expert, the war is already clearly impacting the budget. "Defence spending is at a record level, and next year it is expected to exceed 6% of GDP and more than double from 2022," money.pl's interlocutor calculates.

- Does Russia have reason to worry? Economically, yes, certainly. The current trajectory is simply impossible to maintain. The question is not if these difficulties will increasingly affect society, but when. What will be the political effects? This is harder to predict, as spending on "internal security" is also rising. And the protest potential is currently not large," the PISM analyst assesses.

He emphasises that financing an expensive war means less money for social spending and household consumption.

Russia still has some tricks up its sleeve. They will try to address issues in gas exports. Perhaps they will remove the professional and relatively independent management of the central bank and start printing money," Dzierżanowski suggests.

Soon it will become clear how resilient the Russian economy still is, our interlocutors say. "It seems that next year we will enter a period where Russia's economic problems may surpass those related to a potential end to the war," the PISM expert states.

Russian society fears a return to the economic chaos of the 1990s, and next year we may see its first signs becoming noticeable to the public. Small delays in the payment of benefits, pensions, or wages in the public and military sector cannot be ruled out, for example. I do not foresee a permanent collapse, but even slight delays could be an issue for Russians," says Piotr Dzierżanowski.

However, he emphasises that the reaction of authorities and society will not be immediate, and these problems will not lead to an immediate end to the war. "Time is not on the Russians' side. Therefore, it is advisable to maintain and intensify sanction pressure on Russia and also on China, as cutting off support from China would be a huge blow to the Russian economy at this time," the analyst assesses.

Marcin Lipka, a market analysis expert at the Polish Bank of National Economy, assesses that Russia's situation is not yet dire today. "The revenues from the export of energy resources remain high for now, and the current account surplus will likely mitigate the risk of a deep devaluation of the Russian currency," he points out in his analysis.

In a broader sense, the Russian Federation's economy is grappling with significant domestic imbalances, which are a result of its reorientation towards military actions," he explains.

The above factors cause Russia to grapple with high inflationary pressure. Simultaneously, to cool off the economy and reduce the risk of further price increases, the central bank of Russia must, as mentioned at the beginning, maintain high rates. This puts the Russian economy in a vicious circle.

This significantly increases the costs for private enterprises and reduces demand for credit. The negative results of these actions will already be visible next year when, according to CBR estimates, GDP growth will slow to about 1% from about 3.5% this year. Growth close to 1% is also expected in 2026

This will not be without effect on the economy. "An increasing percentage of the population will start to feel the negative effects of current policy, and the number of beneficiaries of the current situation will dramatically shrink. Furthermore, subsequent quarters may experience lower revenues from crude oil exports due to a global oversupply," the economist points out.

"Ultimately, Russia is facing a clear deterioration in the economic situation, which will be felt by a large number of households," he sums up.