Russia's Economy Enters Stagnation Phase as War Costs Mount
Russia's economy has officially moved into a period of stagnation after initial war efforts temporarily boosted output, according to economic analysts. Four years after President Vladimir Putin's full-scale invasion of Ukraine, economists are flagging significant threats to Russia's economic stability, with growing hopes in the West that further sanctions are successfully limiting growth.
From Growth to Stagnation
The Russian economy initially enjoyed growth of around four percent following the start of the war, primarily driven by fiscal stimulus on military expenditure. However, this momentum has now reversed dramatically. Liam Peach, senior emerging market economist at Capital Economics, stated that Russia's economy is now facing a period where GDP growth will likely fall below one percent.
Peach warned that lower oil export volumes could widen Russia's budget deficit beyond four percent, potentially forcing the government to implement further austerity measures. "Putin seems willing to bear heavy economic costs to achieve his goals around issues of Ukraine's sovereignty, security and territory," Peach noted.
Sanctions Impact and Vulnerabilities
While Western sanctions have reduced Russia's access to advanced technology and weighed on its potential growth, Peach acknowledged that the sanctions regime has largely proven too weak against Russia's energy sector. The main setbacks involve components and Western goods entering through third countries like Kazakhstan, along with the use of a "shadow fleet" of tankers to circumvent restrictions.
Capital Economics analysts identified Russia's banking system as particularly vulnerable, suffering from double-digit inflation and steep credit growth. Higher income, corporate, and consumption tax increases have partially offset government expenditure, but rapid debt issuance could lead to steep debt servicing costs in coming years.
New Sanctions and Political Responses
On Tuesday, the UK government announced a new sanctions package targeting dozens of individuals, energy companies, banks, and businesses across the shipping industry. Foreign Secretary Yvette Cooper stated that the 300 sanctions announced on the fourth anniversary of the war represent the "largest raft of measures since the early months of the invasion."
Government officials argue that sanctions have deprived the Russian economy of approximately $450 billion, with oil revenues falling to their lowest level since the pandemic. Energy tax revenues are projected to decline by another twenty percent this year.
International Reactions and Peace Efforts
In a series of interviews, Ukraine's President Volodymyr Zelensky warned that Putin has effectively started World War 3, pleading with President Trump to increase pressure on the Russian leader during ongoing peace negotiations. At Tuesday's Cabinet meeting, Sir Keir Starmer expressed that images of injured Ukrainian soldiers and handcuffed civilians remain "etched" in his mind, emphasizing the UK's duty to "defeat the falsehood that Russia is winning."
"Let's be clear in terms of getting to that just and lasting peace – it is Putin who is standing in the way," Starmer declared. "[Zelenskyy has] taken the lead. It is Putin who is standing in the way. And that's why we must always double down on our support for Ukraine. That means capability. It means resource. It means more sanctions."
Starmer is conducting a series of 'Coalition of the Willing' meetings with Zelensky and other world leaders to discuss deploying armed forces to protect Ukraine's territory after any peace agreement is reached.
