The EU Has Received Evidence Of The Growing Fragility Of The Russian Economy
- 14.05.2025, 10:11
The sanctions are working.
The Russian economy is becoming more and more vulnerable in the conditions of a protracted war and Western sanctions. The report of the Stockholm Institute for Transition Economics (SITE), prepared specially for the meeting of EU finance ministers, says The Moscow Times.
The authors of the report note that despite its apparent stability, Russia's economy is increasingly suffering from internal imbalances and structural distortions. In the short term, it is kept afloat by large-scale fiscal stimulus associated with the country's transition to a "military economy". In the long term, however, this model is becoming less and less viable due to dwindling financial reserves and a non-transparent financing mechanism that distorts the allocation of resources. "The Kremlin claims that time is working for it, but in reality the situation is the opposite," the report emphasizes.
Since the start of the full-scale invasion of Ukraine in February 2022, the EU has imposed 16 sanctions packages hitting Russia's key sources of revenue - oil, gas and coal exports. Sanctions were also imposed by the US, the UK, Canada, Japan and other Western countries. Against the backdrop of these restrictions, Moscow is trying to demonstrate sustainability: according to official data, the country's GDP will grow by 3.6% in 2023 and by 4.3% in 2024.
But as SITE economist Thorbjorn Becker, who presented the report to European ministers, said, the reliability of these figures raises serious doubts. According to him, the Russian authorities underestimate the inflation rate, which allows them to artificially inflate real GDP growth figures.
"They claim that inflation is holding at 9-10%, but then it is not clear why the Central Bank sets the key rate at 21%. No normal central bank operates with a differential of more than 11 percentage points. If any of our central banks did that, its head would immediately lose his position," Becker said. He emphasized that such a high rate most likely reflects the real inflation rate, not the one published officially.
In addition, according to Becker, Russia is facing increasing budget constraints: revenues from oil and gas exports are declining, while military spending continues to rise. Despite this, official statistics record a budget deficit of only 2% of GDP. However, the SITE economist believes that this data is understated, as a significant part of military spending may bypass the official budget - through the banking system.
If hidden financing mechanisms are taken into account, the real deficit may reach about 4% of GDP, says Becker. Such a situation, he said, leads to increased risks in the banking system, and the rapid increase in lending reported by banks could signal an approaching crisis.
SITE's findings were supported by European Commissioner for the Economy Valdis Dombrovskis. According to him, the European Commission shares concerns about the reliability of Russian statistics and recognizes the growing vulnerability of the Russian economy. He said such assessments only emphasize the need to maintain international pressure on the Kremlin to limit its ability to continue its aggression against Ukraine.