Russia's Economy Faces Crisis After Three Years of Conflict

Moscow is currently grappling with the repercussions of three years of war against Ukraine, which have significantly affected its economic stability. Despite initial resilience against Western sanctions, the Russian economy is now showing signs of distress, marked by rising inflation and pressure on various key sectors.

Following the onset of the conflict, the Russian government increased military spending, which initially bolstered certain industries. Reports indicate that the economy saw a growth rate of 4.1% in the previous year, largely driven by the defense sector and improvements in sectors like automotive and agriculture. However, this growth has not been uniform across all industries.

As of early 2025, inflation has surged to 9.9%, a figure acknowledged by government officials. This rampant inflation, coupled with stagnating growth prospects, has led to concerns of stagflation, where high inflation coincides with minimal economic growth. Experts suggest that while the defense sector continues to thrive due to government contracts, many other industries are struggling.

For instance, the real estate market is facing a downturn, particularly in Moscow and its surrounding areas, where demand for housing has dropped by a third. This decline is attributed to the reallocation of state funds, which previously supported housing through subsidized mortgages. Consequently, related sectors such as construction materials and steel are also feeling the strain.

Analysts have highlighted a stark divide within the economy. While the defense industry benefits from substantial government investment, other sectors are grappling with rising costs and a shortage of skilled labor. This disparity is exacerbated by competitive salary offerings in the military sector, making it difficult for other industries to retain employees.

The automotive industry, which had seen a rebound in sales, now faces a potential decline, with projections indicating a 15% drop in new vehicle sales due to increasing taxes and financing challenges. Many dealerships are struggling with unsold inventory, leading to financial instability.

Western sanctions have particularly impacted the oil and gas sectors, which are crucial to the Russian economy. With the recent imposition of sanctions on parts of its shadow fleet, the export of oil has become more challenging. The state-owned gas company Gazprom has reported significant losses, a stark contrast to its previous profitability. The loss of access to the European markets and falling gas prices have compounded these issues, leaving the Russian government with dwindling revenue streams.

While state resources were previously bolstered by the National Wealth Fund, recent conflicts have drained these reserves significantly, raising concerns over the long-term sustainability of the economy. Experts warn that if the U.S. increases its oil production as planned, this could further diminish Russia's economic standing.

In summary, the combination of high inflation rates, a shrinking real estate market, and the adverse effects of international sanctions paints a bleak picture for the future of the Russian economy. As the country continues to navigate the complexities of ongoing conflict and external pressures, the sustainability of its economic growth remains in serious jeopardy.