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June 20 2025 - 11:00am
More than three years after Russia’s full-scale invasion of Ukraine and its ensuing economic war with the West, the Kremlin is finally starting to feel the fiscal pinch. Yesterday, Economy Minister Maxim Reshetnikov acknowledged that the country is “on the brink of a recession”.
These comments belie an ongoing conflict within the Kremlin. Earlier this month, Reshetnikov called for a lowering of the central bank interest rate to counter the trend. Central bank governor Elvira Nabiullina, whose steady management has long made her key to Russia’s war machine, has sought to maintain high rates to counter inflation that has persistently run at an annualized rate of 10% this year — far above the target of 4%. True consumer inflation is even higher, with the Kremlin managing the headline statistics through a series of changes to its consumer price index in recent years.
By weaponizing energy supplies following the 2022 invasion, Russia sent global oil and gas prices skyrocketing, while keeping wartime inflation in check. Yet the Kremlin’s coffers have increasingly been squeezed by the cut-off of gas sales to Europe, and Gazprom’s output has gone from being a major profit center to a source of substantial losses.
This has compounded the problems presented by Vladimir Putin’s expanding defense budgets, not to mention growing labor shortages in the wartime economy. Contracted soldiers are paid well by Russian standards and the country’s banks have been reoriented towards financing the conflict, putting a more positive spin on the state’s balance sheet.
Although Russia is now battling inflation, in recent months pressure has grown on Nabiullina to instead prioritize boosting growth. This effort has borne some success: the central bank decreased its base rate from 21% to 20% this month. Other Putin allies are now insisting that she go further, dropping the rate to below 15%, in order to maintain popular support as the war’s costs become harder to ignore.
The reality is that, while Russia is frequently dubbed the “most sanctioned country in the world”, its ultimate economic trajectory remains dependent on its global linkages. Gas profits may have evaporated, but the Kremlin’s global oil supplies continue to fuel its war machine, with 2024 export volumes above their pre-war level. The country is economically vulnerable, but a crisis is unlikely without a change in approach to sanctions.
So far, Western leaders have sought to target the price at which Russia sells its oil, rather than volumes. The key instrument for doing so is known as the G7+ Oil Price Cap, which bars companies using Western financial systems from involvement in transactions where Russian crude is sold above $60 per barrel.
However, this cap has largely failed, with China and India either ignoring or evading it. Meanwhile, Donald Trump has created doubt over US willingness to police Russian sanctions as tightly as under the previous administration. Europe and the UK have picked up the slack by sanctioning Russian “shadow fleet” vessels involved in evading the cap, but these measures have not yet had a demonstrable chilling effect.
Brussels officials last week proposed lowering the price cap to $45 a barrel, but that plan was put on hold shortly afterwards in the wake of oil price spikes caused by Israel’s attack on Iran. That same spike has also given Russia a potential get-out-of-jail-free card for its latest crisis.
If the West were serious about holding Putin to account and supporting Ukraine, it would switch from a policy of limiting Russian oil revenues to one of limiting the volumes of these sales. The problem with this, however, is that it would help sustain higher prices and therefore economic pain for Europe.
The economic war is, much like the battlefield in Ukraine, increasingly one of attrition. Such conflicts are won by the side willing to take more damage to achieve their aims. Russia may be on the brink of recession, but to capitalize on this the West must be willing to take a hit of its own.
