War with Ukraine is the only thing preventing Russia from entering an immediate recession, economists say

• Russia would be in a recession by now if it weren’t for the nation’s hefty war budget, economists told BI.
• War spending is propping up the economy, which is becoming increasingly overheated, they added.
• But Moscow has big problems on its hands, including soaring inflation and mounting currency issues.

War may be the only thing keeping Russia’s economy afloat.

According to Jay Zagorsky, an economist and markets professor at Boston University’s Questrom School of Business, the Ukraine invasion is likely the only thing preventing the country from slipping into a recession.

That’s because Russia’s hefty military budget is supporting its sagging economy. But that’s a temporary solution for Moscow’s mounting economic problems, he told Business Insider. Dilemmas faced by the Kremlin include spiraling inflation and lingering currency and budget issues.

“The Russian economy right now is being propped up by large amounts of government spending, so there’s not going to be a slowdown in any sector in the economy that the Russia government is buying supplies from,” Zagorsky said, pointing to Kremlin purchasing uniforms, boots, ammunition, and food as part of its war efforts against Ukraine. “So if there was no war, oh yes, I think there’d be an immediate recession.”

While the war continues, the timing of a downturn is uncertain, according to Yuriy Gorodnichenko, an economist and professor at the University of California-Berkeley who also sees trouble ahead for Russia.

The nation is reportedly setting aside a record 13.2 trillion rubles for its defense budget next year, which should help stimulate its economy. However, that kind of monster spending can’t continue forever, Gorodnichenko said.

“With the government money, they can keep the economy afloat, but at some point the government is going to run out of money, so they’ll have to stop, and they’ll have a recession,” he added.

Moscow’s economic issues

There are many red flags waving inside Russia’s economy.

Inflation is one of the biggest problems, Zagorsky said. According to Russia’s official statistics service, consumer prices climbed 9% year-over-year in August.

Yet Zagorsky speculated that inflation could be running way hotter than that. The Bank of Russia hiked rates to 19% in September — the highest they have been since the Ukraine invasion began — which prompted central bankers to take emergency policy moves.

“It suggests to me that inflation might actually be really higher, and they’re a little bit underreporting,” Zagorsky said, pointing to the Soviet Union’s practice of understating its inflation numbers during the Cold War.

Russia’s economy is also being plagued by currency problems, Gorodnichenko said, pointing to Russia’s limited access to the dollar as the result of Western sanctions. That’s crimped Moscow ability to trade, especially for its oil and crude products, which make up a significant portion of its total revenue.

Russia has turned to alternative currencies, like China’s yuan, to bolster its balance sheet and keep trade humming along. But now even the reminibi is in short supply, with Chinese firms increasingly hesitant to do business with Russia in fear of being targeted by secondary sanctions from the US and other Western states.

“Russia is making fewer sales to China, or receiving less for whatever volumes, physical volumes they send to China. All … are contributing factors to economic problems in Russia,” Gorodnichenko said.

Previously, Gorodnichenko predicted Russia could see a severe recession in the next year if the nation ran out of dollars.

It’s unclear if that will happen in the next year, he said, though he noted that the nation’s oil revenue has dropped as military spending has climbed. That’s partially been a result of crude-oil prices falling globally.

“Russia is not only facing a reduction in demand for its product, but a rather dramatic fall in the price. This is kind of a double-whammy,” Zagorsky said. “To me, it’s a pretty simple story. The question is how long can the Russian economy keep going in the face of these big headwinds?”

Neither Zagorsky nor Gorodnichenko could say concretely when a recession could start for Russia. That will ultimately depend on how long the war in Ukraine — and therefore, spending on the war — will last.

Gorodnichenko is keeping a close eye on whether Russia will further raise the signing bonus for recruited soldiers. He says that if it does increase, it will be a sign that the nation is both running out of workers and that its economy is overheated.

“At some point, they will have to make critical decisions — very unpopular decisions,” he said.