Bonus Episode: The Russian Wartime Economy (Live Event Recording)
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Welcome back. I'm Max Bergman, director of the Stuart Center and Europe-Russia-Eurasia program at CSIS. And I'm Maria Snegovaya, senior fellow for Russia and Eurasia. And you're listening to Russian Roulette, a podcast discussing all things Russia and Eurasia from the Center for Strategic International Studies.

The Russian Wartime Economy: From Sugar High to Hangover. That's the title of our new report here at the CSIS, Europe, Russia, Eurasia program. You can go download it now at CSIS.org. And we're here to discuss the findings of that report and to discuss Russia's wartime economy and how Russia is doing economically and how it can sustain or maintain its current war effort.

And with me to discuss this report, we have three excellent panelists. First, I'm joined by my dear colleague, Maria Snegevaya. Maria is a senior fellow here on the CSIS Europe, Russia, Eurasia program, and it was the lead author on the report.

Additionally, we are thrilled to be joined by Alina Rybakova. Alina is here with us in the studio. She's a non-resident fellow at the Peterson Institute for International Economics here in Washington. Additionally, she's a non-resident fellow at the great think tank Bruegel in Brussels and also the director of the International Affairs Program and vice president for foreign policy at the Keeve School of Economics. Alina, thanks so much for being with us.

And last, but certainly not least, is Vladislav Inozemtsev, who is currently this morning or this afternoon in Bulgaria. Vladislav is an expert at the Center for Analysis and Strategies in Europe and is also the director and founder of the Center for Post-Industrial Studies in Moscow. Vladislav, thanks so much for being here with us. Finally, I should note that this event was funded by the Russia Strategic Initiative

of the US European Command and the views expressed in this event do not necessarily represent the views of the Department of Defense or the United States government. Needless to say, we have three fantastic experts with us on the Russian economy and it's gonna be, I think, a really fantastic discussion. So let's jump right in.

We are going to get into the kind of details of this report. But before doing so, I kind of want to set the stage. As Russia was approaching its full-scale invasion of Ukraine in February 2022, Alina, maybe I could start with you and then turn to Vladislav.

Where was the Russian economy? How was Russia postured before its full-scale invasion? Because the invasion, when it happened, it seemed to catch many attention.

off guard inside of the Russian state, including in the economy ministries and in the Russia Central Bank. So how was Russia postured for this war in Ukraine? Also remembering that Russia, I think, did not expect this to be a long, attritional fight that it's currently fighting. So where was the Russian economy as we approached the full-scale invasion? Alina, maybe start with

Well, great to do this sort of stage setting, fantastic idea. Why? Because there was the first war to begin with, right? There was 2014 when there were the little green men which were not there and then it turned out to be there and then actually did the great wonderful thing of helping separatists in the region, right?

So after that, Russia had experienced sanctions for the first time in recent history. And it was also sanctioning, at the time, a rather large integrated economy after 2014. So I think the most important lesson that Russia took away from 2014, that they need to insulate themselves from potential future sanctions. And they want to go further, maybe in some ways isolate themselves.

Some of the measures that were so taken in 2022 were already telegraphed in 2014. Already then, the risk of SWIFT was discussed, as well as SDN of the largest banks and many other measures that were taken subsequently. In SWIFT, the financial transaction mechanism to exchange...

- Information, absolutely, sorry. This is the messaging system. So if we transact and I send you money and back and force with the banks, the banks have a way of recording that information in a coherent and sort of standardized way, which is very useful for all of us, right? So exactly, some of these measures were already discussed then, which allowed time for Russia and Russian institutions to prepare.

So what happened by 2022 is we had a little bit almost like a fortress Russia that we were talking about. And I remember we had very heated exchanges with Mario on that. And it's wonderful. Sometimes we agree, sometimes we don't disagree. But the problem was that we needed to look at that country with open eyes, that they really came prepared.

So this is one aspect. Another very big aspect to me, and in some ways I also take it personally, we had a lot of technocrats, very liberal economists working in the current regime. After 2014, you know, there was opening of the Russian Eurobond market to the international capital markets sort of around that time, right? There was sort of influx of foreign investors.

And I think that gave a false sense of security that somehow this liberal part of the economy may also influence politics, that not everything is lost, you know, that maybe there are some liberal parts of the political class that are still open to the international integration, maybe a bit more cautiously, but they're willing to embrace the orthodoxy of the IMF and do all this. When in reality, everybody was fooled. The joke was on us as much as on them. They just

all realize that they're just like a little useful tool within the bigger geopolitical machine that actually wants to eat up its neighbors. And I think there was a huge disillusionment. That's what you were referring to. There's also a surprise to many of these technocrats within the regime that, wait a second, we are not the signals of potential hope for liberal regime in Russia. We're more like sort of, you know, useful pets that are kept to keep this regime going and be stronger.

Vladislav, maybe I could turn to you. I mean, one of the things that sort of struck me about Russia's, I don't know about its preparations before the full-scale invasion, but it seemed very disciplined from a fiscal standpoint, embracing austerity, not overdoing a lot of its domestic finances. How would you sort of elaborate or do you agree with Alina's assessment of where Russia was approaching the war?

Partly. In general, yes, it was like this and the Russian economists and the economic bloc of the government really started to prepare. But of course very few of them, or better to say no one, expected the war as it happened in February 2022. And so therefore I would say that

even while there was a lot of other preparation measures, like for example the National Wealth Fund get rid of dollar assets in summer 2021 and this was one of the once again preparatory measures. But nevertheless, my opinion, my assessment is that the Russian economy was

in general not very good prepared. The reserves were still in Brussels and they were arrested there. They didn't have any kind of, I would say, measures, countermeasures, which would prevent Rubel from devaluation, which happened in the first three weeks of the war. And so my point is that the liberal part of the government, these technocrats,

they faced an enormous provocative challenge for them just to keep the economy running in such harsh conditions. And for them it was not only to support the regime visually, it was also about to resolve the questions and tricks which to them were actually

can come once in a lifetime. And so when they did this, when they managed to take the Russian economy through all these big problems in summer 2022, when the ruble rose to $50 per ruble,

versus '78 when it was before the war, when they sealed the capital outflows, when they stabilized the price rate, the price hikes, this was enormous, enormous achievement. So my point is that

But nevertheless, the adjustment of the Russian economy to the war conditions went on and on until, I would say, the end of 2022. Because in September, another shock came in with mobilization, because for this one, the central bank and the minister of finance were also not prepared. And if you look on how, for example, the military was paid between February and September,

it says to you that they were not prepared. They were actually hoping to wage the war paying 42,000 rubles for contract soldiers. And only after mobilization, the hike was to the wages were reason, have been risen to 200,000, 195. So this was enormous number of

I would say, situational decisions and situational actions. And only by the end of 2022, I would say, the contours of the new economy arose.

Really interesting. And I think it's clear that they were caught off guard, in particular in the European response, where leaving $200 to $300 billion worth of central bank assets in Euroclear, a Belgian financial institution, just sort of sitting there and not expecting that to be frozen. Maria, let me bring you in. It seems that

the Russian Central Bank, the Russian economic technocrats caught off guard. There was a really strong bouts of Western sanctions beginning in 2022.

But it also seems that there was a countervailing increase in fossil fuel prices, which probably which definitely benefited the Russian economy. How do you see Russia's reaction to the war? How would you assess how it reacted in that kind of early 2022 period?

Yeah, and by the way, you can still see that there's a lot of discussion among the economists about what actually happened, and it's even harder to predict what's going to happen. But I think both Ilin and Vladislav are right in that sense that indeed Russia was transitioning towards a fortress Russia situation. Putin in particular has been obsessed with this idea of import substitution, Russia being able to survive through its own production.

not very successfully achieved, but nonetheless Russia was trending in that direction. But Vladislav is also obviously correct that Russia did not anticipate the strength of the sanctions. And while everybody is used to criticize sanctions, they never deliver as we wish. Nonetheless, it's also clear that one of the most efficient tools was the freezing of the foreign currency reserves of the central bank, which lost the ability to control the ruble. And obviously at first, and that's exactly what our report describes,

Russian economy would basically in a disarray in some sort of maybe small free fall with people rushing to purchase dollar because the instinct reaction of any Russian citizen in any unclear situation purchase more dollars. And authorities trying to stabilize the system, raising interest rates in particular, selectively applying currency controls in order to keep the currency inside of the country and prevent currency flight.

But as we show in the report and as Vladislav flagged, over some time, partly because Russia has a very professional macroeconomic team, which for some reason chosen the evil side of history, the economy has been able to adjust. And for the lack of the foreign direct investment basically, and that's the key kind of change in the economy,

the drivers were substituted through state led investment which convincingly for the Kremlin coincides with the needs to boost the military industrial complex. And basically that's the key driver in combination with conflict inflated oil prices which also reinforced by the import cutoffs which were partly a result of inflation basically a lot of the part of the result of the sanctions a

allowed the Kremlin to accumulate more currency inside of the countries despite those other foreign currency reserves that were frozen by the sanctions. So the subsequent development unfortunately somewhat offset the original impact of the sanctions. But at first, as we know, this new model worked and Russian economy grew somewhat artificially primarily through this

huge amount of money that the Kremlin pumped into the economy. But again, as we show in this report, lately the situation is changing. We are right now at the stage where Russian economy is changing again and the growth is slowing down significantly, while Russian economy grew quite substantively in the first couple of years and stronger actually than many Western economies, which by the way is typical for the countries at war.

Now the growth is slowing down, and we see that the regional effects of this military Keynesianism that the Kremlin implemented are now currently dissipating. MR ZELTAKALNS: I want to turn to that in a minute, but maybe we could sort of summarize kind of where – how Russia got through 2022. It seems that the sanctions caused a real shock. There were other major disruptions to the Russian economy.

the increase in oil prices and fossil fuel prices caused essentially a shock absorber and also then the transition to the state then unleashing its kind of fiscal capacity to invest in the defense industry, as well as then China and others figuring out that they can, that Russia can circumvent sanctions by going through China and other avenues. Is that how you see it, that those three kind of components sort of helped

kind of Russia sort of both get through 2022 but actually experience economic growth um well yes definitely in the Russian um oil dependence is both a blessing and a curse it's a huge weakness which I think the Western sanctions are yet to tackle fully but it's also strengthened the sense that every single time the the criminal starts a conflict it boosts the prices and

It's not necessarily limited to Kremlin-started conflicts. Right now we see the same dynamic with Israel and Iran. And so in some ways it's beneficial for Putin to start new wars because it improves the budget situation, which is sort of unfortunate scenario. MS. Well, I absolutely agree. I think we – you discussed all the key factors accurately. I also want to focus on the oil part because it was a huge present.

So we had a debate about whether and how to sanction Russian energy exports. Europeans have stepped up very forcefully. But unfortunately, in the G7 coordination groups, we started going for this oil price cap, which was very imperfectly in the end implemented and enforced.

That didn't come into force until '23, but the whole discussion around it created a huge terms of trade positive shock for Russia. We had, as Maria correctly pointed out, we had Russian current account surplus more than 230 billion. This is not too far from the 300 or so billion of arrested reserves. So basically they got back what they needed almost just in a year, which they very smartly and swiftly used to support

support the economy. That was a huge present. If you were abstracting from anything else going on, you tell me, oh, a Russia analyst, what happens if the world price goes up so much? Current account goes up this much? I'll say they have fantastic growth. The fact that they had any contraction, I think that was a miracle.

Yeah. And part of, I think, the issue was also that the United States and the global economy writ large, Russia, I believe, is roughly 10% of global oil supplies. And there was a real fear that if you suddenly took Russian oil off the global market, it would cause a global economic catastrophe as the world is trying to recover post-COVID.

And I think that was part of the White House thinking and led them to tamp the brakes. But Alina, you want to push back? I think that was part of the marketing around the discussion, which some of it is true. There is a way marketing works because I usually pick up things that are true and then you expand on them. But I think they're also down the line political issues. Let's not forget we had relatively high inflation globally in Europe, but most particularly in the U.S. We had midterms coming up.

And I think that was the big driver, that the price of oil at the pump, the gas at the pump will affect midterms. I think that was a very important driver of this decision making. Yeah. In Europe, they did an oil embargo in the spring of 2022. But Vladislav, maybe bring you back in and how you saw the situation then.

Look, I see it in the same fashion, but I would add that of course the West was able at the time to introduce much more significant sanctions which it didn't. For example,

It was up to the Western countries to disrupt the whole internet system in Russia and internet providers, just to disrupt the whole financial system as well as the system of immediate payments in Russia also.

But this was not done. Nothing was done actually for switching out all the Western software for Russia, which also was possible. It was done nothing until the end of 2023. Moreover, I would add that the idea of arresting the Russian reserves

was of course a beautiful idea, but nevertheless one should understand that for the operations inside Russia it didn't matter so much because part of these reserves were of course the National Wealth Fund which was used by the Minister of Finance to stabilize the budget and to cover the budget deficit. But if you arrest

the physical money on the accounts in Brussels, it doesn't prevent the Minister of Finance from selling this particular money to the central bank for rubles and to finance the deficit as it was before. So my point is that the sanctions which were celebrated as the most harmful for Russia were not so much harmful actually. The more important problem might be the

cutting off the imports into Russia, the imports which were crucial for the Russian Federation at the time. But the sanctions were targeting only dual-use products or the military equipment or something like this, and the Russians responded by the early March of 2022 with so-called parallel imports, and the West did nothing against it.

So, you know, companies like Apple may say that, yes, we are not trading in Russia, we close our office, but their devices were sold all the time. And the next day they appeared in New York premiere. So anyway, the problem is that to my mind, it was much more important to close

the ways of smuggling Western goods into Russia than to fight the Russian oil exports because you can have money, but if you can't buy anything on this money, it doesn't matter. Yeah, this, I think, was the phenomenon of suddenly huge increases of washing machines and other

goods with chips in them going to countries that were sort of adjacent to Russia, Central Asia, and then coming across the border and likely being used in some of Russia's missile technology and other systems. I want to now turn to the report.

Again, the Russian Wartime Economy: From Sugar High to Hangover, authored by Maria and then two of our colleagues, our associate fellows, Nicholas Fenton and Tina Dolbaya. And Maria, maybe you could outline some of the methodology in the report, and then we'll sort of break it down and go through different parts of it. But maybe you could…

could kick us off by talking about it. ASSISTANT SECRETARY ZEVA: Yeah, absolutely. Well, the key approach was using – obviously relying on existing statistics that comes from Russian regulating agencies. There's a lot of, say, uncertainty about how good the statistics is, but we looked into that, and most of the analysis to date generally agrees that

Russian macroeconomic statistics is still more or less reliable. And of course, the other key element of our analysis was interviewing the esteemed experts like Vladislav and Alina here who were extremely instrumental. I will argue though that

There's a lot of disagreement among the economic colleagues as to what's going on with the Russian economy. Some say it's doomed and it's about to collapse. Others say it can last forever. And basically, we had to obviously to make our own conclusions about what's going on. Last but not the least, we also came up with a series of scenarios, which is one of the major contributions of this report.

conditional on the Western sanctions going forward. I think it's very important to flag, as Vladislav said, that part of the maybe low impact of the sanctions is actually by design. And I think it's very important to keep in mind when we talk about how sanctions did not deliver, it

it's important to remember that they were sort of meant to deliver perhaps less pronounced blow, particularly to Russia's oil and gas revenues than perhaps we hoped.

And we actually, with that in mind, make several predictions going forward as to where Russian economy may find itself in a couple of years. We forecast the status quo scenario. Things remain more or less the same. And what it means for the war is that Russia, unfortunately, is able to continue the war more or less at current scale. And besides that, is able potentially to even implement a small hybrid operation, which is, I think, particularly important in light of the new forecasts about, you know, green man. Mm-hmm.

in somewhere in NATO countries. Another scenario is partial sanctions lift against the backdrop of the ongoing peace talks and the offer coming from the U.S. administration to perhaps lift some sanctions on Russia. The key takeaway there is that it's actually not as likely that Russia's macroeconomic situation is going to be likely impacted by sanctions lift. We can discuss that a little bit more.

So that the lifting of sanctions may not significantly improve Russia's economic conditions. Because, first of all, the radical change that Russian economy underwent over the last couple of years is too pronounced to be altered by the lift of the sanctions. There's new winners of this new status quo who are going to be resistant, like the new businessmen who received the Western assets left in the country.

And also the obviously the investment climate in Russia will remain highly uncertain and unreliable for at least as long as this regime is in place. If not more than that so that's unlikely to be attractive to Western companies. And third scenario is reinforcement of the sanctions with particularly keeping in mind precisely what Elena and Vladislav flagged perhaps going after the oil revenues that Russia still accumulates

legacy of the shadow fleet there are ways to do it so it's not right to believe that we it's law the battle is lost and everything um is impossible like basically impossible no indeed there are ways to reinforce the current sanctions design Russian budget still is 30 percent at least dependent on oil revenues and there are ways to reinforce them potentially allowing also Ukraine a little bit of the leeway on the front line because the less resources the Kremlin has at its disposal

the less damaging – few – less damages can incur in Ukraine. MR ZELTAKALNS: Maybe we could – we'll sort of pick apart some of the aspects of the report, and maybe we could start by talking about the wartime Keynesianism that is described in the report, that Russia is currently sort of undergoing to investing a lot of state resources in building up the Russian defense sector.

and also paying significant amounts of funding or funds to both recruit individuals to fight and then also those that are casualties of this war. Alina, maybe you could describe what is how, you know, we talked about how Russia got through 2022. It then had to shift its economy in 2023 and 2024.

How would you describe the kind of military Keynesianism that right now is taking place or would you describe it that way?

I will describe it this way with one big caveat. If money comes out of the ground, it makes your life much easier. So the way we think about sort of traditional monetary mechanisms is where you sort of have a traditional economy, you have to produce something for domestic consumers, you have to produce something for exports, right? And then suddenly you have to eat it away and increasingly produce tanks, right? So then you're eating away from your ability to produce consumers, you're eating away from your ability to export and get export proceeds and revenues, and therefore you have this very

stark choices to be made. Where are you going to direct your economy? Well, if the money is coming from the ground, it makes your life so much easier. And if the money is not only coming from the ground, but most other your sort of adversaries are more timid about imposing difficult measures on this money and they're willing to continue transacting with you. If you remember the oil price cap, it has two objectives, keeping Russian oil on the market

and reducing Russian revenue. Sounds a bit like having a cake and eating it too, right? And then, you know, so the first objective, I always look first, which one's the first objective? The first objective is keeping more Russian oil on the market. And I think that's where we left a lot of space, policy space for Russian authorities to turn to this military Keynesian much more successfully than in some of the other cases. And then just very quickly,

And I'm sure we'll talk more about it, about the chips that you mentioned, right? I do recommend strongly to everybody to go and look at the testimony to Senator Blumenthal or their committee. It was, I think, Texas Instruments, AMD, Intel, all testifying there. So for those of you who have seen them, thank you for smoking. That probably will be entertained especially. Basically, they all have to testify, and they come up with these stories that Russia is taking chips from toothbrushes.

for sonic missiles. Imagine what the toothbrush will do in your mouth if it goes rogue, right? So, but it just tells you how little enforcement we've actually managed to do because these companies are still exporting enormous amounts of chips to Russia, even directly. Russians don't even need to rip apart the washing machine or toothbrushes because they're getting them indirectly, oftentimes via China. And these companies don't do the due diligence necessary to be able to stop it. So in a way, it's like we pretend that it's not happening.

We pretend we don't know, and therefore we sort of have the excuse. Vladislav, let me bring you in here both on the sanctions component but also on the wartime Keynesianism being pursued by the Kremlin.

Look, if to add something about this pro-Keynesianism, I would say that actually the war production, the military production doesn't affect a lot the Russian export capabilities. Because if you look on the ferrous metals, on steel, for example, so the increase in tank production and artillery production and even shells production

accounts for around 3.5% of all steel produced in the country.

So it doesn't affect exports. You shouldn't say that because of increase of military production, Russia is unable to export as much steel as it exported before the war. It's just peanuts for the Russian economy. The second point, which is also important, is that besides of financing the major industrial complex, the Russian government started to finance, as it was mentioned already,

the mercenaries which now compose the Russian army. And this inflow of money is really enormous. Between the mid-2024 and nowadays, between mid-2025, it was at least 4 trillion rubles. It's more than one third, around one third of military budget goes directly to servicemen, both as wages

and as death gratuities. And this actually affects the Russian economy very much because this money, they don't go from one enterprise to another enterprise and they are not still stolen by the officials, they are going directly in the pockets of the people and

then transmit to the consumer market. And this is also a very strong incentive for consumer industries to flourish. Service industries, consumer industries in Russia and so far

So therefore, I would say that two major elements of Ganesanism is one, the financing of the military-inductive complex and the second, very important, which wasn't the case, for example, during the Second World War in the United States, because at that time, the military production accounted for around 85% of expenses and the salaries just were 15%. In Russia, it's much bigger share, which goes directly to the people and this keeps people

I would say, convenient with the war. Because in recent months, I should mention, many regions just lowered the premiums for the signature of the contract with the Minister of Defense, because there is more than enough people to compensate for the losses. And so this part of the economy can be kept running for maybe not years, but quite a lot, quite significant time. And so this is...

Quite important point. And once again, I should stress because of this, because of this, the Russian wages

overall economy increased quite significantly because of the competition between the Minister of Defense and the military-industrial complex for the people and the rest of the economy. This is a very important issue. I would just mention one number. Between 2012 and 2021, the share of wages in Russian GDP declined from 45% to 38%. In Europe, it's 60 plus. It was very low

rate, very low part of GDP, which was created by wages. Now it is back to 45% in three years. So it's a huge change in trend. Russian economy is more and more based on wages which the people are getting and therefore it will be much more stable

on the one hand in tax issues, because 2024 was the first year ever when the income tax collected was bigger than the VAT, sorry, bigger than the profit tax for the first time ever. And also the consumer market is stabilizing just because of the constant demand from the people.

That's, I think, a fascinating point, the amount of money being sort of injected to effectively the Russian public and oftentimes probably the

the more disadvantaged parts of Russia getting this sort of windfall of funding and money, which, yes, is being in some ways it's blood money and people are being forced to or being volunteering to go and fight. But that is having real economic benefit is leading people to feel that their lives are better off. But it does seem that that is having also an inflationary effect as as well. And Maria, maybe you could talk a little bit about

Some of the challenges now to this

military Keynesianism that Russia has – is pursuing both – well, I think ticked through it on the inflation labor, and I want to get back to the kind of oil price cap as well. But maybe on the inflation we could hone in there. MS. And two points to the previous conversation, actually, to your point about blood money. Vladislav has come up with a brilliant term, I think, "deathonomics" -- MR. Of deathonomics. -- to describe the current situation in Russia, and I think it is really true.

Another point is that I think we forget to mention often that Russian economy is very much a leftover, like hybrid from the Soviet times, which includes a lot of rural residents, rural areas and also smaller towns. Previously, the strongholds of the military-industrial complex during the Soviet times, which stagnated during the early post-Soviet years, and one of the reasons why the liberal reforms were unsuccessful, and partly the

reason for the failed Russian pro-Western modernization. The peace dividend impacted Russia as well. Yes, exactly. And now all these areas suddenly are revived by this basically Russia reverting back to the Soviet style, like very, of course,

not fully, but at least in part, going back to its historical norm. And that is actually quite welcomed by these groups of people who otherwise missed out from the transition period. And that's one of the reasons for resilience, I think, that we often forget to mention. But of course, that is not a cost-free situation. And Vladislav has described the situation with a lot of people with money.

and not sufficient capacity of the economy to basically produce resources, goods, to satisfy the demand. And as a result, we have inflation that's accelerating. It's about 10% at this point. It's not crazy compared to, for example, Turkey, where at some point it was at 60%. But, of course, by Russian standards and by central bank standards,

requirements is actually at least twice more above the target and over the last months the central bank has kept its key rate quite high at 21 percent trying to slow down the economy which by the way it's been able to achieve but it's unclear whether it's been able to slow down the inflation we just got another report like another statistics coming from Russia actually showing that the inflation is still pretty high

So it's very hard to manage the situation when you have a lot of people with money and you keep pumping the money into the economy, and while your economy is hidden, it's natural, basically, limits.

That is the problem that the Russian Central Bank faces. There's labor shortages, too. Unemployment is at historical, like, lowest, at the historic bottom. It's about 2%. And basically the Russian economy is at potential in that sense. You can't really, there's huge competition between business industries and the military-industrial complex for

labor for free hands available and basically apparently it's relatively easy to find a job. Although my Russian colleagues I talked to still think, still complain about this situation. Then of course there is also high dependency on China. Oil revenues were already discussed. Russia continues to be highly dependent on influx of foreign currency into the country.

And there's also a lot of talk about credits that the companies have taken, also some individuals that potentially can create some very problematic scenario, especially as the central bank keeps the key rate at this current level. Slightly decreased recently from 21% to 20%, but it's not going to do the trick.

So altogether the central bank and the Russian macroeconomic team is trying to make sure they're still able to control, to get hold of this new reality. But it's not fully clear to most analysts to what extent they are successful at it.

by keeping the key rate very high despite the state continuously pumping up the money into the economy, they have been able to achieve economic slowdown. In fact, we know that in the business industries and private sector there was a decline already for several months

since actually mid-2023. But recently we also see the decline in the manufacturing industry as well. That means that the military industrial complex is also starting to now sort of slow down. But it hasn't yet converted into the inflation, and it's also unclear how sustainable the situation is

for the Kremlin if the economy is actually declining. It's not something that they want either. That all has been unraveling in the first quarter of this year against the backdrop of generally bad macroeconomic situation internationally because of the trade wars between the United States and China. There was a decline in oil prices. Right now the situation has been reverted.

between because of the conflict between Iran and Israel. But it's very unclear what's going to be and in general Russian macroeconomic team seems to be quite concerned. They already started revising the budget with the low oil price. Yes, now they have to revise it back. But in general, we can see how actually dependent they are on the general macroeconomic situation in the world.

Maybe let's break it down. It's a fantastic overview. On the inflation side, I mean, how big of a concern is this right now if you're in the Russian central bank? Is inflation kind of at the top of their mind? Well, I would step back and think about Russian war economy as a bubble economy. So we all remember the global financial crisis, right? Any bubble is problematic. Greenspan was saying nobody wants to prick the bubble, right? And the bubble is problematic not only because it has macroeconomic repercussions,

repercussions, which Maria wonderfully has described about inflation, misallocation of resources, misallocation of capital, labor, then the economy also hitting the natural constraints. And we see that manifested in inflation and very low unemployment rates.

But we also see it in revenues. Some of the revenues we see now, people forget. During the bubble times, you will have higher corporate income tax. You will have higher personal income tax. By the way, personal income tax is beginning to come off substantially this year, as well as some of the corporate income tax as well. So you think you have good budget, but suddenly you actually don't have good budget at federal and at the regional level. And also bubbles have problems with the social economic issues, right? Yeah.

hopefully will publish soon enough at the Peterson, we're working on the regional sort of convergence. You know what Vladislav and Maria talked about, sort of the suddenly you have the social lift, this morbid, this economic social lift for poor regions. Well, that will also come to an end when the war economy ends.

So it's not just inflation. If you're sitting in a central bank, probably you keep on tweaking, you will have high rates, you will have the situation where you have a large share that goes at lower subsidized rates or some special arrangements between the budget and the procurement, a military industrial complex.

That you probably can manage in the near term, but you're sort of going more and more, you're sort of cornering your economy more and more, and you have the problem where not only you have high specialization where you're exporting oil to oversimplify things, you're now only producing tanks. So basically it used to be what was it, gas station, you know, but now that's gas station is now producing only tanks.

So you have a very difficult situation to unravel that when and if this specific war, Russia decides to end, maybe there will be others or they will have to spend money to restock. They might have difficult times going to the export markets. You know, somebody could say, well, they're producing now for the war. The war ends, they will go to the export market.

Other companies will probably capture these expert markets, and also they will see what's happening in Ukraine, what's happening now in Iran and Israel. Iran is not quite no limits, but I remember what was the partnership document they signed with Russia.

Nobody's helping run at the moment from Russian side. Some of their defense systems are Russian, and they're clearly not showing themselves very well. So many people in the export, India or China, will say, you know what, do we really need you on the export market? So the big bubble will be sort of like an elephant in the room going forward.

And just very quickly, we've done a lot of work at Kiev School of Economics and looking at the clusters, exactly what Maria was talking about. And I strongly recommend anybody to reread Kotkin, you know, about this Armageddon verdict and other publications that he's done. Stephen Kotkin's great book about the collapse of the Soviet Union. Absolutely. Ten times on Rust Belt, I think is how he described it. Exactly. And now when we look at these regions, these are the same regions.

Basically, these are the same regions and there is huge concentration. And if you look at the Russian military industrial complex, they're all sort of conglomerates. They're all like chai bowls. You know, they're literally dominating each part of the production. And if you look at the history, every few years they have to be refinanced because they're not profitable.

And now with the removal of the profitable export markets, they're still having problems. You'd think there'd be so much money thrown at them and yet they're not profitable, right? So that will hang on the economy way beyond inflation. These are structural issues that will stay.

Yeah, the Russian arms exports, Russia was the second largest exporter of weapons after the United States. And now I think they've fallen significantly. France has overtaken them. But also countries like Turkey are looking to kind of consume some of the former Russian export market. But Vladislav, I want to bring you in here. Alina sort of brought the specter of the 2008 great financial crisis

where there was essentially lots of bad debt and money floating out there and everything seemed fine until suddenly it didn't. Do you see financial problems, a potential financial crisis? How would you sort of assess Alina and Maria's assessment?

Not yet, I would say. Because, yes, of course there are real problems, because the government should refinance the debts from the military-industrial complex.

And not only to refinance the debts, it should compensate the interest rates because for years the loans to the military industrial complex and also the private mortgage loans which were disbursed for the Russian citizens till June 2024, they are very highly subsidized. And the government, it seems, should repay around 1.5 trillion rubles a year these days just to compensate

this interest rate, the low interest rates.

But at the same time, I would warn about some kind of apocalyptic forecast because the amount of the Russian war economy or military economy is not so big, so huge as it was, for example, in the Soviet Union. In the Soviet Union, by 1986, it was just around 22% of GDP produced or somehow connected to the military-industrial complex. Now, I think it's much less.

on the one hand, and on the other hand, so all other branches of the economy are doing much better than they were doing during the Soviet times. Soviet Union was unable just to supply itself with wheat, and now Russia is a food exporter. So this is not directly

direct comparisons to be made between the Soviet Union experience and today's Russia. Moreover, I would say, even if you look on some kind of adjustment, after war adjustment, and if one takes, for example, the United States after the Second World War, after the war in Korea,

It's also not the case, because I should remind you that the deficit of the federal budget of the United States in 1943 was 26.3% of GDP. Russia's deficit is 1.5% these days. And so the military expenditures were around 41% of GDP in the United States in 1944 and 1945. Russia is now around 7.3%.

So the adjustment, which definitely will come after the war ends, would be much milder than it was in most of the countries which were engaged in huge wars. Moreover, the last point here I would say is that Putin actually outlined some kind of tactics for a possible period when he came in February 2024 to the Luhansk-Gonzalvort

and talk to local KGB people dressed as workers, then he will assure the full financing of military orders for at least five more years after the war stops, because Russia should somehow compensate the losses

which were made during the war. Putin doesn't want to modernize the Russian military force. He wants just get more tanks, maybe a little bit modernized or newer tanks, but nevertheless, he will restore the army. And moreover, during the war times, he increased the number of personnel in the Russian army with his decrease three times. And so if you look on the

official number of the military personnel in the russian art forces it's exactly which it is now and so i doubt that if the war ends if the war stops it would be a huge wave of demobilization maybe he um

would make his choice for keeping people inside the army, paying them a little bit less, but nevertheless it's not a big problem. If the people are not killed, they can be trained and they can form a very effective mercenary army, like a huge Wagner of half a million people. And so therefore I wouldn't say that if the war stops, it would be immediately,

some kind of no uh how this uh called uh there would be a crisis yeah crash landing yes it will not be the case and how would you describe the Russian banking sector uh is it well capitalized or is that an area of potential weakness um how would you is there is there a potential financial risk there

It's for me. Look, I would say that the Russian banking sector is like in some sense it's like a black box because now you have a huge inflow of funds into the banking sector because people are putting their money into bank deposits in growing numbers.

the amount of bank deposits held by private people doubled actually in Russia from late 2021 till now. And the same dynamics have been shown by

deposits which are held by enterprises. So there is a lot of money inside the banking system, but the banks are very cautious to lend them into some kind of business projects because

I would say the biggest challenge for today's Russia is not the war, it's not the peace, it's uncertainty. Because if you cannot make your decision either to invest or to keep money in some, you know,

AAA in the Russian sense, assets like Russian treasuries, this is a problem. You don't have a feeling of perspective. And this is what the Russian bankers, all of them, are talking when you talk to them. This is the biggest obstacle for growth in financing, for releasing the money into investment. No one knows what will happen next.

And of course, if you look on the events which unfolded this year, you can see that every friendly call from Mr. Trump to Mr. Putin pushes the stock market up and the ruble also up, the dollar down. There is a lot of optimism for some days, maybe weeks, and then it goes back. So the Russian economy anticipates peace and it hopes for peace.

but there is no peace inside. So therefore, I wouldn't make any prediction about whether the money which is now deposited in the banks will flow into investment. It will happen next day after some certainty will be delivered about whether the war ends or it continues.

Maria, maybe I could turn back to you to talk about some of the labor problems affecting the Russian economy. It strikes me that

They have all sorts of challenges with a declining population, but then also a massive war effort taking young men, putting them on the front lines. Maybe you could talk a little bit about the labor challenges facing the Russian economy. Absolutely. Russia faced demographic crisis already before the war. In fact, I think an argument can be made that one reason why the war started, and Putin's constant talk that he's just reintegrating Russian speakers or Russians, quote-unquote, in Ukraine back into Russia, is demography.

They actually realized that instead of rather than stimulating birth rates, it's much easier to just annex, you know, territories. And the Crimea annexation alone has boosted the Russian population by far higher number of people than previous demographic stimulation measures.

But indeed they face a big crisis. The war has accelerated it because primarily the key groups who were already an issue for the regime, younger generations, right, they either fled the country, about 600,000 people left since the start of the war, or they are now fighting in Ukraine.

In that sense, it's actually much harder now, obviously, to envision Russia's future from the demographic perspective. Clearly, it will be even worse now, although I bet Putin probably points fingers to Ukraine, saying in Ukraine the situation is also not great.

But Russia is in a lot of ways through this current dynamic destroying its future, right? Not only does it take resources, burst resources from the future, investing them instead into this death economy, but also it's taking resources from the future by killing the very people who were to become Russia's future in the first place.

And of course the state is aware of this problem now even if like sort of doing two opposite things at the same time But there are ridiculous measures intended to stimulate birth rates right now. For example, if you are College students or even a pre-college student you actually get additional money if you're pregnant and go into college So things I don't know it's hard to imagine how this is actually good for

stimulating teenage births, but I guess the regime doesn't really have a lot of other options. So we are really seeing a huge sort of

reversal in Russia's development where you're likely to see this population that's first of all when the war ends is penetrated by many of these people with PTSD syndrome coming back to the country and at the same time teenage girls given birth and you might imagine that's also not investing in human capital in any serious sense.

So in a lot of ways, basically, the Kremlin is shaping a future country that perhaps is more to its liking, but it's clearly not a great perspective for the future. Yeah, I think another factor that I sort of found surprising in this report is that after the terrorist attacks in Crocus Hall, there's been expulsions, deportations of migrant workers. And so you have kind of a decrease in the amount of

of net migration into Russia to then, you know, for these jobs and that... Even if you need these very hands more than ever, you need immigration into the country. But I guess there's two reasons to explain this similarly counterintuitive policies, and maybe Lena will help me here. But first of all, they're concerned about security issues, especially the central... the border with Central Asian countries, which is not a...

you can enter Central Asia without having a visa into Russia, is from their perspective how Ukrainians perhaps can penetrate and do some other badass operation like the spider web. The technical term. Yes.

And also, I think also there's an ethnic sort of ideological component that in a lot of ways this war is fought basically as a cultural genocide of Ukraine aimed to boost Russia's own demographic situation, its world standing. And with that in mind, you sort of – in that picture, I guess, immigrants do not really fit since it's the war that's intended to basically boost the Russian nation in a very weird sense as the Kremlin understands it.

I will just add that I'm enjoying this discussion because, like,

This Russia's war of aggression on Ukraine, it is full of nuance, right? So we discussed sanctions. So sanctions and the military to Ukraine was enough for Ukraine to defend itself, but not enough to win, right? So we're talking about Russian economic specialization on the war. It is enough to worry us, especially people in Europe, but it's not quite enough to say you will have a crisis. Because if you have a, you know, to have a crisis, you need to have an open market economy. Therefore, then, I mean, Russia has in many sectors still a market economy, which has helped us

supported, but it doesn't necessarily have independent private investors that are going to short the markets to show that you know you have a problem, right? And there are many state-controlled banks that in the end of the day will be bailed out on one way or the other. So I think it's very important to have this nuanced in mind that, you know, it is the specialization, but nobody is saying that either extreme Russian economy is surviving forever or it is collapsing. Tomorrow is accurate. And I think that's what

sort of confuses especially a lot of journalists because they need a simple answer, right? You're not going to get always that simple answer. And I think on the migrant policy, it is an example where the sort of probably the Syloviki group is winning out versus the technocratic group. And Maria correctly pointed out is, you know, chauvinism was incompetence.

doesn't work well with improving your labor market. And that's what I think, you know, chauvinism is the biggest story that Maria explained. And incompetence, the fact that they can't prevent these attacks, you know, it's, they have, they're spending at least 7%, right? They're spending on defense, but also spending on the domestic security block. But that is not enough for them to prevent this kind of attacks. And that's why, for the sake of, you know, sort of

preventing potential this attacks then they're shooting themselves in a way in the food by not attracting migrants which traditionally for russia has been a very important buffer for the economy when the economy does well needs more uh hands more labor then they come in and then otherwise they just go back to their home countries so um so that is fortunate at least because that is putting a block on some of the military industrial production and just to um

sort of anecdote, which is not a funny anecdote. You know, Walt probably read this analysis about Alabuga, you know, attempts to bring

students from some of the African universities to work on a highly poisonous production. And some of the leaked documents called them completely unacceptable derogatory terms in their documents, where they say they would like to bring X number of things like that. When it's, you know, sort of basically like a disposable material and tricking some of the students to come and work in Russia.

Maybe turn to one more area, and then I want to kind of get everyone's assessment on where the Russian economy stands today. And Maria, we'll go to you for some of the, where you think the report, where the report comes out, and then we'll talk about some of the scenarios. But the one area I want to also just sort of

poke at a little bit is a potential the state of the ruble concerns about a balance of payments situation when the Biden administration did fairly extensive sanctions in November of 2024 after the election, it caused the value of the ruble to plummet. And

And is that a potential source of weakness also in the Russian economy? Vladislav, maybe I could ask you, you know, is there a concern, you know, if you were in the Russian central bank, concern about a potential currency crisis or issues with the ruble? Look, first of all, I would say that

the crisis of the disturbances which happened in November 2024 partially were, of course, accelerated by the sanctions imposed by the Americans. But I would say that the biggest and the most important cause for this panic was dissociation between the financial institutions inside Russia.

Because what was the Recipe for Success in 2022, it was a huge, incredible, I would say, coordination between all the economic ministries and entities in the Russian government. And all the decisions were made absolutely swiftly and coordinated. By the end of 2024, I would say, the dominant feeling was that everything is going quite okay.

And so then it was, if you remember, November 2002, it was a time when the Minister of Finance tried to know to buy more and more hard currencies, or yuan first of all, into reserves. And the central bank said, yes, we are on the free market, so we will not intervene, it's up to the Minister of Finance to buy. And the Minister of Finance said, yes, of course, we don't care about the exchange rate, we will buy because we should compensate the depleted reserves. And then what happened?

What actually stopped the crisis? It was just one statement by Mbihudene who said that yes, tomorrow, or by Silvana, if I don't remember, who said tomorrow we will not buy yuan anymore for rubles and we will not actually play against rubles.

Two weeks later, the exchange rate was once again below 100. So my point is that the problem is one of the most important challenges to the Russian economy, which the Russian economy faces, is now the decline in discipline inside the Russian government. Because now in 2022, Mr. Birgina and Mr. Silovanov and other guys, they managed to

put the Russian economy to switch it from the pre-war normal to the war economy. Two years later, in late 2024, what is needed is what I'm calling the second adjustment. In 2022, it was the first adjustment. Now you should adjust to the new environment with high wages, with high inflation, with high interest rates. You should somehow manage to

once again to transform this economy into more resilient and more stable kind of economy. I think that this can be done if the central bank, for example, succeeds in lowering interest rates down to maybe 13-14% in several months. This will provoke the outflow of deposits from the banks

This will accelerate somehow the investment by the private sector and if the inflation will be kept

steady at the time, it might be a jump into the new reality. Maybe it will fail, I don't know. But anyway, the situation when there is 20% key rate, 10% inflation and rubles at 78 is absolutely unbearable. So the economy cannot

survive it for long. So something should be changed in this equation. How successful this adjustment may be, it may happen, this is the biggest question. If they

would be successful in this by the year end. So I would say the prospects are more optimistic. If not, they're very grim. To my mind, what I would like to add to the report, the report looks on different scenarios. First of all, taking as a variable the outside conditions, oil price, sanctions, more sanctions, less sanctions whatsoever. To my mind,

one should focus more on the domestic developments inside Russia and inside the Russian government. Because actually what happened in 2022 proves that the Russian government can manage the economy very effectively. And it depends on it more than on the West, whether it will survive this year or not. This is my point.

Well, Vladislav, I think you gave us the topic for the next version of this report. I think it's a very interesting analysis that the current situation for Russia economically is quite grim, but yet what you're proposing is the Russian central bank and those that manage the Russian economy have options.

Maria, I want to maybe turn to you because one of the big overarching assessments of this report is that the Russian economy is in...

is is running into some headwinds there the sugar high is is running out uh you're feeling some side effects of that growth is slowing there's inflation labor shortages uh banking issues concerns about the the ruble yet we're not seeing sort of a crisis or collapse so the potential for for russia to or the willingness or for putin to sort of say i need this war to end uh

isn't really there, at least from what we can see from an economic standpoint. Yes, and Vladislav is obviously completely right to point out that the domestic situation and domestic conditions are much more important, by the way, not just from the economic standpoint, but also from a political standpoint. There's only limited leverage that, as we have seen repeatedly, the West has over Russia. But this report was written for Western policymakers. I'm not necessarily hoping for Putin to read it,

So the goal that we had in mind is actually to suggest next steps forward. And the status quo scenario actually outlines this current dynamic. And while it's not ideal, and it's Vladislav Flagg, right, especially with the high key rate, but also borrowing from the future, there is...

the growth without development sort of situation. It's not unfortunately for Ukraine, catastrophic for Russia anytime soon. They can in fact move forward for quite some time. The budget deficit is manageable. Inflation may be higher, but this new higher inflation may become the new normal.

even if the central bank has somewhat of the leeway to maybe push it a little bit down, at least in the foreseeable future. Russia will still maintain its current level of war production, may try to boost it further, but as we have discussed, there are just limits to how far it can go, primarily labor shortages

its production, but even at this level, about 250,000 shells a month, it produces more than I think all of the Western countries combined. And unfortunately, again, for Ukraine, it's not a perfect situation. Russia is also running through its Soviet-era stockpiles in terms of the weapons, and at some point it will probably hit the limit.

But because drones are so instrumental in this war and they're so easy to build, that unfortunately per se does not indicate the end of the war. It may decrease somewhat Russia's offensive potential, but it's not radically going to alter the situation. Unfortunately, it can still produce missiles, drones, and keep attacking Ukraine.

There's also continuous factor like North Korea, Iran, China, obviously. China in particular plays a huge role in Russia's adaptation and will continue to do so. It's very unlikely that no matter which policies the U.S. takes, they're going to be able to decouple Russia from China.

But Iran is an interesting question given everything that's going on. However, much of the production that – war-related production that used – relied on Iran is on Russian territory. So even if Israel is very successful at destroying some of the military-industrial complex on Iranian territory, the Russian one still remains.

And that, unfortunately, is not great news for Russia's neighbors, nor is it great news for NATO more broadly, because as we see, Putin's appetite is rising while – during the launch, so to speak, to quote the Russian saying. And that means that, unfortunately, even hybrid operations against NATO are not off the table, even if given this extremely exhausting and atrocious war, for the Kremlin, it's not going to be easy to pull it off right now.

So altogether, it's not an ideal situation. It definitely happens at the expense of Russia's future, but it is sustainable for the Kremlin in the short term. And also, you know, the report looks at the scenario for a potential...

lifting of U.S. sanctions vis-a-vis Russia. What is the report's finding there? MS. Yeah. And that's perhaps the most interesting and controversial finding. I already flagged that we actually realize that despite the fact that sort of the Kremlin and some of the businessmen in Russia do want sanctions to be lifted, and that is something that has come up during even the peace talks.

The situation is not going to be radically different for the Russian economy because, as we have discussed, the bad investment climate, the interim, the limbo status in which the Russian economy is likely to find itself is unlikely to be very attractive to Western businessmen. And we have seen something similar in Iran in mid-2010s when the nuclear deal has been achieved.

And some sanctions were lifted, and yet the Western business was not exactly like excited about going back to Iran. Right. MS. And for very understandable reasons, right, Putin is also not exactly giving out the best possible signals. As we speak right now, they actually about to nationalize Russia – Moscow's largest airport, the Medvedevo, which one of the only few remaining private airports in Russia, which

It survived sort of for a while, but it seems – it looks like it's also finally was overtaken by the state. And this general wave or renationalization or redistribution of property is actually unraveling in Russia very actively at the moment, and Western companies obviously are very attractive, appealing options for the Kremlin and its appetites. The war economy-related needs are part of the story, and another part of the story is obviously the contingency

domination of Silaviki, who finally hold an upper hand and they want a piece of very attractive options available in the economy. That is not a situation conducive to the Western investment. Yeah. And also, I think that it's similar to Iran, where you weren't, you know, I think businesses weren't sure if there was going to be a

an election that went the other way and it did, and then suddenly the US pulled out and sanctions were reimposed. In a situation like this, you could have a year and a half, there could be Democrats in Congress that are putting forth the Lindsey Graham sanction bill, which is currently in the Senate, and then suddenly your investments are sort of stuck. So I think there would, don't see a lot of investment, but there could be other sales.

Alina, I want to bring you back in. I want to ask you specifically about China's role, but maybe if there's also other things that you want to comment on, feel free. But China has been a major source of technology, of parts and components to the Russian economy. Russia's figured out waste and some ways work around a lot of the Western sanctions by going through China. How, you know, if China...

changed its tune, if the Europeans put a lot of pressure on China, if there was some big Sino-European deal and then China just decided that it was gonna damp down, turn down some of its exports to Russia, would that have a real impact? Or what is China's role in kind of maintaining the Russian economy?

So the China-Russia relationship is a very lopsided relationship at the moment. And the Soviet leaders probably will be turning in their graves at the moment just seeing how horrendously Russia is a junior partner to China at the moment. And there was recently, I think, a leak, and then New York Times wrote about it, about this Russian intelligence, about the risks from China. And it was sort of seen here, as some people tried to interpret, oh, this is why we can do the reverse Kissinger.

No, the interpretation is different. Russia had a very cautious relationship with China up until it was in a way forced with poor enforcement of sanctions to come closer together despite all these things. So anybody who has spoken to a Russian official probably understand to what extent they've always felt very threatened by China.

This is not a new discovery for them. And also how uncomfortable it is to be such a sort of small and insignificant junior partner in this relationship, that you have to come and beg, and then you close many, many paper investment projects that go nowhere, apart from this very targeted investment project that China has done around

oil and gas, and then maybe a little bit in some military sort of production projects. But basically, if you look at, you know, Russia-China trade, it's the biggest trade partner for Russia. It is small and insignificant for China. If you look at the investments for China, you can't even find as a percent. If you put it on the chart, you don't even find it.

as a percentage of China's GDP or total investments, right? If you look also after the executive order in 2023, when the third parties would be, financial institutions would be targeted if they help evade sanctions, including export controls, Russia struggled for a few months to be able to rebuild some of these networks. And many Chinese banks said, you know what, you're not worth it for me. My biggest trade exposures are still Europe and US.

So what one could potentially do is, of course, in a different environment, is understand what are China's interests there and try to isolate Russia. But I do not think you can do the other way around. So I think that is very important. And then on the specific lips

sort of just wanted to comment on the sanctions front. No, it's not going to be a dramatic change for the Russian economy. And many people have this, especially the older generation business people, some in this administration, they have this image of the 2000s Russia. You know, yes, the business climate was awful, but look how great.

It was great. Oil price went from 13, 1.3, to 113. Yes, it was great, right? You could overlook UCAS, you could overlook a lot of things. Now it's gotten much worse in terms of business environment, right? You just lost many companies had to come to their boards and tax authorities and say, why did I sell my company for $1? But now you're going to come back and say, well, my expectation for oil is sort of down, you know,

you know, we just lost a few billion and I'm going to go back to Russia. Why exactly? Right. So there is

there isn't really the same money to be made but i think as um ladies have also pointed out correctly is that the expectations will free up a little bit the supply side constraints so you know if there is expectation of normalization that will give you a little bit more investment maybe they will give you a little bit more inflows on on the labor so basically it will reduce the supply side constraint and this is exactly at the time when russia is thinking we

the offensive has been continuing since February so that they're waiting for summer offensive they've you know today we had a horrendous day in in Ukraine and Kiev many people died again right so so we will give that little extra space for Russia to continue and I think that will that will be problematic that's why it's normalization is such a problematic thing and that's why also Europeans should do all they can and we have seen the negotiations in G7 but also Europeans independently

to keep maintenance on sanctions. So in a way, you have to keep on running to stay still, to keep the supply-side constraints on Russia, to keep a lid on their military-industrial complex. Václav, I want to bring you in on everything that's been discussed and some of the scenarios as well, but also maybe to ask you about the

impact of oil prices on the Russian economy. Israel attacking Iran has then has now pushed oil prices back up above $70. They had been in the $50 range for much of this year. Is that sort of a huge relief to the Russian economy?

How are they thinking about oil prices going forward? And is that one of the key X factors in how to think about Russia's economic situation? Look, of course, it's important, but I think it's too early to predict some consequences of these fluctuations. Because, yes, the oil prices are up. The Russians are definitely happy with this.

But no one knows for how long it comes, because if, for example, it will be a kind of regime change in Iran, and if Iran will need more to export more oil for its economic construction, so it might be even worse for the Russian economy, as the prices will go down again.

So I would say that it's, once again, it's too early to judge. We can see the prospects for the Russian economy, I would say, by August or September this year, for two reasons. First, the oil prices and the situation of the global markets will be much clearer, because some negotiations that the United States under Trump

is engaged in with the Europeans, with the Chinese, they are all temporary solutions like 90 days, 50 days, 30 days above the tariffs. So it should be somehow finalized and we will see in which direction the global economy moves. And the second point which also is important is that look,

If you focus on the Russian budget in 2023, 2024 and now 2025, you see that the amount of deficit is very huge, becomes very huge in the first months of the year, like till March or even April because of the financing of military orders.

by the year the start of the year and then it becomes more and more balanced for example in may it was very small the budget deficit was very small and the overall deficit really didn't increase so if we if we see that in summer months the budget will be in surplus month by month uh

And at the same time, we will see what the oil prices are doing and how the different branches of the Russian economy are surviving. So I think by August or early September, we can make valuable predictions about the rest of the year in 2026, not earlier. Okay, we have about 10 minutes left, and there's two topics that I want to hit on. One, Maria, is the

What if the West decides to go very strong on sanctions? We've heard Trump potentially threatening that if negotiations don't go well, it does not appear that they're going well. The European Union has just put forth its 18th sanctions package, which seeks to lower the oil price cap from $60 to $10.

I can't remember if it's $50 or 45. And then also to finally reduce and basically end European consumption of oil and natural gas, LNG, that was still flowing into Europe. What are the steps that you think the West could take here and what impact would that maybe have on the Russian economy?

The key issue with the oil price cap, and Elena, I think, pointed that out, it's a great idea on paper, but unfortunately, it's not very successfully implemented, especially when you're failing to enforce it. And Russia has invested a lot in shadow fleet, and Russia is really good when it comes to Russian circumvention sanctions, ask Russia. And plus, they have a lot of experience to learn from countries like Iran, for example.

And so the shadow fleet is the big elephant in the room. You can push the oil price cap all the way to zero but as long as you're unable to enforce it what difference does it make? So I would argue that before the EU keeps pushing us down and I feel like they felt a little bit pressured against you know this uncertainty and peace talks

with Russia ending Russia's isolation on the U.S. side, it felt like they needed to come across stronger and manifest action. But unfortunately, it's not a given that this will be successfully enforced.

On the gas side, they're actually planning, I think, to fully cut it off by 2027. So it's not going to be anytime soon. But that also doesn't matter as much because the major bulk of the revenues that the Russian budget currently receives from hydrocarbons sales is primarily from oil. So gas is important, but it's also a very long-term goal and it's not as consequential.

From that perspective, what I think really matters in the new EU sanctions package is the effort to go after the shadow fleet. The original effort, the previous effort by the Biden administration in January 2025 was successful. We saw almost immediate impact on Russia's budget revenues in the first quarter.

And hopefully this is actually where the EU has more leverage because the Baltic Sea is right there. So they can really go after it. We see that there's a lot of tensions right now. Russia is also coming up with alternative scenarios. They actually consider having a military ship

you know, accompanying the shadow fleet to avoid, to prevent the EU from enforcing sanctions on the shadow fleet and whatnot. So this is a situation in development, but this is something that will have to be done for the oil price cap to work. If that is successful, then things are not looking up for Russia, not immediately. Again, it will take some time to take action, and there are other tools that the Kremlin has at its disposal.

For example, we can print more money if push comes to shove. But altogether, that is not great and it will definitely be problematic, especially now that we already see the growth is slowing down and the original impetus of the military Keynesianism is evaporating slowly.

And I want to flag one more time for our audiences that it's not that sanctions do not work. It's that they were deliberately designed not to be super efficient and problematic and painful for Russia. But this is not the reasons to give up on sanctions altogether. Or for us, right? Or for us. Most importantly for us. And Russia was just a yes, a side effect. But it's not the reason to give up on this tool. It's the reason to learn from the past mistakes and perhaps do better going forward.

And I want to bring Alina and Vladislav maybe for final comments, both on other things that we can do, but then also maybe for your assessment on where the Russian economy is. Does Russia feel any pressure to really negotiate because of its economic situation?

And maybe lastly, it doesn't seem like the Kremlin can really turn off the military Keynesianism. I think Vladislav mentioned that they can't really stop this, that there's going to – even if the war ended, there would be a continued investment into the Russian defense industry to continue modernization because that's how the economy has moved. So maybe –

sort of final closing comments from both of you on what Maria just said, where the Russian economy is going, and whether there's pressure for negotiations. A lot on the table to kind of close this out.

So I think from both sides, economy as well as what's happening on the front line right now, it doesn't appear that Russia is under pressure to be negotiating. So on the economic side, they're comfortable enough. And at the same time, they're so vested into this war that you almost don't want it to stop.

right so there is a perverse and i wrote an ft op at a long time ago the journalist kept asking me when will russian economy stop the war and i'm like no no it's actually unfortunately the other way around it's almost this economy is risking prolonging the war for all these reasons that we've just discussed so this is on the economic front on the military front i think it's very important to see

see how Russian troops have been very slow to capture territory. There's been offensive going on from February. It's been very active. Russia has tried to step up the drone and missile attacks. We have seen recent drone attacks, recent attacks, multiples of what we have seen in autumn.

they will probably continue to move forward. You know, there's been some potential cities will be lost. And I think Russia is just seeing if they can continue going forward, then why would they negotiate, right? And we have seen so far very lukewarm or rather lame, I would say, attempts at negotiations. They send people that are not particularly interested

sort of don't have high degree of – levels of responsibility in Russian Government to the Ukraine-Russia negotiations. They reiterate their maximalist demands, which obviously they cannot hold. They cannot even – they don't even control the territories that they're planning to capture as a result of these negotiations. That's not how the negotiations sort of are likely to move forward. So then where does it leave us? And I think Maria

explained great, great, fantastically the sanctions, so I'm not going to even go there. I think what leaves Europe is focusing on paying for its insurance for defense. And I think that's where it leaves Europe. It's defending itself in a smart way. Hopefully, we'll never need to use that insurance. The fact that you buy a flood insurance, it doesn't mean you're going to cause a flood, right? There is a lot of confusion about that. And then, on the other hand, supporting Ukraine. And for support of Ukraine,

I think this message from the Trump administration where they cut off intelligence temporarily, I think that undermined the whole negotiation process at the very beginning. Because Russia realized, wait a second, we can get presence here. Not only were being asked to give up something, we actually can get ginormous presence here that helps us move forward. Well, maybe it's, wait a second, we'll sit it out, we'll get more presence.

And that's the reason I mention it, because U.S. intelligence is so critical. It's very hard to replace that. And the other part of it is the third-party transfer. While Europeans – I'll explain – while Europeans are finding ways to build their own machinery, especially their defense, they potentially will need to buy from the U.S. and then transfer it to Ukraine. So if U.S. blocks intelligence and third-party transfer, that gives a ginormous present to Russia and actually will enable Russia to move forward a little bit faster.

So Russia is in a situation where by themselves they couldn't capture Kyiv neither in three days nor in three years, but they're trying to recruit the U.S. to help them out. That's the whole point of negotiations, I think. So that's where we are. So I think Europeans need to invest their defense smartly in a way that is more creative and not legacy contracts with their old producers and in a way that integrates Ukraine's military support together with the sanctions improvement or sort of maintenance and improvement and lessons learned.

Great. Vladislav, over to you. I absolutely agree with Alina on the military issues, because the wars are won on the battlefield, not in the banking business. So definitely the most crucial issue is how big the Western assistance to Ukraine

will be and how effective it will be delivered, definitely. And what I would like to sum up and what I would like to say about the report, coming back to it, is that what is for me, what is the greatest valuable in this report is that it absolutely lacks wishful thinking. Because this is the biggest single problem that the Russian economic research faces.

because no one from analysts are absolutely unaware about what he or she believes should happen, who should win, how soon the Putin's regime should disappear, and whatsoever. And here we can see the brilliant expert community who united its efforts to produce a very objective

very well made report, which is absolutely free of wishful thinking, it which analyzes the things as they happen. And this is a big success for myself to my mind. Well, Vladislav, thank you so much for the excellent plug. I think we should put it on top of the report. It lacks wishful thinking. Unfortunately, I wish you know, I oftentimes have wishful thinking Maria beats that out of me, which is sort of our

her role in our, when we collaborate. But I really want to thank Marisa Negevaya for her work on the report, as well as Tina Dolbaya and Nick Fenton. And I want to thank Alina and Vladislav for a fantastic conversation. Normally for hour and a half conversations, you know, by the end, I'm, you know, I'm running out of questions. What should I ask? But actually in this case, there was many other things that I wanted to get into. We didn't have time for, which means that we'll have to have another conversation at some point. Uh,

And maybe we'll have that conversation on our podcast, Russian Roulette, which for the listeners, if you are still watching, well, then you have to subscribe to Russian Roulette, which is a fantastic podcast, as well as our sister podcast, The Europhile. I really want to thank our guests. I want to thank you for tuning in. And please go check out the report. You can download it at csis.org. It's a fantastic report.

as Vladislav said, lacks the wishful thinking and provides clear-headed analysis on where the Russian economy is going, much like the conversation that we just had here. So thank you all for tuning in. You've been listening to Russian Roulette. We hope you enjoyed this episode and tune in again soon.

Russian Roulette releases new episodes every two weeks on Thursdays and is available wherever you get your podcasts. So please subscribe and share our episodes online. And be sure to check out all the latest analysis by the Europe, Russia and Eurasia program at csis.org.