Fever rising: Russia’s 2024 macroeconomic check-up results are in

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Attractive yet questionable figures

Official data suggests that Russia's real GDP is set to grow by 3.6% in 2024, mirroring the growth rate in 2023 and well above the official 1.3% drop recorded in 2022. Optimistic economic indicators for 2024 are being touted not only by Kremlin authorities, but even by the International Monetary Fund — which relies on reports from Russian government agencies in its projections — creating the impression that Russia continues to prosper despite the economic sanctions and diplomatic isolation resulting from its ongoing full-scale invasion of Ukraine.

Low unemployment is a separate point of pride for Russian authorities, standing at just 2.6%. This is markedly lower than the 4.6% recorded in the pre-crisis year of 2019. Among G7 nations, only Japan has unemployment levels comparable to Russia’s.

But top-line numbers do not tell the full story. The IMF projects that Russian exports will grow by 4.8% in 2024, which will not compensate for the declines of previous years — an 8% drop in 2022 and a further 14% decline in 2023. Imports have been rising for the second consecutive year — up by 2.6% in 2024 following a 16% increase in 2023 — but this comes after a 15% drop in 2022. Russia’s trade surplus is also no longer as large as it was before the full-scale invasion.

And there are other problem areas. Official inflation is estimated at around 9%, though economists increasingly distrust these figures. In a report titled “The Russian Economy in the Fog of War,” the Stockholm Institute of Transition Economics (SITE) characterized both Russia’s official price data and its real economic growth figures as being little more than propaganda narratives. While nominal GDP numbers are relatively reliable, the way the Kremlin extracts inflation and real growth from the data raises questions.

Two main measures of inflation — the Consumer Price Index (CPI) and the GDP deflator — have shown unusual discrepancies since 2022. Independent monitoring by the ROMIR center indicates annual price growth closer to 16%, and SITE’s estimates suggest that Russia’s real GDP dynamics are negative, ranging from –2% to –11% annually.

If these alternative figures reflect reality, it would explain several anomalies: why the economy appears to grow despite war and sanctions, why perceived inflation is consistently higher than reported price growth, and why a credit boom has persisted despite high real interest rates.

Living large on public money

Russia’s government spending in 2024 accounted for roughly 37% of GDP, while revenues hovered around 35%. Before the pandemic, the government spent 33-34% of GDP, with a jump to39% in 2020 followed by a more typical 34.6% in 2021. Extraordinary spending programs typically leave a lasting increase in expenditures, and the same applies to war. Since 2022, the share of government spending as a percentage of GDP has risen like a fever: from 35.6% in the first year of invasion, to 36.5% in the second, and now to 37.3%.

The country’s budget deficit, at less than 3% of GDP, has not yet reached a critical level, and the figure in 2024 was even slightly smaller than in the previous year. Russian deficits have long been low relative to those of G7 countries, and the ongoing war in Ukraine has not changed this reality.

Total investments in the Russian economy equaled 25% of GDP, down from 25.7% in 2023, but above the 22-23% level recorded in 2019-2022. The key question, of course, is how much of this investment is private and voluntary. Private investors put money into business expecting profitable returns, whereas government investments are often motivated by political interests or by opportunities for corruption. In 2021, the public sector accounted for nearly 19% of all investments, according to data from Rosstat, and before the pandemic it had exceeded 28%.

Given the level of risk and uncertainty faced by Russian entrepreneurs and the general population, the volume of private investments appears to have remained surprisingly high. This result comes in part thanks to the fact that countries with better investment climates are closed to Russian capital, which therefore cannot flow to safer locations.

The peculiar situation — in which it is easier to move money out of Russia than to bring it into developed countries — emerged in 2022 and remains an anomaly. Historically, freer countries have not restricted capital inflows or outflows, while unfree ones fight outflows, not inflows. Today, the policies of the U.S. and its allies essentially compel Russian capital to work domestically, inadvertently boosting Putin’s regime. Even before 2024, these realities had become increasingly entrenched.

This is a key weakness of Putin’s war-driven economic model: if Washington and Brussels change course, capital investments in Russia could plummet to levels resembling those of the 1990s.

Three troubles at once

Russia's economic vulnerabilities are not limited to capital flows. In 2024, three problems dominated discussions: accelerating inflation, a weakening ruble, and high real interest rates. This rare combination signals significant imbalances.

Even according to the Central Bank and Rosstat, Russia’s inflation is embarrassingly high for a country with a strong budget, and its rise accelerated throughout 2024. For five years, the Central Bank under Elvira Nabiullina has failed to meet its target of 4% annual inflation — this despite skillfully manipulating the key interest rate. The failure lies in the government’s simultaneous pursuit of mutually incompatible goals.

Achieving the primary goal — that of curbing inflation — is theoretically straightforward: limit the growth of the money supply to 3-5% annually. In practice, however, Russia’s money supply (M2) has expanded much faster, increasing by 19.5% in the past year, 19.4% in 2023, and 24% in 2022. Pre-war growth was more moderate, around 13%, and the pre-pandemic 2019 figure was just 9.7% — not coincidentally, that was the last time Russia managed to keep price growth within 4%.

Why print so much money? To achieve a secondary goal: stimulating the economy and expanding credit beyond natural market levels. Inflating credit is a misguided and destructive aim. The central bank cannot change people's preferences or the technical limits of production — all it can do is manipulate market participants, temporarily creating a false perception of reality.

When Putin launched the full-scale invasion in February 2022, the markets panicked. People rushed to dump rubles and stockpile both foreign currency and goods. Demand for ruble savings collapsed, velocity increased, and prices surged — all logical outcomes in such a situation. It seemed the war would be extraordinarily costly, creating a budget deficit that could only be financed by printing more money and driving the exchange value of the ruble ever lower.

However, Putin made a gamble that he could afford to wage war on the cheap, relying on coercion and psychological manipulation while drawing manpower from among his country’s economically disadvantaged and incarcerated populations. Despite the invasion, fiscal stability was preserved. The ruble not only survived — it strengthened in 2022. Central Bank Chair Nabiullina calmed the panic without resorting to particularly drastic measures — instead of freezing deposits or imposing price controls, the bank simply offered high interest rates on ruble savings.

Rather than pushing the economy’s problems onto the private sector, in April 2022 the authorities began lowering the key interest rate, reviving credit growth and triggering inflation. Today’s spike is at least partially a result of those policies.

The current tightening will also leave lingering effects. Once inflation is subdued, the economy will face another depressive cycle.

Illusions from the Central Bank

It is impossible to sustain the illusion for long that the war is not harming the purchasing power of the ruble or driving down consumer activity. Someone inevitably has to cover the cost for the feast held during a plague.

The Central Bank’s clever manipulations create nothing but optimistic illusions. Borrowers are led to believe they can refinance without tightening their belts — after all, the Russian economy is “growing”: Meanwhile, creditors and savers are assured that their money will not lose value — since the ruble is supposedly stable. However, only one of these promises can be fulfilled — never both at the same time. Occasionally, the public realizes they’ve been misled. Trust in the authorities erodes, and each successive time the cycle repeats, it becomes harder for that trust to be restored.

For instance, when a country develops high inflationary expectations, reducing them becomes a difficult and painful task. In modern Russia, this has been achieved twice: from 2000-2003 and in March-April 2022. Both times, the benefits of these efforts were squandered, and before long, inflationary expectations rose again.

Unnaturally high demand for loans is both a consequence and a cause of inflation. When a commercial bank sees demand for loans, it can create money out of thin air, simultaneously increasing its assets (loan portfolio) and its liabilities (the borrower’s account balance) by the same amount.

As such, it is entirely possible for a borrower to take out a loan at 30% annual interest with the expectation that inflation will reach 20% — thereby making the real interest rate only 10%. At the same time, the banker may anticipate inflation at 11%, which would render a real rate of 19%. If the banker is right, the borrower will regret their decision and will have to make significant sacrifices to repay the debt. This, in turn, would leave all businesses that rely on this borrower without money. Such is the risk posed by high real interest rate policies, which increasingly suggest that Russia will eventually recognize the presence of stagflation — an economic stagnation or recession accompanied by rising prices.

Psychologically, stagflation is marked by high inflationary expectations coupled with pessimistic expectations about credit availability. Currently, only the first component is present, but signs of the second are growing. The mortgage sector has collapsed, and all other forms of credit have become more expensive.

According to a Central Bank analysis released several weeks ago, “In November, corporate lending slowed significantly: the loan portfolio grew by only 0.8% for the month compared to 2.3% in October (annual growth slowed to 20.3% from 21.8%). The retail loan portfolio shrank by 1.7% after growing by 0.4% in October (annual growth slowed to 11.1% from 14.9% the previous month).” As the bank’s head Elvira Nabiullina summarized on Dec. 20, “The pace of lending growth in November dropped significantly.”

Other observers describe the slowdown in lending more vividly. According to the Russia-focused analytics company Frank RG, loans issued to individuals in November 2024 were 28% lower than in October and 56% lower than in November 2023. The number of consumer loans issued was half that of November 2023, and their total value had been cut by more than half.

Avoiding difficult decisions

It is likely that the Russian authorities will seek to avoid a “hard landing.” Putin cannot forget how unpopular both Mikhail Gorbachev and Boris Yeltsin became when consumption had to be sharply reduced under their rule. It is no secret that many leaders have lost power after affording their citizens greater comforts, then failing to sustain the people’s access to necessities that had once been seen as luxuries. Historical experience suggests that Putin is unlikely to adopt a strategic vision based on any principles that would require enduring short-term hardships — no matter how necessary such a period of reform may be for the country’s long-term future.

Unlike other leaders both past and present, it is doubtful that Putin would expend political capital in order to suppress inflation. Principled leaders are prepared to sacrifice their popularity, do the hard work, and, if necessary, step down — as did British Prime Minister Margaret Thatcher, Polish Finance Minister Leszek Balcerowicz, or Czech Prime Minister Václav Klaus. For obvious reasons, this scenario doesn’t suit Putin.

Elvira Nabiullina may have hoped that Putin would allow her to act like Paul Volcker, the U.S. Federal Reserve Chair during Ronald Reagan’s presidency. Volcker curbed inflation by sharply raising interest rates, which triggered a severe but brief economic downturn in the early 1980s. However, as soon as Russia’s current tightening of monetary policy began to yield results, the country’s leadership seemed to waver. Despite promises to continue, the key rate was not raised in December 2024. If the coming months see defaults on debts, corporate losses, a stock market crash, bankruptcies, and layoffs, the rate is likely to be lowered again, leaving inflation undefeated.

Entrusting the fight against economic “overheating” and “cooling” to the issuer of the national currency is inherently flawed. Markets are self-regulating systems, while central banks’ tools are fundamentally imprecise. In modern Russia, where temporary regime survival takes precedence over long-term economic necessity, this approach is even less effective.