Five Major Factors Why Russia’s Economy Is Verging on Chaos

An analysis of the economic figures that the Kremlin claims do not add up to anything resembling an approaching Russian victory.

With all such data coming from Moscow, one would be hard-pressed taking the Kremlin at their word. However, even if one were to give Putin the benefit of the doubt, the numbers show tell-tale signs of an impending economic disaster for Russia.

Problem 1: Russia’s inflation is far higher than what is reported

This past December, Putin claimed that Russia’s inflation in 2024 “may approach” 8 percent and this past February said that “special attention must be paid” to the “current” 7.2 percent rate of inflation.

However, Steve Hanke, a professor of economics at John Hopkins University says that Russia’s real inflation is closer to 27 percent – a figure that dwarfs Russia’s “official” inflation rate by nearly fourfold.

Russia’s own military leaders have estimated that “20 to 40 percent of Russia’s military budget is stolen,” further compounding Russia’s black economy, adding to inflation, while also explaining why Russia’s “superior numbers” still come up short.

Problem 2: Russia’s labor force is in disarray

Aside from sending hundreds of thousands of men to die or be maimed in Ukraine, Russia has unwisely decided to begin deporting Central Asians. The harassment of Russia’s estimated 9 million Central Asians, many of whom work in labor-intensive jobs, will exacerbate what British Defense Intelligence calls a labor shortage that is “becoming a significant problem in some sectors,” with Izvestia news estimating that there 4.8 million too few workers in Russia.

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Berezhinskaya, a theatre director, had railed against Russia’s actions in Ukraine, saying Moscow’s soldiers were killing civilians and destroying cities in a naked land grab.

Alexander Kolyander of CEPA notes that in economics, labor has an inverse relationship to unemployment: Lower unemployment correlates with higher inflation, hence “full employment” typically assumes a “natural unemployment rate” often around 5 percent, depending on country’s demographics, labor laws, etc.

Kolyander says that the optimal inflation rate for Russia, of 4 percent, is one where “the economy runs at full capacity without overheating and causing a spike in inflation.” However, recent numbers in Russia show that this past March, Russia had an unemployment rate of only 2.7 percent – a huge shift from a pre-2022, decade-long average rate of 5.1 percent, indicating that inflationary pressure is very strong.

The Russian Central Bank’s key interest rate, of 16 percent, attempts to help lower inflation, but at the same time saps the life out of businesses and makes commercial loans impossible, something that will only further cripple the labor market while also damaging the economic stability for all sectors.

Problem 3: Russia cannot always turn to China to be bailed out

Despite claims of a “limitless” relationship between Moscow and Beijing, a BBC report notes that their analysis found that “the alliance has not seemed so ‘limitless,’” pointing out that “the term has almost disappeared from state media.”

Zhao Tong, a Carnegie Institute Senior Fellow, cited in the same BBC report, says that though “China supports the goal of undermining Western influence, it does not agree with some of Russia’s tactics, including the threat of using nuclear weapons,” which China feels are undermining its interests as they present “reputational costs of appearing to offer unconditional support to Russia.”

Importantly, throwing away Western relationships for closer ties to Moscow makes no economic sense for Beijing: China exports $1.3 trillion to the US, EU, Japan, South Korea vs $111 billion exported to Russia. Likewise, China imports more than $1 trillion from the US, EU, Australia, Japan, and South Korea vs the $155 billion that it imports from Russia.

China may egg Russia on to play the dunce who does its bidding in hurting the West’s status quo, however China is not ready to jump off the bridge after Russia and forgo its own well-being in the process.

Problem 4: Russia’s population is much larger than Ukraine’s

Yes, Russia is much larger than Ukraine. Not counting those who have live under Russian occupation since 2015, Russia’s 140 million dwarfs Ukraine’s 28 million.

However, if the population discrepancy has been a 5:1 ratio, how did Ukraine, since 2022, successfully liberate 74,443 square kilometers of its territory?

Certainly, Ukraine has lost some territory, from Nov. 11, 2022 to Jan. 1, 2024, but not at a rate consistent with the population ratios between the countries: Russia has only gained 518 square kilometers in Ukraine, despite hundreds of thousands of casualties.

When looking at future military might, one must consider that though most populations have a roughly equal male-female breakdown, Ukraine is an outlier as the vast majority of the many millions of refugees who have fled were women and children. Men of military age have mostly stayed within Ukraine, meaning that Ukraine is disproportionately male-heavy compared to a normal society’s distribution.

In terms of the numbers of actual soldiers, not all of the Russian Army is destined to serve in Ukraine: Russia continues to require tens of thousands of soldiers domestically to prevent insurrections and to guarantee stability, while Russia is still heavily committed to ventures across Africa, Asia, and Latin America – meaning that not all of their military budget is spent on Ukraine.

Though Russia does have an annual conscription of soldiers for military service, Putin has been particularly careful to not use them in his war on Ukraine. This past March, when Putin called up 150,000 soldiers to serve, it was again announced that they would not be sent to Ukraine. Why? Putin fears the public backlash of sending young men, drafted without a choice, to face almost certain death: It is too much risk for Putin’s own stability.

Despite Russia theoretically having a hundred million inhabitants more than Ukraine, the reality is that Putin does not appear ready to draft soldiers from major urban areas, such as Moscow or St. Petersburg, which means that available bodies for the slaughter are tens of millions less than what appears at first glance.

Putin, facing a stunning labor shortage, rocketing inflation, low morale, and an unwillingness to upset the general public through a draft, has far fewer soldiers available to him than what he would like the West to believe.

Problem 5: Russian soldiers are not motivated

There is another factor at play in the war: For Ukraine, waging a defensive war requires fewer troops than an offensive war. But perhaps more importantly, Ukrainians are fighting for their country’s very existence.

Russia has relied heavily on contract soldiers and mercenaries, something that Machiavelli warned about: “Mercenaries and auxiliaries are useless and dangerous… they are disunited, ambitious, and without discipline, unfaithful, valiant before friends, cowardly before enemies; they have neither the fear of God nor fidelity to men… The fact is, they have no other attraction or reason for keeping the field than a trifle of stipend, which is not sufficient to make them willing to die for you.”

Russia does not have the capacity to add huge numbers of new soldiers to its ranks, hence why it has not been able to overwhelm Kyiv with its size: Russia simply cannot muster the quantity of men they need to have an overwhelmingly-sized army in Ukraine.

Upon reviewing Russia’s economic trajectory, Dr. Oleksandr Lugovskyy, an American economist, told Kyiv Post: “Russia still has resources but its economy is more vulnerable than it seems. The next major economic shock could be the last one for Russia.”