Russia’s economy is overloaded and the fear of hyperinflation is growing

In a race to gain as much territory as possible in Ukraine before Trump enters the White House, the Russian military is on the offensive, ignoring extreme casualties of over 2,500 dead a week. The war economy is also accelerating accordingly. But without strong demands other than defense spending, and with restrictions on exports and human capital that has fled or been killed – the Russian economy is on the way to overheating, which could turn into hyperinflation. how long will it take It’s hard to know, but economists and Russia commentators agree – this is not a sustainable situation for long. And just in the last few days, the Russian ruble began to erode at a particularly high rate.

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Contrary to the gloomy forecasts that were predicted for the Russian economy at the beginning of its invasion of Ukraine, in February 2022, it has held up impressively. The ruble, which had initially fallen, re-established itself at an even higher level than at the beginning of the war, due to decisive actions by the central bank, headed by Elvira Nabiolina. Neviolina, who is considered a “technocratic” professional woman, was admittedly surprised by the war, but she was quick to raise the interest rate, impose restrictions on the withdrawal of foreign currency from the country and begin pouring into the economy the foreign currency treasure that Russia had accumulated for years. Thanks to Russian oil and gas exports, mainly to Europe, Russia managed to maintain a low level of debt, and even hold impressive foreign exchange reserves – just for such a scenario.

But contrary to initial estimates, the war did not end in a few weeks. Now, after over 1,000 days of bloody trench warfare, the Russian economy is beginning to feel the consequences. “First of all, there is a tremendous shortage of manpower,” says Dr. Yevgeni Klauber from the School of Political Science, Government and Civil Affairs at Tel Aviv University. “This is even expressed in taxi drivers. People who don’t know how to drive enter the profession, and the number of people killed in traffic accidents has doubled.” This shortage is of course due to the widespread recruitment into the Russian army (which uses tactics that are particularly demanding on manpower), but also from the mass flight of approximately 900,000 citizens from the country, and from record demands for skilled personnel in the military industry .

Extreme salary offers

In fact, the Russian military and the Russian military industry are conducting a “bidding war” against each other, in an attempt to attract personnel, which leads to both a 2.4% unemployment rate (even lower than the extremely low unemployment in Israel), and extreme wage offers. Russia offers new recruits a salary three times higher than the average salary, plus a signing bonus of 3 million rubles (about NIS 100,000, which is three years of work at the average salary in Russia).

“Even so, people don’t come that much, because the life expectancy on the Ukrainian front is very short. Now they have announced that they will also start forgiving debts under 10 million rubles. They are so desperate that they are recruiting from Yemen and Nepal.” Indeed, it was recently reported that the Houthis brought Yemeni citizens to Russia under the guise of working in factories – but they were kidnapped for frontline service.

The enormous costs of manpower and military production, which also include a heavy premium for circumventing the sanctions imposed by the Western countries at the beginning of the war, lead to a huge military expenditure of 8% of GDP and 32% of the budget for 2025. But without available sources, and without the ability to borrow money from the international debt market For, the government spending increases the demand in the economy, and with them the prices.

Official inflation in Russia stands at 8.5%, but there are suspicions that the truth is even more extreme. “Economists say inflation is closer to 30%. Train fares have increased by 30%, car prices have increased by 100%, and there is even a butter crisis that has increased prices by 70%. Food chains store butter in a locked cabinet, like alcohol and luxury goods “, says Dr. Klauber. The “Today’s Prices” project, which tries to reflect the situation on the ground, showed that many categories of products are actually becoming more expensive from the official statistics regarding them. The reason, according to Dr. Klauber, is that “Putin does not want to show that his economic model does not work, so they prefer to hide the statistics.”

The Governor of the Central Bank Neviolina recently warned the Duma, the Russian Parliament, that “when the economy reaches the limit of its production capacity, but demand is still stimulated – stagflation occurs.” That is, economic stagnation and monetary inflation. It even raised the central bank interest rate to 21%, the highest level in Russia in more than 20 years. But there is a limit to the effect of the move, as the Russian government continues to spend money at an increasing rate, and to grant subsidized loans for investments in the military industry. “There is already talk of raising the interest rate to 25%, and the economy is in a catastrophe. It is impossible to invest in such a situation,” says Dr. Klauber.

Even if this is not yet reflected in the official statistics, traders are already beginning to realize that the ruble is buying much less than before. In recent months, the value of the ruble has been eroding, and in recent days the pace is accelerating even more, after a publicized debate between Neviolina and the heads of the military industry.

Sanctions also affect this, but as Russian exiled economist Konstantin Sonin comments, “No sanction can completely stop the flow of products and money, due to the rules of the market: when a transaction becomes more expensive, the profit on it increases, which encourages new intermediaries to come and find bypasses and loopholes.”

According to Sonin, this results in the collection of an ever-increasing price from ordinary Russians, but “their willingness to bear the economic burden is what changes in the end, and it seems that it has not reached the end yet.” Sonin, who now lives and teaches in Chicago, was sentenced in absentia in Russia to eight years in prison for “spreading false information about the Russian military” as part of his activities in consulting on Russia’s economy and war effort.

The biggest concern: oil prices

But the most acute thing that Russia fears is oil and gas prices. The higher they are, the higher Russia’s foreign currency income increases, and with it the possible expenditure on the war. But despite the high hopes in Moscow for Trump’s entry into the White House in January 2025, one of the most important moves that Trump has promised is the abolition of environmental regulations, which will allow the production and export of American oil, which will dramatically lower oil prices in the world. “For the Russians it’s a nightmare,” says Dr. Klauber. “The minimum needed to wage war is $60 per barrel, $10 less than today. Trump said he would be able to end the war not through troops or money to Ukraine, but through lowering the price of oil – which would leave Putin with no money to fight. This is a completely possible scenario.”

However, in his estimation, the Russian regime will not agree to fold, because it has long passed the threshold of rationality. “Putin said that Russia is not subject to any rational logic, but is held by God. They play Russian roulette and say ‘the flood is after us’. They actually behave like orthodox ayatollahs.” According to Dr. Klauber, “I don’t know how long it will last, but it is bound to fail.”

While the campaign in Ukraine is leading to mutual military attrition, the combined economic power of the West is far greater than Russia’s GDP, which is closer to that of Italy alone. With enough staying power, it is not impossible that Russia will fall into a hyperinflation crisis, which could have severe consequences. “A civil society under total oppression should not be underestimated. As soon as ‘ordinary’ Russians take to the streets – the regime will be in danger.”