The new advance of Russian forces towards the strategically important Pokrovsk, in eastern Ukraine, continues and its possible capture would mark the first major victory for the Russian side since the fall of Bakhmut in 2023.
It will not only provide Moscow with a strategic advantage in its goal of fully capturing the energy-rich Donbas.
It will strengthen the Kremlin’s maximalist narrative, both within Russia and in the face of Western pressure for a ceasefire on the existing line of contact, in order to begin difficult peace negotiations later.
For Russia, however, developments on the battlefield do not keep pace with the state of its increasingly strained war economy. Fearing secondary sanctions, Russia’s oil and gas export revenues fell by 27% year-on-year in October, according to official figures.
This is a major blow to the Kremlin’s finances, as new US sanctions tighten the “cock” on Russian energy exports. The main source of financing the war.
Over time, this pressure is expected to intensify, as problems accumulate in the overheated Russian economy. It is becoming clear that, relying on military production, it is no longer a basis for sustainable growth.
On the contrary, cuts are being made everywhere, with the sole exception of military spending.
Massive economic and social obstacles
Currently, Russia is facing a significant slowdown in growth, high inflation, labor shortages after almost four years of conscription or flight of people from the most productive groups, and an unprecedented fuel crisis due to reduced production due to escalating Ukrainian drone attacks on energy infrastructure.
In the background is a practically static front in Ukraine, as well as a doubly lost diplomatic opening with Trump. The messages about the prospects of the national economy are becoming increasingly worrying.
The growth rate in the third quarter of the year was just 0.6% on an annual basis – well below the 1.1% in the second quarter and the 1.4% in the first.
The Central Bank of Russia is now sounding the alarm
After a prolonged period of slowdown, it warns in its latest updated forecast, the economy could face the risk of recession by the end of 2025.
Despite persistent inflationary pressures, it recently cut the key interest rate again. However, it remains high at 16.5%, making borrowing expensive and stifling investment.
New measures to increase VAT to 22% are expected to come into effect at the start of the new year, despite promises to the contrary.
The aim is to offset the decline in oil export revenues, which is putting pressure on the budget. With the budget deficit forecast to reach 5.7 trillion rubles by the end of the year, cuts are being made to non-defense spending, including social spending.
With annual inflation forecast to hover between 6.5-7.0% by the end of the year, the cost of living is rising and popular discontent is growing.
Reminiscent of the “1990s”
Even pro-Putin Alexey Chadayev, general director of the Ushkuynik Research and Production Center, which manufactures Russian drones, does not hide his disappointment.
“The real sector of the economy, with the exception of those who work in the defense industry in one way or another, is in a very gloomy situation because money has become expensive. The devaluation is growing, costs are rising, and there is no access to affordable credit. Everyone is facing cash flow gaps and we are seeing the return of swap agreements, just like in the forgotten days of the 1990s,” he said in an interview with a Russian military blogger.
For Ukraine, this is welcome news, as the weakening of Russia’s economy would also mean a weakening of its military engagement. In its own analysis of the Russian economy in the third quarter, the Ukrainian intelligence agency claims that almost
- 39% of Russian companies reported payment delays, up from 25% in 2024.
- 32% are facing liquidity problems. Demand for goods and services has fallen for 34% of companies in Putin’s Russia.
- 15% reported business interruptions.
- 68% have begun to drastically reduce expenses.
Even if Kiev’s aforementioned estimates are considered “overblown,” the problems for many businesses in Russia are expected to increase from the beginning of the new year, with the increase in taxes.
The crisis is now also affecting part of Russia’s military-industrial complex.
Russian tank and rail freight car manufacturer Uralvagonzavod (UVZ) has announced restructuring plans to cut costs, following reports of plans to lay off up to 10% of its workforce by February, across various sectors, and freeze hiring.
