Russia is on the verge of financial disaster. Interest rates are at record highs, inflation is soaring, and businesses are collapsing. Putin’s war in Ukraine is draining Russia’s cash reserves, pushing the nation closer to total economic failure. How bad will it get? Watch to find out!
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NewsTranscript
00:00Russia is in economic freefall, its manufacturing and services sectors are struggling.
00:06The nation's interest rates have reached record levels and show no sign of falling
00:10any time soon.
00:11Recruitment is challenging and major companies are cutting jobs at a massive rate.
00:16The cost of war in Ukraine is higher than Russian President Vladimir Putin could have
00:20ever anticipated and he's sending his country down the economic toilet.
00:25And it will get worse for Russia in the future, as you'll find out later in this video.
00:29But just how big are the economic problems facing Putin right now?
00:34Well, let's start with the country's Purchasing Manager's Index, or PMI, data.
00:40On the surface, it looks like Russia's economy is due for some limited growth, that's according
00:44to Russia Matters, which says the World Bank predicts Russia's Gross Domestic Product,
00:49or GDP, to grow by 1.6% in 2025, falling to 1.1% in 2026.
00:56The World Economic Outlook has slightly different figures.
00:59It says the country's GDP will grow by 1.4% this year, followed by 1.2% growth in 2026.
01:07These aren't particularly impressive figures, especially when compared to the full-year
01:11GDP growth of 4.1% Russia experienced in 2024.
01:16Still, growth is growth, right?
01:19A growing economy is always better than a contracting economy.
01:22The problem is that these growth figures, as meager as they may be, are still hiding
01:27the problems that are causing Russia's entire economic core to rot.
01:31The country's most recent PMI data showcases this problem.
01:35On March 3, the Moscow Times reported that Russia's sector PMI fell by almost three points,
01:41dropping from 53.1 in January to 50.2 in February.
01:45That's still indicative of expansion, as any number over 50 suggests that product and service
01:51output is growing.
01:53However, Russia is at the point where its PMI is just about holding its metaphorical
01:57head above water.
01:59S&P Global says that the result highlights the slowest PMI expansion in five months,
02:04with its report on the issue stating,
02:06"...the latest data signal only a slight improvement in the health of the goods-producing sector,
02:11and one that was the slowest in the current five-month sequence of growth."
02:15The words sequence of growth are key here.
02:18The previous five months have seen Russia's goods-producing sectors experience a small
02:22bounce back.
02:23That's on its way to reversing.
02:25With Russia's PMI in free fall, it's only a matter of time before it finds itself in
02:29a position where its PMI shows contraction, indicating that demand for what Russia manufactures
02:34is slowly disappearing.
02:36The takeaway is simple.
02:38Russia's manufacturing momentum is way down.
02:41The Irish start caused these figures an unmistakable indicator of an economy on shaky ground, while
02:47suggesting that Putin is considering drastic action to reverse the downward trend.
02:51Nobody knows what that drastic action might be, but it's clear that Russia's leader is
02:56panicking, and he should be.
02:58The PMI news is bad enough, but it still indicates marginal growth.
03:02Elsewhere in Russia, we're seeing plenty of signs that the country's economy is teetering
03:06on a cliff and that it already has one foot over the edge.
03:10Take Russia's base interest rate, for example.
03:12On February 14th, the Bank of Russia Board of Directors chose to maintain a base interest
03:17rate of 21% throughout the country.
03:20It gave several reasons.
03:22Inflationary pressures remain high, with inflation hitting a two-year high in February.
03:26The Moscow Times reports that annual inflation jumped to 10.1% year-on-year in February,
03:31which was an increase over the 9.9% year-on-year figures from January.
03:36The net result is that everyday Russians are spending more than they have in two years
03:40on goods, while also dealing with massive costs of borrowing due to the country's high
03:44interest rate.
03:45The PMI fall now starts to make more sense.
03:48Combine a lack of international appetite for Russia's products with its inability to spend
03:52domestically and you get a decline in the number of orders being placed for goods and
03:56services.
03:58Russia's central bank also suggests that there's a supply and demand issue in the country.
04:03Domestic demand growth is still outstripping the capabilities to expand the supply of goods
04:07and services.
04:08It says in its base rate announcement.
04:11That's a veiled way of saying that the massive demands placed on Russia by the Ukraine war
04:15are exhausting its manufacturing sector.
04:18Russia simply can't build enough to keep that war going, which has the knock-on effect of
04:22the country failing to meet domestic demand for goods and services.
04:26Still, the bank is trying to claim that there's hope for Russia's economic future.
04:30The bank says its forecast suggests that its tight monetary policy stance will result in
04:34annual deflation falling to between 7 and 8 percent by the end of 2025, returning to
04:40its target rate of 4 percent in 2026.
04:44That doesn't seem likely.
04:45Even if Russia and Ukraine negotiate peace terms, the economic fallout of the Ukraine
04:50war is going to hit Russia hard, as we'll explain later.
04:53Plus inflation, being as high as it is right now, suggests that more interest rate hikes
04:58are going to come in 2025.
05:00That's according to the Carnegie Endowment, which said as much in December 2024.
05:05That's when Russia's inflation stood at 8.7 percent.
05:09It's 1.4 percent higher than that today.
05:11It also points out that the decision to hike rates to 21 percent back in October 2024 set
05:17Russia's third interest rate record in a decade.
05:20The first came in 2014, when Russia switched to a free-floating currency, forcing a hike
05:25up to 17 percent.
05:27Ukraine's decision to invade Ukraine saw rates jump up to 20 percent before declining to
05:3216 percent at the beginning of 2024.
05:35However, the combination of growing inflation and the weakening of the ruble caused a turnaround,
05:40leading to the 21 percent base rate we see today.
05:44Don't underestimate the impact this sky-high interest rate is having on everyday Russians.
05:49Speaking to the Irish star, Anastasia Ovacharenko of Contact Intersearch Russia, points out
05:55that there are now tons of problems for businesses and their employees.
05:59Business is caught between a rock and a hard place, she says.
06:02On the one hand, high interest rates and expensive loans.
06:05On the other hand, this also affects the lives of employees.
06:08If previously they could get a mortgage at 10 percent, now they can only get one at 30
06:12percent.
06:13And that means they will demand more money from their employers.
06:16That could be a problem.
06:18Why?
06:19Because another indicator that Russia's economy is in the toilet is that its businesses are
06:23currently struggling.
06:24Oleg Buklemyshev, who is a Russian economist and the director of the Economic Policy Research
06:29Center at Moscow State University, puts it bluntly.
06:32There is no longer enough of a profit margin to significantly increase workers' salaries.
06:37There will be no profit cushion to make this possible.
06:39And he's right.
06:40Between 2016 and 2020, Russian incomes stagnated to the point where they were between 7 and
06:458 percent below the level seen in 2013.
06:49Growth resumed in 2021, but by that point Russians had already experienced four years
06:54of wage declines.
06:55By the end of 2024, Russian incomes just about exceeded those seen in 2013.
07:01It didn't seem that way on the surface, as by 2024, the average Russian was being paid
07:06a nominal wage of 84,000 rubles, which is much higher than the 29,800 rubles average
07:12from 2013.
07:14However, this increase came at a time when the exchange rate was above 100 rubles per
07:19US dollar.
07:20So in real terms, the wage increases seen from 2013 to 2024 amounted to just $14 per
07:26month.
07:27And it's only going to get worse from here.
07:29If Russia is getting away with essentially overstating the realities of wage growth in
07:34the country, it's not going to be able to hide what's really going on for much longer.
07:38Jobs are disappearing, as Russian companies try to cut back as much as possible so they
07:43can become profitable again.
07:45We see hints of this in Russian recruitment.
07:48In November 2024, Reuters reported that Russia's economy was struggling to find workers.
07:53Why?
07:54The country's defense sector, which is still one of the very few sectors seeing any sort
07:58of growth in Russia, was poaching all of the best workers.
08:01Combine that with the military's need to constantly bring recruits on board, and you get a situation
08:06where Russia is once again papering over cracks.
08:09So while unemployment dropped to record lows of 2.3% in November 2024, that figure was
08:15propped up by Russia's defense and military sectors.
08:18Reuters highlighted the example of Sverdlovsk.
08:21The region is home to many factories serving the defense sector, but there are also hundreds
08:25of other businesses that aren't related to the war and are facing severe recruitment
08:29crises.
08:30Reuters said the region, which is home to 40 million people, had 54,912 job vacancies
08:36in October 2024.
08:38The problem is that it only had 8,762 unemployed people, creating an imbalance of nine jobs
08:44for every unemployed person.
08:46That's a Russia-wide problem.
08:48Recruitment company Superjob says that job vacancies across Russia increased 1.7 times
08:53over the two years between 2022 and 2024, rising to 2.5 times in its non-war-related
09:00industrial sector.
09:02Even the Russian Central Bank has gotten in on the act.
09:04It says that 73% of Russia's businesses are short on staff.
09:08Le Monde Diplomatique puts the numbers in sharp focus.
09:12In February, it reported that Russia's military-industrial complex running at full steam had created
09:17a severe labor shortage estimated at 5 million people, which accounts for 6.8% of Russia's
09:22active population.
09:24There are several reasons for this.
09:25For one, as Reuters reported, Russia's defense industry is sucking up all of the viable recruits.
09:31Russia is also dealing with a drop in birth rate that has persisted since the 1990s, meaning
09:36there's a shortfall of young workers entering the job market.
09:39Combine those two issues with Oleg Buklemyshev's statement that regular Russian businesses
09:44are quickly running out of money and you get a powder keg that can only lead to one thing
09:48— the complete collapse of every Russian business sector that isn't being propped
09:52up by the Ukraine war.
09:54That's what Putin doesn't want the rest of the world to understand when he touts Russia's
09:58record low unemployment rates.
10:00Sure, minimal unemployment is often a good thing for a country's economy.
10:04It means average people have jobs and are getting paid, which gives them money to pump
10:08back into products and services.
10:10However, the businesses producing those products and services are struggling to keep their
10:14heads above water and can't find the people they need to grow.
10:17Plus, the average Russian having a job doesn't mean much when rampant inflation and record
10:22interest rates are limiting their ability to spend.
10:25There's a great irony in all of this.
10:27Russia's non-war businesses have struggled to find the right people for so long that
10:31they're now being forced to make severe cuts.
10:33They have to.
10:34They haven't been able to generate the profits they need because Russia's wartime demands
10:38have limited their access to talent that could help them grow.
10:41So even papering over the cracks isn't going to be possible for much longer.
10:45Putin is soon going to face a situation where some of his country's most talented workers
10:49find themselves out of jobs, and the odds are they'll struggle to find anything else
10:54that isn't military-related because other companies that may have hired them are being
10:58forced to make cuts driven by their previous inability to find good talent.
11:02It's a devastating cycle, and it's going to hit Russia hard very soon.
11:06Viziv consult managing partner Olga Petrova highlights the scale of the problem.
11:11Several companies are discussing behind closed doors about reducing up to 40 to 50 percent
11:16of contracted staff, including IT specialists, she says.
11:20Anastasia Ovacharenko echoes that viewpoint.
11:23It's likely that IT specialists working on investment projects with uncertain prospects
11:28will be let go.
11:29These projects will be closed and their resources redistributed.
11:33But there won't be a big story where all tech staff are fired.
11:36Of course there won't.
11:37Putin will never allow such a story to make the rounds in Russia.
11:40However, he can't hide from the fact that his drive to employ as many people within
11:44the military-industrial complex he created is having devastated effects on Russia's
11:49other business sectors.
11:51They simply can't survive.
11:52They're dealing with sky-high borrowing costs, profits are falling, and they aren't able
11:56to find the right people when they need them.
11:59Now, they're being forced to cut projects that would have led to investment in their
12:02own and Russia's future, all because Putin needs more people for his war.
12:06Natalia Milchakova, an analyst at Freedom Finance Global, discusses the future of Russia's
12:11economy.
12:12We can't rule out that in some sectors, unemployment might go up slightly.
12:16For example, if small and medium-sized enterprises leave the market or considerably cut expenditure
12:22because they cannot access finance due to high interest rates.
12:25These layoffs are going to affect Russia's white-collar workers ahead of their blue-collar
12:29employees.
12:30The latter will likely find plenty of work within the military-industrial complex Putin
12:34has created.
12:35As for the former, some may end up in military-related roles, whereas others could find themselves
12:40unable to find work because so many companies are cutting back.
12:44The Bell notes that some major Russian firms have already started making redundancies.
12:48Jobs have been cut by MTC, which is a leading mobile operator in Russia.
12:53Gazprom, which is one of Russia's largest energy companies, is also planning on slashing
12:57employees at its corporate headquarters.
13:00Ultimately, these cuts will only further hurt everyday Russians.
13:03The Bell cites numbers from Freedom Finance Global that find real wages in the country
13:08are expected to rise by between 3 and 4 percent in 2025.
13:12That doesn't amount to much when inflation is more than double that increase, effectively
13:16meaning that Russians are dealing with wage cuts.
13:19We also just mentioned the energy sector and Gazprom.
13:22Long the chief driver of Russia's economy, the country's energy sector is also starting
13:26to experience severe problems.
13:28In February 2024, Russian data show that oil production has slipped well below the
13:33nation's OPEC Plus quota.
13:35This quota is an agreed-upon limit on the amount of oil an OPEC member nation can produce
13:40per year.
13:41Russia's crude oil output fell to 8.962 million barrels per day, which is 16,000 barrels short
13:47of its supply agreement under OPEC Plus.
13:49Part of that reduction comes down to Russia promising to reduce its crude output by 971,000
13:55barrels per day, as it was previously oversupplying.
13:57However, we also can't ignore the impact Ukraine has had on Russia's oil industry.
14:02Its campaign against Russia's oil refineries and pipelines has taken about 10% of Putin's
14:07oil industry offline, with more attacks against Russian oil looking likely as the war moves
14:12into 2025.
14:14Combine those attacks with Western sanctions starting to bite hard and Russia's commitment
14:18to reducing its output, and what do you get?
14:21An oil industry that employs fewer people and generates less income for Putin's war
14:25machine.
14:27It's clear that Russia's weapons industry isn't immune from these types of shortfalls.
14:30Despite the fact that the country seems to be placing nearly all of its eggs in the weapons
14:34manufacturing basket, most of what's being produced is going to the soldiers fighting
14:38on the front lines in Ukraine.
14:40The problem is that Putin's invasion has showcased that many of his country's weapons are nowhere
14:45near as capable as he claimed.
14:47The Kyiv Independent highlights the impact that this combination of poor weaponry are
14:51being forced to build for war rather than sales has on Russia.
14:54Since Putin invaded Ukraine in February 2022, Russia's arms exports have taken a dramatic
15:0047% tumble.
15:02That's part of a wider decline that now sees Russia accounting for just 7.8% of the global
15:07weapons-dealing market share.
15:09The drop is actually 64% when measured from 2020, with the number of countries buying
15:14weapons having fallen to 33 from a high of 47 in 2022.
15:19The Jamestown Foundation says the issue is even worse than that, claiming that the decline
15:23in weapons sales has accelerated since Putin began his war.
15:27By 2024, sales were 92% lower than those seen in 2021, meaning Russia is pulling in less
15:33than $1 billion per year from its weapons.
15:36For context, it made $14.6 billion in 2021, $8 billion in 2022, and $3 billion in 2023.
15:44Again, sanctions and the need to cover domestic weapons supply play into this decline.
15:50But Putin can't escape the simple fact that his war is costing his country billions
15:53of dollars per year.
15:55And it may be impossible for him to undo the damage at this point.
15:59Why?
16:00The sheer cost of Putin's supposed special military operation is adding up.
16:05Against the backdrop of high interest rates, rampant inflation, job losses, recruitment
16:09problems and lower sales of some of Russia's most important products, Putin is wasting
16:14billions of dollars of Russian money to keep his ego-driven war going.
16:18Back in December 2024, it was estimated that Russia has spent over $200 billion on Putin's
16:24war while absorbing around 700,000 casualties.
16:28Recruitment costs for the Russian military are also soaring, with one-time enlistment
16:32fees of $20,000 being paid out and Russian soldiers earning between $2,000 and $5,000
16:38per month.
16:39That's good for the soldiers' bank accounts, but it's all money that Russia isn't investing
16:43into activities that aren't related to the war.
16:46We've already seen the impact that's having on its non-war businesses.
16:49During the first half of 2023, Russia was spending $13.42 billion per year on military
16:55salaries.
16:56That number has likely grown since then, which isn't ideal for a country that's losing its
17:00oil and weapons revenue while dealing with a host of domestic issues previously pointed
17:04out.
17:05Russia is also dealing with an estimated $340 billion of Russian Central Bank foreign currency
17:10reserves being frozen, according to Russia Matters.
17:14Its financial sector has absorbed hundreds of billions of dollars of losses caused by
17:18Western sanctions, with its earnings from energy exports dropping by $78.5 billion between
17:23December 2022 and June 2024.
17:27Again, it all amounts to less money coming in as Putin dedicates billions more to an
17:31invasion that was only supposed to last five days.
17:35And none of this accounts for what the future holds for Russia.
17:39According to a joint report by the World Bank, United Nations, and European Commission, it's
17:43believed that the cost of rebuilding Ukraine is around $486 billion.
17:48That's bad news for Putin whether he wins or loses the war.
17:52If he wins, he has to plow money that Russia doesn't have into rebuilding a country that
17:56its military has devastated.
17:58If Russia loses, it may still be on the hook for at least some of those reconstruction
18:01costs if the West decides to punish Putin for his actions.
18:05In the immediate future, Russia is hurtling toward a recession in 2025.
18:10That's according to the Atlantic Council, which points to the weakening ruble, international
18:14sanctions, and the interest rate and inflation issues previously mentioned.
18:18Labor shortages mean that the industrial factories are operating at 81% capacity.
18:23Russian businesses that previously operated internationally are struggling under the weight
18:27of Western sanctions.
18:29And with Putin spending tens of billions of dollars every year on more weapons, none of
18:33these problems look like they're going to be solved anytime soon.
18:37It's gotten so bad for Russia that Reuters reports that its economy would struggle even
18:41if peace were achieved with Ukraine.
18:44The country's lending crisis would play a massive role here.
18:47Russia's military businesses aren't going to default on their loans, as they're primarily
18:51state-owned, and the beneficiaries of Putin pumping 40% of Russia's federal government
18:56budget and 8% of its GDP into their coffers.
18:59But Russia's manufacturing businesses outside of the military?
19:03That's a different story.
19:04It's estimated that 20% of those companies spent at least two-thirds of their operating
19:08profits serving loan debt in 2024, compared to just 10% the year prior.
19:14That's unsustainable and is only going to lead to even more cost-cutting.
19:18Putin has ultimately created a no-win situation for his economy.
19:22If the Ukraine war continues, the many economic problems plaguing Russia only grow worse.
19:27But even if the war ends, those problems are already so massive that it will take years
19:31for Russia to approach something that even resembles a recovery.
19:35But what do you think about Russia's pending economic collapse?
19:38Is there anything it can do to recover?
19:40And what this will mean for Russia as a global power once the Ukraine war ends?
19:45Let us know your thoughts in the comments, and remember to subscribe to the Military
19:49Show for the latest news about Russia and Ukraine.
19:52We strive to be an accurate, up-to-date source of news surrounding major conflicts, and we
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