The Limits of Putinomics: The Russian Economy Runs a Risk of Going "Berserk"

The Warning from Putin’s Business Envoy

Titov is hardly a dissident. A wealthy sparkling-wine mogul and former presidential candidate, he spent years as Putin’s official business ombudsman, serving as the dutiful mouthpiece for Russia’s commercial elite. When someone so deeply embedded in the system speaks out in RBC, the country’s leading business daily, it shows that the unspoken agreement between the Kremlin and private enterprise—political loyalty in exchange for a functioning market—is falling apart.

His comments point to growing desperation among the technocrats responsible for keeping basic institutions running. For four and a half years, Moscow managed to run two economies at once: funding a full-scale invasion in Ukraine while using heavy state spending to protect ordinary citizens from the fallout. That balancing act has now run out of road.

Growth has virtually stopped. After picking up by roughly 9 per cent across 2023 and 2024, GDP is expected to crawl forward by just 0.4 per cent this year. Non-military industries, from retail to manufacturing, are shrinking under the weight of severe worker shortages, higher corporate taxes, and steep interest rates imposed by Central Bank Governor Elvira Nabiullina.

The immediate trigger for Titov’s warning is a bitter row behind closed doors. Hardliners and war hawks are pressing to shift the country onto a full war footing, demanding total state control under the old Soviet slogan: "Everything for the front, everything for victory."

Yet the officials tasked with keeping the country afloat know the reserves that fueled Russia's war-driven boom are gone. Moscow Mayor Sergei Sobyanin gave his own warning recently, pointing out that gutting the civilian economy would eventually wreck the country.

Around the same time, Andrei Klepach, chief economist at the state development bank VEB, was quietly pushed out after an internal memo leaked showing he had warned of impending social and economic trouble. The team of technocrats that spent years cushioning the public from the financial reality of the war is being dismantled piece by piece.

The Illusion of Resilience

Today's slowdown brings an end to a strange period of survival. When Western powers cut Russian banks off from SWIFT, froze around $300 billion in central bank reserves, and banned energy and tech imports in 2022, major international banks predicted immediate disaster, forecasting economic contractions of anywhere between 9 and 15 per cent.

Those predictions missed the mark. The economy shrank by a manageable 1.4 per cent in 2022 before rebounding. High global oil prices, quick trade detours through neutral countries, and massive government checks for soldiers and weapons factories created a short-lived domestic boom. Real incomes rose 15 per cent over two years, fueling spending and creating the illusion that Russia was immune to sanctions.

That boom was built on borrowed time. By mid-2024, the military sector was effectively devouring the rest of the economy, sucking up available cash, raw materials, and skilled workers.

Because defense plants run on state money rather than market logic, they can offer far higher pay to pull staff away from civilian businesses. That triggered high domestic inflation and left non-military trades short of workers. To contain the fallout, the central bank hiked borrowing costs so high that private companies can no longer afford to invest, bringing growth outside the defense sector to a standstill.

Squeezed from the Outside

At the same time, external pressure on Moscow’s main income sources is building. To fund its defense budget, the Kremlin relies heavily on oil sales carried by a "shadow fleet" of old, unflagged tankers designed to dodge sanctions.

That route is getting harder to use. Under expanded legal powers passed in July, European naval forces under Operation EUNAVFOR MED IRINI have started physically intervening. European officers recently boarded the Russian-linked tanker MV SUN in the Mediterranean to inspect its registration—the sixth such boarding in recent months. Crucially, the EU rules now allow member states to seize and auction off ships caught without proper paperwork.

Inside Russia, critical infrastructure is taking direct hits. A steady campaign of long-range Ukrainian drone strikes has targeted supply bottlenecks well behind the lines.

Recent attacks hit major oil refineries, grain terminals, and supply hubs as far east as Yekaterinburg, where warehouses belonging to the online retail giant Wildberries were set ablaze. Strikes near the Baltic port of Ust-Luga have directly hit maritime export sites.

These naval seizures and drone strikes are compounding the strain. Fixing damaged civilian infrastructure now means competing with the military for precious steel, microchips, and construction crews.

Political Trouble Ahead

This financial squeeze comes at an awkward time for the Kremlin, with parliamentary elections taking place this month. While the political scene is tightly controlled and anti-war candidates have been kept off the ballot, independent polls show clear signs that the public is growing tired of the conflict.

Behind the official election campaign lies widespread anxiety over persistent rumors that the government plans a second major military draft once voting ends.

The Kremlin has called these reports fake news, but fear of another mobilization to supply troops for a renewed push in the Donbas has led consumers to cut back on spending and accelerated capital flight.

Putin's choices are narrowing fast. The regime can no longer promise both guns and butter. Keeping weapons factories running now means forcing ordinary people to accept higher taxes, worse public services, and relentless inflation. The alternative—trying to protect consumer standards—would mean slowing down military production.