The incoming Trump administration doubtless wants a strong hand to begin negotiating with Russia on peace with Ukraine. Moscow is providing an opening with its precarious economic situation. Despite Putin’s chipper tone in his annual marathon press conference on Dec. 19, in which he challenged the West to a “high-tech duel” over Kyiv, critics raised questions about his grip on reality. His multi-billion-dollar spending on his war on Ukraine is unsustainable, and Russia’s economic situation is getting worse. Ursula van der Leyen, EU Commission president, has suggested to President-elect Donald Trump to replace Russian LNG with imports from the U.S. The Kremlin would lose $ 12 billion as a result.
Russia’s soaring inflation, capital flight, and exodus of oligarchs—may cause a painful recession in 2025. The Trump administration should not rush to negotiate with the Kremlin. Instead, it should let Russia’s pending economic crisis play out. Strategic patience will likely soften Moscow’s position and ensure better outcomes.
Since the war began in 2022, Russia has defied ominous predictions of collapse. Despite Western economic sanctions, the nation’s economy—boosted by massive currency reserves—has proved stronger than expected during the three years of war. After an initial 2.1 percent decline in GDP in 2022, the number rose to 3 percent to 4 percent in 2023. This year, the government forecasts a 3.9 percent expansion.
The Kremlin’s significant increase in military spending is largely responsible for this growth. Reports indicate that the projected military budget accounts for more than 30 percent of the overall budget, between 7 percent and 8 percent of GDP.
In the past two years, an investment boom has arisen as Western companies have withdrawn from their businesses in Russia, creating a demand for new trade infrastructure. The Kremlin has also provided its citizens with generous financial incentives, including mortgage subsidies, and has profited from increased prices for the commodities it exports.
But all of this has unfolded against a backdrop of mounting strain. Due to the loss of the European oil and natural gas markets and other factors, Russia has been forced to discount its Urals oil by 15 percent. The result? Petroleum export revenues dropped an estimated 21 percent year on year in November.
Russia’s budget deficit widened as the conflict entered its third year. Inflation has been growing, prompting the nation’s Central Bank to hike interest rates to an unprecedented 21 percent. A prominent Russian politician, Sergey Mironov, called for the sacking of the Central Bank’s highly regarded chairwoman, Elvira Nabiullina, and even Putin, usually her ally, voiced unprecedented criticism. Nabiullina has survived for now.
With declining tax revenues, the Kremlin is urging war-profiteering oligarchs to bear more of the burden. Officials have proposed the possibility of higher taxes, new levies, and substantial semi-forced “voluntary donations,” which are already widely utilized to support the war effort.
With the Central Bank losing its battle against inflation despite unprecedented interest rates, it is expected to tighten monetary policy even further. This has raised the fear a wave of company bankruptcies. The country’s top bankers and influential think tanks have raised the stagflation alarm. The outlook for 2025 is deteriorating rapidly, leading analysts to declare the country increasingly “vulnerable to economic crises.”
Faced with limited upside and increasing pressure, the Russian business elite is weighing unpalatable options: remaining in Russia or fleeing. Some sanctioned billionaires have chosen to repatriate their holdings, boosting investment in the country. Others, such as Arkady Volozh, co-founder of Yandex, a major Russian tech company, have divested from Russian assets and denounced the war in hopes of being removed from the sanctions list in August of 2023. Indeed, Volozh is no longer under sanction by the European Union.
And he is hardly alone.
Recently, billionaire Roman Avdeev, who previously controlled the Rossium Group—a multi-sector conglomerate and one of Russia’s largest private banks—sold off his last Russian holdings. In December, Avdeev made his final exit from Russian businesses when his companies transferred their remaining stake to his business partner. He said he planned to spend more time with his family.
Russia’s economic troubles and the defection of many of Putin’s oligarchs could benefit President-elect Donald Trump. His “drill, baby, drill” pledge seeks to boost the global oil supply, which puts downward pressure on oil prices and denies Moscow much-needed wartime revenue. Additionally, Ukraine shutting off the flow of Russian gas through pipelines connected to Europe starting Jan. 1 will impact the situation.
Tightening the enforcement of the price cap on Russian oil and cracking down on Moscow’s shadow fleet of tankers could eliminate about 1 million barrels of Russian crude daily. A significant decline in oil and gas revenue would compel the Kremlin to address its already expanding fiscal gap through means that would ultimately be self-defeating, including exerting pressure on Russia’s wealthiest citizens.
If the elites feel they have “nothing to lose,” the regime’s facade of stability may crumble, leading to unpredictable outcomes—and possibly a better deal for Ukraine.
Ariel Cohen, Ph.D., is a Senior Fellow at the Atlantic Council and author, “Russian Imperialism: Development and Crisis” (Praeger Greenwood).
The views expressed in this article are the writer’s own.
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