A new report by the Stockholm Institute of Transition Economics (SITE) warns that Russia’s economy is becoming increasingly fragile due to heavy war-related spending and the impact of Western sanctions over its invasion of Ukraine, despite official claims of strong growth.
The report, presented to European Union finance ministers on Tuesday, states that while the Russian economy appears stable on the surface, deeper structural weaknesses are growing. SITE said the Kremlin’s war-driven fiscal stimulus has kept the economy afloat in the short term, but rising dependence on opaque financing, distorted resource allocation, and eroding fiscal buffers make the current path unsustainable.
“Contrary to Kremlin narratives, time is not on Russia’s side,” the report said.
Since the start of the war in February 2022, the EU has imposed 16 rounds of sanctions targeting key revenue sources such as oil, gas, and coal. Other Western allies, including the U.S., U.K., Canada, and Japan, have also implemented sanctions.
Russia claims its GDP rose 4.3% in 2024 following 3.6% growth in 2023. However, SITE’s Torbjörn Becker questioned the credibility of these figures, arguing that Moscow likely understates inflation to inflate real GDP.
“Russia says inflation is at 9-10%, yet the central bank maintains a policy rate of 21%. That mismatch strongly suggests inflation is higher than reported. If inflation is understated, real GDP is overstated,” Becker told reporters.
Becker also raised concerns about Russia’s reported 2% budget deficit, noting that this figure likely excludes a significant portion of war spending routed through the banking system. When including off-budget spending, the actual deficit could be nearly twice as high, he said, adding that rising credit growth signals potential financial risks in the banking sector.
“These are red flags we associate with looming banking crises,” Becker said.
European Economic Commissioner Valdis Dombrovskis echoed SITE’s assessment, saying the European Commission shares the view that Russian economic data is unreliable and masks growing vulnerabilities.
“This analysis shows the Russian economy is not performing as well as official statistics suggest. It highlights the need for continued international pressure to reduce the Kremlin’s ability to finance its war of aggression,” Dombrovskis said.
