Three years into the conflict between Russia and Ukraine, official statistics paint a picture of resilience and economic strength. In 2024, Russia’s GDP reportedly grew by 4.1%, real disposable income increased by 7.3%, the unemployment rate remained at a record low of 2.5%, and external debt decreased by 8.7%. State-controlled media highlight Russia’s ability to bypass sanctions, its successful pivot to the East and the Global South, and overall socio-economic stability. But what lies behind this facade of economic prosperity? Is the Russian economy truly resilient enough to withstand the current level of sanctions and the turbulence of global markets, especially as the new U.S. administration under Donald Trump takes shape?
From Potemkin Villages to a Potemkin Economy
According to historical legend, during Catherine the Great’s journey to Crimea in 1787, she was shown bustling towns, flourishing agriculture, and well-trained military units along the route. These impressive scenes, orchestrated by her favorite, Prince Grigory Potemkin, turned out to be nothing more than temporary theatrical backdrops—painted facades and relocated populations brought in to create an illusion of prosperity.
The Russian Empire and its successor, the Soviet Union, may be long gone, but the tradition of Potemkin villages remains a defining characteristic of Russian governance. Today, this tendency extends beyond village facades to entire economic sectors. When assessing Russia’s highly optimistic economic figures, skepticism is warranted. A closer look at the data reveals the fragility behind the apparent economic strength.
Russian Economy in the Third Year of War
Following the full-scale invasion of Ukraine in 2022, Russia faced severe economic disruptions—soaring inflation, the freezing of Central Bank reserves, and unprecedented sanctions. Many analysts predicted a rapid collapse of the Russian economy. However, the GDP contraction in 2022 was less than 2%, and by 2023, official statistics claimed a 4.1% growth, a figure that was repeated in 2024.
According to Rosstat, the primary drivers of GDP growth in 2024 included:
- Information and communications (+11.9%), with a surge in software development (+18.0%).
- Hospitality and restaurants (+9.6%), driven by a 9% increase in the food service sector.
- Manufacturing (+7.6%), with significant growth in metal products (+35.3%), transport equipment (+29.6%), and electronics (+28.8%).
- Wholesale and retail trade (+6.9%), supported by a 6.8% rise in wholesale trade and 7.2% growth in retail, fueled by demand for consumer goods and machinery.
Other sectors showing notable expansion included finance (+16.5%), culture and sports (+8.4%), and electricity production (+1.9%). Growth was largely driven by increased domestic demand (+4.8%) as net exports continued to decline.
While these numbers suggest economic resilience, they obscure underlying vulnerabilities that could spell trouble for Russia in the near future.
An Economic Growth Fueled by Military Spending at the expense of Social and Investment expenditures
The most significant driver of Russia’s economic expansion is defense spending. Military-industrial complex (MIC) funding skyrocketed by 60% in 2024 and is set to rise another 25% in 2025. This massive injection of public funds into the economy creates short-term growth but does not translate into long-term stability. Weapons production does not generate sustainable economic value, innovation, or infrastructure improvements—it is a consumption-based rather than an investment-based expansion.
Moreover, the defense sector does not operate under market conditions. MIC enterprises rely heavily on direct government funding and preferential loans. When budget allocations fall short, the government issues subsidized credit, increasing the overall debt burden and fueling inflation. This unsustainable cycle of debt-financed growth makes Russia’s economic stability highly fragile.
The rapid expansion of military spending, now consuming over 40% of Russia’s federal budget, has significantly reduced funding for healthcare, education, and infrastructure. As resources are funneled into defense, social programs shrink, disproportionately affecting pensioners and public-sector workers who rely on state support.
At the regional level, mounting budget deficits are forcing local governments to cut essential services, delay infrastructure projects, and reduce social assistance. Meanwhile, sanctions have made foreign debt financing nearly impossible, limiting Russia’s ability to raise capital internationally and increasing reliance on domestic borrowing.
The trade-off is clear: as military expenditures grow, hospitals, schools, and public services suffer, leaving ordinary Russians to bear the economic burden of a war-driven economy.
Economic Growth Is Slowing Down
Although Russia’s GDP officially grew by 4.1% in 2024, the economy has been losing momentum since mid-year. The initial surge, fueled by state investments and military spending, masked deeper vulnerabilities that are now becoming clear. A key factor has been the end of preferential credit programs, which had previously supported consumer spending and business activity. With subsidies withdrawn, rising borrowing costs and inflation have weakened private sector demand, slowing both consumer spending and business expansion.
Sectors like retail and construction, once major growth drivers, are also struggling. The expiration of subsidized mortgage programs has led to a decline in real estate demand, while rising prices are squeezing household budgets, limiting purchases, and slowing retail sales. Looking ahead to 2025, growth is expected to decline further, as the government’s ability to inject new stimulus measures dwindles. Even officials now concede that 1-2% GDP growth is a more realistic target, signaling the end of Russia’s short-lived economic rebound.
Rising Inflation and Tax Burden
Inflation has become one of the most pressing economic challenges in Russia, putting immense pressure on households and businesses alike. While the official rate stands at 9.5%, many experts argue that the real figure is much higher, particularly for essential goods like food, utilities, and transportation, where prices have surged well beyond government estimates. As wages struggle to keep pace, purchasing power is eroding, making everyday expenses increasingly unaffordable for millions of Russians.
At the same time, the government has turned to aggressive taxation in an attempt to offset mounting budget deficits. Businesses have been hit particularly hard, with corporate profit tax rising from 20% to 25%, while small enterprises now face a new value-added tax (VAT) that adds to their financial strain. Tighter financial regulations have also increased scrutiny on personal incomes, creating further economic pressure on individuals.
To combat inflation, the Central Bank of the Russian Federation set an extremely high key rate of up to 21%. This makes loans inaccessible to both the population and businesses, effectively killing investment.
This growing tax burden is having a chilling effect on the economy. Many businesses, particularly small and medium-sized enterprises, are finding it increasingly difficult to remain profitable. Investment is slowing, entrepreneurial activity is stalling, and more businesses are being pushed into the shadow economy to avoid excessive taxation. Rather than stabilizing the economy, these policies risk stifling long-term growth and deepening Russia’s economic challenges.
The Labor Market Is Struggling with Workforce Shortages
Russia’s economy is facing a severe labor shortage, with key industries like manufacturing, construction, and services struggling to find workers. A major factor is the shift of skilled labor to the military-industrial sector, where state-funded defense contracts have absorbed thousands of workers, leaving other industries understaffed. At the same time, the emigration of specialists, particularly in IT and engineering, has drained the economy of much-needed talent, further weakening technological development and business competitiveness.
Adding to the strain is the fear of another wave of mobilization, which has led many young men to avoid formal employment altogether. With the risk of being drafted, a growing portion of the working-age population prefers informal or freelance work, worsening labor shortages across multiple sectors. As a result, businesses are unable to maintain production levels, economic activity is slowing, and long-term growth prospects are becoming increasingly uncertain.
Key Export Sectors Are in Crisis
Russia’s export-dependent economy is facing severe pressure, as key industries that have historically fueled growth—oil, gas, metals, and raw materials—struggle under the weight of sanctions and shifting global trade dynamics. The loss of Western markets, once the largest consumers of Russian energy, has forced Moscow to turn to alternative buyers like China and India. However, these countries, aware of Russia’s limited options, are demanding steep discounts, significantly reducing the profitability of oil and gas exports. This shift has weakened one of the primary revenue streams that have long sustained the Russian economy.
Other major export sectors are also feeling the strain. Metals and timber industries, once key contributors to trade surpluses, have suffered under European sanctions and increased export tariffs, making it harder for Russian producers to remain competitive. At the same time, the coal industry is seeing a decline, as China and India, two of Russia’s main customers, have imposed new restrictions, further squeezing export revenues. With foreign markets becoming increasingly inaccessible or unprofitable, Russia’s ability to generate hard currency and sustain economic growth is rapidly diminishing, pushing the country toward deeper financial uncertainty.
Growing Dependence on China
As Russia distances itself from the West, China has emerged as its dominant economic partner, but this growing dependence comes at a price. While Beijing has become a key buyer of Russian oil, gas, and other raw materials, it does so at steep discounts, significantly reducing export revenues. With limited access to Western markets, Moscow has little leverage in negotiations, leaving it increasingly reliant on Chinese trade terms that favor Beijing far more than they benefit Russia.
Despite this growing partnership, China cannot fully replace the economic role once played by Europe. The scale of demand from Chinese buyers is not enough to offset lost European trade, particularly in high-value sectors like energy and advanced manufacturing. Meanwhile, Russia’s attempts to source critical technology from China have failed to compensate for the loss of Western components. Chinese tech imports lack the sophistication of Western alternatives, further widening Russia’s technological gap and slowing industrial development.
This unbalanced economic relationship risks turning Russia into little more than a raw material supplier for China, eroding its economic sovereignty. Instead of being a strong global player, Moscow is slipping into a position of junior partnership, increasingly dependent on Beijing’s strategic and economic decisions. As time goes on, this dependence could leave Russia with fewer options to shape its own economic future.
Economic Hardships Are Making People to Turn to the Supernatural?
As economic pressures mount, an unexpected trend has emerged in Russia—a surge in demand for esoteric services and mystical goods. Faced with uncertainty and financial instability, many Russians are turning to astrology, fortune-telling, and mystical rituals in search of reassurance. Market data reflects this shift, with sales of shamanic drums skyrocketing by 95%, voodoo dolls increasing by 66%, and spending on astrological and fortune-telling services reaching 2.4 trillion RUB.
This phenomenon underscores a deeper social anxiety gripping the country. As traditional sources of stability—such as economic growth and government support—become less reliable, people are seeking alternative ways to make sense of an uncertain future. Polls show that one in four Russians believes in mysticism, a sentiment that appears to be growing as financial and political pressures intensify. The rise in esoteric spending is more than a passing trend—it reflects a society grappling with instability, where faith in the supernatural is becoming a substitute for confidence in the future.
Conclusion: A Temporary Boom, A Looming Recession
Russia’s economic growth in 2024 is built on state-driven military spending, rising taxes, and artificial demand stimulation. Beneath the surface, inflation, labor shortages, declining exports, and overreliance on China pose serious long-term risks.
As the fog of war clears, the cracks in Russia’s Potemkin economy will become even more apparent. The real question is not whether Russia can sustain growth, but how long before the illusion collapses.
