Russia on the brink: Economy overheats as war continues

The Russian economy, inflated by trillions of dollars spent on state defense orders and payments to soldiers fighting in Ukraine, is increasingly overheating. Putin's war machine operates around the clock, yet GDP is declining. The end of the war could cause a "total collapse" of the economy, says an expert.

As reported by Rosstat, in June, the Russian economy grew by 3 percent year-on-year, although a month earlier it was 1.5 percent higher. In February, this level reached 7.6 percent.

After two years of war and thousands of Western sanctions, industry slowed to 1.9 percent, three times less than the previous month and winter (5.3 percent in May and 5.6 percent in the first quarter).

Amid payment problems affecting imports to Russia, wholesale trade growth has practically ground to a halt: in June, it increased by just 1.9 percent year-on-year, although in May, this rate rose by 11.1 percent and by 16-20 percent or more at the end of last year.

"Economic activity has slowed in almost all sectors," Rosbank analysts note. The growth rate in construction has fallen nearly sixfold. Retail turnover dynamics have dropped to the lowest level in a year and a half, while goods work in agriculture and transport has started to decline—by 0.3 and 0.8 percent, respectively.

The economy on the brink of war has hit a dead end: sending a million citizens to war has caused an unprecedented staff shortage, and the defense industry and import substitution boom has ‘absorbed’ all available factory and plant resources. Central Bank President Elvira Nabiullina said last week that the country's labor reserves and production capacities are practically exhausted.

According to her estimates, the economy's overheating has reached a record level in the past 16 years, which ultimately could result in stagflation and a "deep recession."

According to the Central Bank's forecasts, next year the Russian economy could slow down to almost zero. The dynamics of investments and private consumption may also drop to zero. Additionally, foreign deliveries to Russia will continue to decline – they will amount to $291 billion this year, which is $12 billion less than this year, and nearly $50 billion less than before the annexation of Crimea (2014).

"Shifting the economy to war mode has led the Kremlin into a dead end: almost all economic growth is driven by the defence industry, and the end of the war could cause a "total collapse" of the economy," notes Renaud Foucard, a professor at Lancaster University, quoted by "The Moscow Times."

"The Russian regime has no incentive to end the war and deal with that kind of economic reality. So it cannot afford to win the war, nor can it afford to lose it. Its economy is now entirely geared towards continuing a long and ever deadlier conflict," Foucard warns.