Mutually Assured Destruction

Vladimir Putin's remarks at this year's Eastern Economic Forum followed a familiar pattern, but with a dramatic shift from previous years. Once focused on attracting foreign investment, the Forum now serves as a platform for the Kremlin to showcase conditions in Russia's Far East. Officials highlighted a 25 trillion ruble investment in the region over the past 11 years, a tripling of regional GDP, and an unemployment rate of just 2.2%, measured against the odd benchmark of 1998.

However, what stood out most was Putin's emphasis on balancing economic growth with price stability for businesses. This viewpoint is nothing new, having been recycled for over a decade. Putin's speech suggested that mass nationalizations are not imminent, though it still reveals the simplistic approach to economic planning in Moscow.

At this stage of the war, the Kremlin can realistically only help businesses by refraining from mobilization or deepening state intervention in markets. According to the business association Opora Rossii, tax breaks could be beneficial, such as extending them to retail giant Ozon and sellers using its platform. However, tax breaks are only effective if companies continue to make profits, which has been a significant challenge for Russian businesses.

Profits fell 13.3% year-on-year in the first half of the year to around 11.7 trillion rubles—an alarming drop even before accounting for inflation. Rising labor and other costs, coupled with a struggle to manage debt or raise prices without losing customers, have further exacerbated the situation.

The regime's extensive use of tax breaks to steer investment into defense supply chains and regional economic hubs has resulted in a proliferation of inefficient companies that have merely survived their early years due to generous fiscal terms. With little incentive to rationalize or improve their efficiency, especially in a political system where employment is used to minimize protests and other pushback, we see a plethora of less productive firms operating in an economy still inundated with money from military spending.

These firms are forced to increase prices to offset labor costs. A decline in IT investment, down 37% year-on-year, is also a concerning sign for white-collar productivity. Notably, consumer spending at large retail centers shifted from alcohol, perishables, and food staples, which accounted for 22% of spending in the first half of the year, to 24% by the end of August 2026.

This slow reallocation of spending toward staples whose prices consistently outpace headline inflation is an interesting development.

What was particularly striking was Putin's admission that price stability matters more than growth. In his opinion, long-term investment planning is challenging in the face of "galloping" inflation. This statement is accurate, but what is more significant is the mechanism he proposed to anchor value-added industries in the Far East: guaranteed long-run demand from federal, regional, and municipal governments.

For this to be feasible, the budget would need to run deficits indefinitely—until the regime is willing to cut social transfers. However, high inflation caused by current deficits, combined with the sanctions regime and labor shortage, will only drive inflation higher. Putin also emphasized that the economic cooling from high interest rates should not be overdone.

Despite this, a 15% utility tariff increase in October will likely push inflation higher this fall. Official statements of intent often contradict the consequences of the decisions the government fails to reconsider. If Putin truly believes that price stability is a cure-all—a belief that shaped policy in the 2010s and justified harsh budget cuts after 2016—achieving this goal during wartime is practically impossible.

His comments on fuel shortages better highlight the realities faced by businesses. Any interventions the state is willing to finance create obligations, at least from the Kremlin's perspective. Putin's invocation of his time as prime minister during the 2008 global financial crisis, when he disregarded many businesses' pleas, bailed out well-connected insiders, and did little to restore sustainable growth, serves as a cautionary tale.

The Kremlin's acknowledgment of the need to avoid excessive pressure is itself an admission that the two sides—business and the state—exist in a state of mutually assured destruction if either fails. Putin's claim that the economy is in an "absolutely stable regime" is concerning, especially since officials rarely utter such phrases when conditions are genuinely stable.

The contradiction between corporate profits falling while stability is invoked creates a nominal recession rather than nominal growth accompanied by real-terms decline.