The Kremlin Consolidates Power as Russia’s Economic Pain Mounts

The Russian Federation came out of its recent parliamentary election with President Putin significantly bolstered in terms of political strength, while the country's economic situation appeared increasingly precarious. United Russia secured a record-breaking majority of 349 out of 450 seats in the State Duma, and a group of around 50 veterans from the conflict in Ukraine entered the parliament.

There was speculation about the Kremlin's tactics to circumvent public war fatigue, but the impression was that Putin was not losing control, and Moscow was not displaying desperation.

Economically, however, the narrative was considerably different. Moscow anticipated a meager growth rate of approximately 0.6% for the current year, with capital investments declining and interest rates persisting at 14%. The federal deficit surged to 5.8 trillion rubles by August, and revenues from oil and gas dropped by 16.7%. Over half of senior Russian business executives surveyed by RBC forecast deteriorating conditions by the end of the year.

Despite these economic challenges, the war in Ukraine remained a potential key to further weakening the Kremlin. However, the situation was not yet dire. The Russian economy displayed some resilience, with unemployment remaining relatively low, real wages on the rise, and high oil prices potentially contributing up to 1 trillion rubles to the National Wealth Fund in 2022.

The government's budget for 2023 indicated a significant increase in military spending, rising by 27% to 17.1 trillion rubles, financed through higher taxes, borrowing, and cuts in other areas. The Kremlin also tightened its grip on foreign assets and data, following Ukrainian strikes on Russian refineries.

The pressure on Russia, however, was not solely economic. The projected growth for 2022 was only 0.5%, with investment declining for five consecutive quarters and corporate profits dropping by 13.3% in the first half of the year. Only 9% of major businesses surveyed by the Russian Union of Industrialists and Entrepreneurs expressed confidence in participating in President Putin's proposed new investment cycle, while 52% anticipated a deterioration in the economy by the end of the year.

Only 9% of major businesses surveyed by the Russian Union of Industrialists and Entrepreneurs expressed confidence in participating in President Putin's proposed new investment cycle, while 52% anticipated a deterioration in the economy by the end of the year. The seizure of assets by the government, totaling approximately 7.6 trillion rubles since 2022, was also causing apprehension among Russian businesses.

The war's escalating cost was becoming increasingly apparent. Russia's expected 2026 budget deficit had been doubled to more than 3% of GDP, and the physical impact of Ukrainian strikes was adding to the economic strain. In a dramatic escalation, Russia threatened to use all available forces, including nuclear weapons, if NATO attempted to isolate the Kaliningrad exclave, prompting Poland and Lithuania to adopt more stringent rules for intercepting approaching aircraft.

Estonia had also accused Russian intelligence of orchestrating an arson attack against a defense company aiding Ukraine. While NATO did not foresee an imminent Russian attack and had not decided to engage in another conventional conflict, nuclear threats, drones near NATO territories, and alleged sabotage provided Russia with less costly methods to exert pressure.