RUSSIA Cracks

Added: 2026-05-18

[00:00:00]Hi, welcome back to the channel. In today's episode, I want to talk to you about what's happening in the Russian economy because we've just had a major announcement from the Kremlin itself that things are slowing down far more rapidly than they expected. And honestly, when you start digging into the details behind this announcement, the picture becomes pretty concerning.

[00:00:21]Russia's Economic Ministry has now downgraded its GDP growth forecast for 2026 from the previous level of 1.3% to 0.4%.

[00:00:33]Now, that is not a minor revision. That is a reduction of almost 2/3 and it doesn't stop there. The forecast for 2027 has also been slashed from 2.8% to 1.4%. So, basically, it's been halved. And even looking all the way ahead to 2029, Russia is now only projecting economic growth of 2.4%.

[00:00:59]Now, to put all of this into context, the Russian economy already contracted by 0.3% in the first quarter of 2026.

[00:01:08]That was the first quarterly decline that we've seen since 2023, so for the last 3 years. So, we're not talking about a slowdown from a position of strength. We're talking about a major forecast downgrade on top of an economy that's already shrinking right now. And what makes this even more significant is that these numbers are coming from the Russian government itself. This isn't Western analysis or NATO or anti-Russian economists. This is Moscow admitting that the economy is slowing sharply. And once governments start publicly acknowledging weakness, it usually means the real situation behind closed doors is even worse. Now, before we get into the details on all of this, could I ask anybody that hasn't subscribed yet to please hit that subscriber button. It really does help me with the algorithm and also put a smile on my face. Now, what makes this story even more interesting is the political backdrop to all of it. Because just last year, Vladimir Putin reportedly instructed officials to ensure that growth resumed strongly in 2026.

[00:02:11]And according to recent reports, he actually rebuked senior officials over the slowdown in the economy and demanded new measures to support growth. So, this latest announcement is essentially the government telling him it's not going to happen. Not this year. And I think that's why this downgrade matters so much. Because it's effectively an admission that the economic model Russia has relied upon over the last few years is starting to run into serious problems.

[00:02:39]Now, officially, Deputy Prime Minister Alexander Novak has described the slowdown as a cyclical correction. But honestly, when you actually look at the numbers and the wider picture, that explanation doesn't really hold up particularly well. Because what we're seeing here looks much more like structural weakness beginning to emerge across multiple areas of the Russian economy simultaneously. And the first major problem is what analysts are now calling the wartime spending hangover.

[00:03:08]Back in 2023 and 2024, Russia actually posted surprisingly strong GDP growth numbers of around 4%. And the Kremlin used those figures as evidence that the Russian economy was resilient in the face of sanctions. But here's the thing.

[00:03:24]A huge amount of that growth was driven by military spending. The government pumped enormous sums of money into arms production, military factories, logistics, ammunition, equipment, and soldier salaries. And in the short term, that absolutely creates economic activity. Factories become busier, employment rises, industrial output increases, and GDP goes up. But wartime spending isn't the same thing as balanced long-term economic growth.

[00:03:51]Because large parts of the civilian economy have effectively been sacrificed to support the war effort. And over time, that creates distortions. The economy starts becoming dependent on state spending, rather than productive private sector growth, and eventually you hit capacity limits, and that now appears to be happening. Because Russia is reportedly planning to spend more than 13 trillion rubles on defense in 2026. That is an extraordinary amount of money. But even that spending is no longer generating the same economic boost as before, because the system is already running at capacity. There simply aren't enough workers, enough production capacity, or enough flexibility left in large parts of the economy. And that's why growth is now slowing, despite enormous military expenditure continuing. And this is where the story gets really interesting, because under normal circumstances, Russia should actually be making an absolute fortune right now. Global oil prices are currently trading above $105 per barrel because of the war in Iran and the disruptions to the Strait of Hormuz. And normally, that would be fantastic news for Russia. Russia is one of the world's biggest oil exporters.

[00:05:05]Higher oil prices usually means higher revenue, larger trade surpluses, stronger government finances, and stronger economic growth. But here's the extraordinary part. Despite oil trading at around $105, Russia's economy ministry has reportedly kept its own internal price assumption for 2026 at just $59 per barrel. And I think that tells you everything you need to know about the situation in Russia right now, because the Russian government clearly does not believe it can fully benefit from the elevated global oil prices. And there are two major reasons for that. The first is obviously the sanctions. Western countries have continued targeting Russia's so-called shadow fleet, the tankers used to bypass the G7 oil price cap and the sanctions systems. And as a result, Russia's often been forced to sell its oil at substantial discounts compared with global benchmark prices.

[00:06:00]At various points, Russian crude has reportedly traded at $40 per barrel even while global prices were significantly higher. And according to recent reports, Russian oil and gas revenues fell sharply last year, coming in at around 2 trillion rubles below budget expectations. Now, the second issue is arguably even more damaging, Ukraine's drone campaign against Russian oil infrastructure. According to figures from Bloomberg, Ukraine has carried out 120 attacks against Russian energy facilities over the past 12 months, and some of those attacks have targeted extremely important energy infrastructure, facilities linked to Ust-Luga, Primorsk, and the Sheshkhara terminal at Novorossiysk, one of Russia's key Black Sea export hubs. And the result of all of this is that Russia cannot reliably export and monetize oil production in the way that it once could. So, despite high global oil prices, the actual benefit flowing into the Russian economy is far more limited than many people realize. And according to Russian analysts, hopes of an oil windfall from the Iran war are now unlikely to materialize. The government clearly seems to agree with this viewpoint because they've only kept $59 in their budget as the price for all Russian oil. And if Russia genuinely expects to benefit from the higher prices, then it would have increased those assumptions. Now, there's another major issue developing here as well, and that's interest rates. To try to control inflation, Russia's Central Bank raised its interest rates last year to 21%.

[00:07:37]Now, just to put that into perspective, interest rates in the UK are currently sitting around 4% and in the USA, similar sort of figure. So, Russia's borrowing costs reach absolutely extraordinary levels. Now, since then, rates have reduced and they're currently sitting at 14.5% but even that is incredibly restrictive for businesses and consumers. Because if companies are borrowing money at those sort of rates, investment becomes very difficult and you can't get return on it. So, expansion slows down, construction slows down, business lending slows down and reports suggest that corporate bankruptcies in Russia have risen by around 20% so far this year. At the same time, inflation is still running well above target.

[00:08:23]Annualized inflation during the first quarter of 2026 has reportedly remained at around 8.7% compared with the official figure of around 6%. Food prices are up by around 20%, services about 14% and fuel is up by 11%. So, ordinary Russians are being squeezed from multiple directions simultaneously.

[00:08:46]And this creates a really dangerous economic trap. Because if the Central Bank cuts rates too aggressively, inflation could surge again and the ruble could weaken sharply. But if rates stay high, economic growth continues slowing and more businesses come under financial pressure. And according to recent signals from the Central Bank, the rate-cutting cycle may now be nearing its end, which means Russia could be stuck with relatively high borrowing costs for a long time. Now, at the same time that all of this is happening, Russia's budget position is deteriorating rapidly because military spending remains enormous. Oil revenues are under pressure, economic growth is slowing and tax revenues are weakening.

[00:09:27]And as a result, the deficit is expanding very quickly. The federal budget deficit has reached 4.6 trillion rubles in the first quarter of 2026, which means the government has already exceeded its full year deficit target within the first 3 months. And in April, it's been reported that the deficit has widened even further to 5.9 trillion rubles. That is a very serious deterioration. So, what is the Kremlin now doing? Well, it's raising taxes, it's increasing borrowing, and trying to squeeze more money out of the domestic economy. VAT has been increased from 20% 22% at the start of this year.

[00:10:07]Additional levies have also been introduced on some imports, and the government is now expected to borrow an additional 5.5 trillion rubles domestically through bond issuance. But this creates another problem because as the Russian finance minister recently stated, the more the government borrows, the less room the Central Bank has to lower interest rates. And that's absolutely correct because government borrowing pushes pressure back into the financial system, which keeps yields high, keeps inflationary pressure elevated, and makes it harder for the Central Bank to stimulate the economy.

[00:10:42]And this is the trap Russia now finds itself in. Growth is slowing, oil revenues are under pressure, borrowing is rising, interest rates remain painfully high, and the government is now raising taxes into an already weakening economy. That is not a recipe for recovery. That is the setup for stagnation. Now, another issue that doesn't get talked about enough is the weakening position of Russia's export relationships. India became one of Russia's biggest oil customers after Europe sharply reduced imports following the invasion of Ukraine. But reports now suggest that India is cutting back on all of its Russian crude purchases under growing pressure from the United States.

[00:11:22]And some estimates suggest India's share of Russian exports has fallen significantly. So, Russia is increasingly facing pressure not just on price, but also on market access itself, partly as the result of the secondary sanctions. And when you combine all of these issues together, high interest rates, falling growth, rising deficits, inflation, sanctions, infrastructure attacks, weaker export revenues, and a war economy running at full capacity, you start to see why the Kremlin is suddenly downgrading its forecast so aggressively. Because 0.4% growth is essentially stagnation. That is not the sign of a booming wartime economy.

[00:12:03]That's the sign of an economy that's starting to grind to a halt. And once growth disappears, all the underlying structural problems become much harder to manage. Budget deficits, regional debt, corporate failures, banking stress, currency pressures, living standards, social spending. Economic growth hides a lot of problems, but when growth slows sharply, those problems suddenly become very visible. And I think that's why this latest announcement from Moscow is actually far more important than most people realize.

[00:12:36]Because for the first time in quite a while, the Russian government itself is openly acknowledging that the economy is entering a much more difficult phase.

[00:12:44]And the really big question now is this, can Russia continue financing both the war and the domestic economy at the same time without eventually triggering a much larger financial crisis. Because right now, the cracks are clearly starting to appear. So, I'll keep you posted on any further news and developments. But hopefully, you found today's video useful, informative, and most importantly, thought-provoking. If you liked what I've said, or maybe you didn't like it, but you thought it was interesting, then please give me a thumbs up. Please subscribe to the channel if you haven't done so already.

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[00:15:46]>> Mhm.