RUSSIA in Trouble

Added: 2026-05-16

[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 the results for the first quarter of 2026 have now been released and for the first time in a very long time, the numbers, the official numbers are showing that the Russian economy is now shrinking. Now, this is a really important moment because over the past few years, the Kremlin has repeatedly claimed that the Russian economy was outperforming the West, outperforming Europe, outperforming the UK and the USA. The Kremlin is using official GDP growth figures, rising military production, huge government spending, and record defense budgets as evidence that the sanctions had failed, and that Russia was successfully adapting to wartime conditions as it switched to being a war economy. But the latest figures are starting to tell a very different story.

[00:00:51]The Russian economy has contracted in the first quarter. The budget deficit is widening rapidly. Oil and gas revenues are under pressure. Inflation remains stubbornly high. Interest rates are still elevated. And after eight consecutive interest rate cuts over the past 12 months, there are now serious questions being asked about whether the Bank of Russia can continue cutting rates without creating even bigger problems elsewhere in the Russian economy. So, in today's video, I want to go through all of the latest numbers, all of the latest developments, and discuss what's really happening behind the scenes in Russia right now. But before we get into all of that detail, could I ask anybody that hasn't subscribed yet to please hit that subscriber button? Really does help me with the algorithm and also puts a smile on my face. Now, let's start with the headline figures because these are significant. According to the latest first quarter data published by the Kremlin, the Russian economy contracted during the first quarter. And this is a major change because for the last couple of years, the Russian economy has effectively been running on a wartime stimulus. Massive government spending on military weapons production, ammunition, recruitment bonuses, and defense infrastructure created an artificial surge in economic activity. Factories are running around the clock. Employment was extremely tight. Wages were rising rapidly in military-l sectors. And that huge wave of state spending helped Russia avoid the sort of collapse that many Western analysts originally expected back in 2022. But there's always been a fundamental problem with this model. Military spending does not create productive long-term economic growth. Building tanks, missiles, and artillery shells may increase GDP statistics in the short term, but it does not improve living standards, productivity, innovation, or consumer prosperity in the same way as investment into technology, infrastructure, private enterprise, or exports. And increasingly, Russia now appears to be hitting the limit of that wartime model.

[00:02:58]One of the biggest problems is inflation. Russia's inflation rate remains significantly above the Bank of Russia's official target. The target rates 4% but inflation is still sitting at around 6%, roughly 50% above the target level. And this creates a huge dilemma for policy makers. Normally, when an economy starts slowing or shrinking as Russia is now, central banks would cut interest rates to stimulate borrowing, investment, and consumer spending and therefore boost GDP. And that's exactly what Russia has been doing. Back in June 2025, the Bank of Russia began cutting rates from the emergency level of 21%. And since then, we've seen eight consecutive interest rate cuts, bringing the rate down to the current rate of 14.5%.

[00:03:45]Now, on the surface, that sounds like a positive development because lower interest rates reduce borrowing costs for businesses and consumer. And if it's cheaper to borrow, people borrow and then spend. But there's a problem.

[00:03:57]Inflation is still too high. And when inflation remains elevated, cutting rates too aggressively, risk creating a second wave of inflationary pressure. If borrowing suddenly accelerates again, if consumer spending picks up too quickly, or if the ruble weakens significantly, inflation could start rising again really rapidly. So, the Bank of Russia is effectively trapped between two competing problems. If it keeps rates high, the economy slows further and businesses struggle. But if it cuts rates too aggressively, inflation could spiral higher again and damage consumer confidence even further. And this balancing act is becoming increasingly difficult because the underlying fundamentals of the Russian economy are deteriorating. Let's talk about the budget deficit because this is another huge issue. Russia's wartime spending has exploded over the last 3 years.

[00:04:51]Defense spending is now consuming an enormous portion of the federal budget.

[00:04:56]military recruitment payments, compensation packages, weapons production, logistics, and support costs are all massively expensive. At the same time, oil and gas revenues have become much less reliable. Russia is still exporting oil, but it's having to sell a large proportion of that oil at discounted prices to countries such as China and India. Transport costs are higher, insurance costs are higher, sanctions have complicated the payment systems, and Europe, which used to be Russia's most profitable energy customer, has dramatically reduced its imports to virtually nothing. Gas exports have been hit even harder.

[00:05:34]Before the Ukraine war, Europe was the premium market for Russian gas. The infrastructure already existed, then the pipelines, the pricing was highly profitable, and Gasprom was generating an enormous amount of cash. But much of that business has now disappeared. And whilst Russia has attempted to redirect energy exports eastward, the reality is that the infrastructure simply isn't there yet to fully replace the lost European market. Russia can't build pipelines to Asia overnight. So revenues are under pressure at exactly the same time as spending is surging. And that's why the budget deficit is widening. Now, the Kremlin can finance deficits for a period of time. Russia still has reserves it's been drawing down in its national wealth fund. It can borrow domestically. It can print money indirectly through the banking system.

[00:06:21]It can continue forcing state banks and institutions to support government financing. But none of these solutions are permanent because ultimately the bigger the deficit becomes, the more pressure it places on inflation, the currency, and long-term financial stability. And there are also growing signs of strain elsewhere in the economy. Industrial production growth has slowed sharply outside the defense sector. Consumer demand is weakening.

[00:06:47]Mortgage activity has cooled significantly because even after the rate cuts, borrowing costs remain extremely high by international standards. Nobody wants to borrow at 14.5% base rate. Many businesses are struggling with labor shortages because hundreds of thousands of workers have either joined the military, left the country, or moved into higher paying defense related industries. And there are increasing reports that many regions inside Russia are now facing severe financial pressure due to the rising costs associated with the war. Another issue is productivity. Russia has managed to keep the economy functioning through state intervention and wartime spending, but productivity growth remains weak. Access to Western technology, components, machinery, and expertise has been heavily restricted by the sanctions. And while Russia has managed to circumvent some sanctions through third countries, parallel imports, and alternative supply chains, these workarounds are generally more expensive and less efficient. So over time, the economy becomes less productive and less competitive. Now, to be balanced here, it's important to say that the Russian economy has not collapsed yet. It has shown some resilience and it was able to pivot and sell things to China and India. They provided alternative markets. Domestic manufacturing has adapted in some sectors. The banking system has remained sort of operational and the government has moved aggressively to stabilize the economy during the initial shock period.

[00:08:16]But resilience is not the same thing as sustainability and that's the key issue.

[00:08:22]Now the question is no longer whether Russia can survive sanctions in the short term. The question is whether this wartime economic model can continue indefinitely without creating deeper structural damage because the longer it goes on, the more resources are diverted away from productive investment and into military spending. And the longer interest rates remain elevated, inflation remains above target, labor shortages continue, and the deficit widens, the greater the risk that economic stagnation becomes entrenched in Russia. And that's why these first quarter contraction figures matter so much because they may be the first clear sign that the wartime growth model is finally running out of steam. Now, of course, the Kremlin will continue presenting a positive narrative.

[00:09:11]Officials will point to low unemployment, military production, and overall resilience. But underneath the headlines, the pressure is clearly building. And the reality is that economies cannot indefinitely run on military spending, rising deficits, and high inflation without consequences eventually appearing somewhere in the system. At some point, something has to give. Either inflation rises again, the ruble weakens further, government finances deteriorate more rapidly, growth slows further, or living standards become under increasing pressure. And that's why the next few months are going to be absolutely critical for the Russian economy. Can the Bank of Russia continue cutting rates? Can inflation be controlled? Can oil revenues remain stable? Can the government keep financing these massive wartime costs? And perhaps most importantly of all, how long can this continue before the underlying strain becomes impossible to hide? Well, I'll keep you posted on any further news and developments as and when they occur. But hopefully you found today's video useful, informative, and most importantly thoughtprovoking. If you have liked what I've said, then please give me a thumbs up. Please subscribe to the channel if you haven't done so already. Don't forget my competition to win my property or a cash alternative prize is now coming towards an end.

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