Putin’s Economic Concerns Amid Ukraine Conflict

By Darya Korsunskaya, Guy Faulconbridge, and Gleb Stolyarov

MOSCOW (Reuters) – President Vladimir Putin has grown increasingly concerned about distortions in Russia’s wartime economy, just as Donald Trump pushes for an end to the Ukraine conflict, five sources with knowledge of the situation told Reuters.

Russia’s economy, driven by exports of oil, gas, and minerals, grew robustly over the past two years despite multiple rounds of Western sanctions imposed after its invasion of Ukraine in 2022.

However, domestic activity has become strained in recent months due to labor shortages and high interest rates introduced to tackle inflation, which has accelerated under record military spending.

This has contributed to the view within a section of the Russian elite that a negotiated settlement to the war is desirable, according to two of the sources familiar with thinking in the Kremlin.

Trump, who returned to office on Monday, has vowed to swiftly resolve the Ukraine conflict, Europe’s biggest since World War Two. He has stated that more sanctions, as well as tariffs, on Russia are likely unless Putin negotiates, warning that Russia is heading for “big trouble” economically. A senior Kremlin aide said on Tuesday that Russia had so far received no specific proposals for talks.

“Russia, of course, is economically interested in negotiating a diplomatic end to the conflict,” Oleg Vyugin, former deputy chairman of the Central Bank of Russia, said in an interview, citing the risk of growing economic distortions as military and defense spending increases.

Vyugin was not one of the five sources who spoke on condition of anonymity because of the sensitivity of the situation in Russia. The extent of Putin’s concerns about the economy and how they influence views within the Kremlin about the war are documented here for the first time.

Reuters has previously reported that Putin is ready to discuss ceasefire options with Trump, but insists that Russia’s territorial gains in Ukraine must be accepted and that Ukraine must drop its bid to join the U.S.-led NATO military alliance.

The Kremlin did not respond to requests for comment about Putin’s view on the economy and Ukraine talks.

Trump “is focused on ending this brutal war,” engaging various stakeholders, White House National Security Council spokesperson Brian Hughes said in response to Reuters’ questions. Trump’s advisers have since tempered his remarks about resolving the three-year-old war swiftly.

Just days before Trump’s inauguration, outgoing U.S. president Joe Biden’s administration imposed the broadest sanctions package yet targeting Russia’s oil and gas revenues, a move that Biden’s national security adviser, Jake Sullivan, said would give Trump leverage in negotiations by applying economic pressure on Russia.

Putin has stated that Russia can fight on indefinitely, asserting that Moscow will never yield to another power over crucial national interests.

Russia’s $2.2 trillion economy had previously shown remarkable endurance during the war, with Putin praising top economic officials and businesses for circumventing stringent Western sanctions.

After contracting in 2022, Russia’s GDP grew faster than the European Union and the United States in 2023 and 2024. However, this year, the central bank and the International Monetary Fund forecast sub-1.5% growth, while the government projects a slightly more optimistic outlook.

Inflation has approached double digits despite the central bank raising the benchmark interest rate to 21% in October.

“There are some issues here, namely inflation, a certain overheating of the economy,” Putin remarked at an annual news conference on December 19, adding that the government and central bank have been tasked with decelerating economic activity.

‘War Goals Met’

Last year, Russia achieved its most significant territorial gains since the conflict’s onset, now controlling nearly a fifth of Ukraine.

Putin believes key war objectives have been met, including control of land connecting mainland Russia to Crimea and weakening Ukraine’s military, according to a source familiar with Kremlin thinking.

The Russian president also acknowledges the strain the war places on the economy, highlighting significant problems, such as high interest rates affecting non-military businesses.

Russia has increased defense spending to a post-Soviet high of 6.3% of GDP this year, accounting for a third of budget expenditure. This spending has been inflationary, exacerbated by labor shortages that have driven wages higher.

Additionally, the government has sought to increase tax revenues to mitigate the fiscal deficit.

Vyugin, the former deputy governor, warned that sustained high-interest rates would pressure the balance sheets of businesses and banks.

Putin Concern

Putin’s frustration was evident during a Kremlin meeting with business leaders on December 16, where he reprimanded top economic officials over decreasing private investment due to high credit costs, according to two sources briefed on the discussions.

While the Kremlin published Putin’s remarks praising business, the identities of the attendees were not disclosed. It was confirmed that Central Bank Governor Elvira Nabiullina was absent.

On Wednesday, Putin told ministers that he recently addressed the risks of diminished credit activity for long-term growth with business leaders, alluding to his prior meeting.

Some of Russia’s most influential businessmen, like Rosneft CEO Igor Sechin and Rostec CEO Sergei Chemezov, have publicly criticized high-interest rates.

Nabiullina faces pressure not to raise rates further from prominent bankers concerned that Russia may be sliding into stagflation, according to a source familiar with economic discussions.

In his comments on December 19, Putin called for a “balanced rate decision.” The subsequent day, the central bank decided to maintain the rate at 21%, despite market expectations for a hike of 200 basis points.

In a subsequent speech, Nabiullina refuted allegations of capitulating to pressure, noting that criticism of the central bank’s policies intensifies when rates are elevated.

Nabiullina, Gref, and Kostin did not respond to requests for comments.

Nabiullina

Elvira Nabiullina, a former economic aide to Putin who has been central bank governor since June 2013, is one of Russia’s most powerful women. Three sources indicated that Putin has faith in her leadership.

Shortly after the invasion of Ukraine in 2022, Putin proposed Nabiullina for a third term. Her mandate extends to 2027.

Supporters argue that critics overlook the root cause of inflation – extensive wartime spending – and assert that her absence could jeopardize economic stability.

Some lawmakers have called for her replacement, though two sources deem this unlikely.

“In such circumstances, changing the central bank governor is unthinkable,” said a source familiar with economic discussions. “Nabiullina’s authority is indisputable, and the president trusts her.”