The Myth of the Russian Economic “Collapse”

Wishful Thinking Helps No One

If you consume any kind of content related to the war in Ukraine, you’ve likely come across a particular type of stories that have become a staple of the media diet around this topic: stories about how the Russian economy is finally about to implode. Usually declaring that sanctions are "crippling," the ruble is "collapsing," and Putin's financial house of cards is moments away from tumbling down. With the implication that this will inevitably bring down both Russia’s war machine and the regime behind it.

Now, I’m not surprised that these types of stories are popular. After all, if you want to see Ukraine succeed and good news are hard to come by, then the idea that Russia is on the verge of collapse becomes very appealing.

But the problem is that Russia's economy is not collapsing. In fact, it’s not even close. And unless something dramatically changes, it's probably going to keep not collapsing for quite a while.The narrative of an impending economic meltdown is, at least in my view, incorrect and based on a misunderstanding of how economies under stress actually behave.

I’m well aware that this might not be my most popular post. A lot of people are emotionally invested in this story and as humans, we naturally prefer to hear things that confirm our beliefs rather than challenge them. But unfortunately, expecting an imminent Russian economic meltdown risks setting up false expectations about the real trajectory of the Russian economy - and about how and when the war might end.

I touched on this in my last post for paid subscribers, but I wanted to dig deeper into it here. So, let’s get into it.

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The Reality of Russia’s Economy

So to begin with, it’s quite clear that Russia’s economy is obviously having some very, very serious problems. These problems are getting worse over time and they will likely only continue to get worse in the future.

To quote from my previous post:

The war costs enormous amounts of money - in fact, every year the cost of the war and the strain on the Russian government budget keep growing. Meanwhile, revenues flowing to the Russian budget are decreasing, mainly because deliveries of Russian gas to Europe have been practically cut off and oil prices are much lower than they were in the first three years of the war. Russia is bridging this gap by draining money from its rainy-day "National Wealth Fund," where it has been storing oil profits from the past two decades, printing money and by increasing its national debt.

On top of that, Russia went into this war with already low unemployment which means it’s not that easy for them to just magically conjure up millions of additional soldiers for the military and workers for the defense production. To expand production - especially in the defense sector - the state is trying to get the same amount of people to do more by fueling in more and more money - and the result is high inflation and what economists call overheating.

In a nutshell, there’s a growing mismatch between what the government is spending and what it’s bringing in. Year after year, the budget deficit keeps exceeding expectations as the real government expenses are higher and revenues lower than previously expected. And that’s not even mentioning the exodus of highly qualified people over the past few years, or a lack of sources of future growth other than natural resources and state spending.

Simply put, the Russian economy is not doing well, at all.

But that’s not the same as collapse. It’s not even close.

The reality is that Russia’s wartime economy - while distorted, overheating, and unsustainable in the long run - is still fully functional in the short-to-medium term. And understanding why requires getting past the surface signals of stress and looking at how the system is actually working.

First, Russia’s economy, for all its problems, is not currently in crisis - at least not yet.

Despite the headlines, Russia is not currently experiencing a financial panic, a currency crash, or mass unemployment. In fact, unemployment is at historic lows and wages have risen sharply over the past few years, particularly in defense-related industries, driven by the worker shortage and massive increase in state spending. In at least some sectors, Russians have paradoxically experienced an increase in their economic standards because of the war.

This boom, of course, is entirely artificial. It’s not coming from innovation or investment or expanded productivity but from the Kremlin pumping money into the system to fund a war. More people are working longer hours to produce things that will be destroyed which means that it’s not a productive growth which would create even more returns and growth in the future but just a temporary boost. But it’s good to keep in mind that even if the growth slows to a zero now, it’s still coming off from a temporary high which will dull the effects and pain inflicted by the slowing economy.

Second, even though the Kremlin is now operating at a deficit and it spends more than it brings in, Russia still has room to finance itself.

Yes, the Russian government is running a deficit. Revenue has dropped, especially from energy exports, while military and social spending keep climbing. But that shortfall doesn’t mean insolvency. Russia can still draw on several sources: domestic borrowing, the National Wealth Fund, and ruble issuance. Each comes with costs, but all remain usable.

The National Wealth Fund isn’t just a stash of foreign currency, it’s an internal buffer, designed to smooth out oil revenue volatility. It can’t be used endlessly, but it still gives the government room to maneuver. And although the cost of borrowing is rising fast and with interest rates above 20%, servicing costs are now consuming a growing share of the budget, Russia's debt-to-GDP ratio is still very low, at least technically. And so while it gets more painful each year, Russia can still keep borrowing as well to finance what it needs.

Third, while the inflation is high, so far it’s manageable - and it’s unfortunately being managed quite competently.

Inflation is the pressure valve in this entire system. The more the government spends, the more inflation creeps up and for the past two years the inflation rate has been steadily going up. Prices have risen sharply and to cool things down, the central bank has had to raise interest rates to over 20% - but that has frozen the mortgage market, crushed consumer credit, and squeezed large parts of the private sector.

But so far, the central bank has managed to keep inflation from spiraling. While painful, the extremely high interest rates seem to have stopped the inflation from going up and it now seems to be slowly going down. The interest rates can't stay at over 20% forever without causing even more damage and potentially even triggering a wider financial crisis but for now, the Russian state is still willing and able to absorb the pain needed to hold it together.

All of this puts the Kremlin in a tight but manageable position. It can redirect funds from other areas. It can raise taxes, borrow more, or keep drawing down reserves. None of these are good options. But all of them are available. If the Russian government doesn't care about the long term consequences and prefers to keep fighting the war, they are able to do that.

Gradual decline, not a collapse

Which brings us back to the idea of collapse. The thing is that collapse isn’t something that just happens because the economy looks unhealthy. Most of the time, real economic breakdowns come from a combination of several strong shocks, or from pretty fundamental policy errors that trigger unexpected second-order effects.

In Russia’s case, collapse would require something more than just bad numbers. It would take a double shock: a prolonged crash in oil prices and a tightening of sanctions that cuts export volumes significantly. Either one of these alone would be serious. Together, they could overwhelm the system. But that’s not the world we’re in right now and it’s not the world we’re likely to be in unless geopolitical conditions shift dramatically.

There are other ways collapse could come as well, triggered more from inside the system rather than from the outside, most likely by serious missteps in monetary policy. For example, if the central bank holds interest rates high for too long, the frozen housing and consumer credit sectors could trigger a broader financial shock. Real estate companies are already sitting on unsold assets, hoping to ride out the rate spike. If they all blink at once, you could see a cascading asset collapse. But again, that’s a risk, not a forecast. And the Russian central bank filled with loyal technocrats remains unfortunately remarkably competent at managing this balancing act.

And so the far more likely scenario is not dramatic collapse, but gradual deterioration.

What’s likely to happen is that the war continues, the state keeps spending, inflation remains high, reserves shrink and debt service costs grow. And year by year, the Kremlin has to make harder tradeoffs to keep the system going: higher taxes, more cuts to pensions and infrastructure, greater pressure on the private sector.

But that doesn't mean that the machine stops or breaks down. Instead, it just wears itself down and it will be less and less reliable with worse and worse results. Unless of course a radical change in policy from both the EU and the U.S. happens and they implement significantly more effective sanctions, improve their enforcement and drive down the price of oil by another $10-$20.

Which is why the collapse narrative doesn’t hold up - not because the Russian economy would be healthy but because it’s much easier for a state to degrade slowly than to fall apart all at once.

Detachment from reality

So why has this collapse narrative been so persistent? Part of it is just the sheer volume of genuinely bad economic news coming out of Russia. Currency volatility, shrinking oil revenues, labor shortages, supply chain bottlenecks, mounting debt - all of this is real, and all of it represents genuine stress on the system. But there's a difference between stress and breakdown, and we've been consistently confusing the two.

There's also a psychological element at play. When the Kremlin consistently insists that everything is absolutely fine, a natural instinct of many people is to push back - assume the opposite must be true and portray the Russian economy as if everything is already falling apart. But reality is messier than that. Everything is not fine, but it's also not collapsing. The system is strained and inefficient and probably unsustainable in the long term, but it's still functioning. And in some ways that's harder to accept than either of the cleaner narratives.

And finally, we tend to fundamentally overestimate how often economies actually collapse. Venezuela didn't collapse despite hyperinflation and mass emigration, Iran hasn't collapsed despite decades of sanctions and even the North Korean regime has managed to somehow keep the economy alive despite being cut off from the world for seventy years.

True, none of them spent several years fighting an extremely costly war. But the Soviet Union ran a completely dysfunctional and mismanaged economy for decades, while spending twice as much on defense (as percentage of GDP) than even wartime Russia does today. And while its economy massively deteriorated, it avoided an outright collapse until after the regime collapsed politically.

What actually happens to dysfunctional economies is that they degrade slowly and unevenly, often in ways that are hard to see unless you're paying close attention. Inflation eats away at savings, investment dries up, growth disappears and living standards stagnate. But the state endures, often much longer than anyone expects, especially when it's willing to sacrifice long-term prosperity for short-term survival.

The Danger of the Myth

Most people think of economic collapse like a light switch: everything's working fine until suddenly it isn't. But that's not usually how it happens. Real economic breakdowns tend to be much messier and more gradual. Budgets get squeezed year after year, inflation slowly chips away at stability, and institutions lose their effectiveness bit by bit rather than all at once. Even when the overall direction is clearly downward, it rarely ends with the kind of dramatic crash that makes headlines.

That’s the part missing from most commentary about Russia. Not that the economy is in good shape - it clearly isn’t - but that collapse is actually a very high threshold to clear. It takes either multiple external shocks or serious internal mismanagement to push a system over the edge. And even then, what looks like a collapse from the outside is often just the delayed outcome of years of slow deterioration.

In reality, states are very good at muddling through even if they make bad choices. Not without serious costs, but well enough to keep basic functions running. Russia still has the institutional capacity to fund this war, even if it means slowly hollowing out the rest of its economy to do so. That doesn't make the current path sustainable but it makes it possible to sustain a lot longer than most people want to believe.

The problem with this narrative is that it’s the economic equivalent of mocking North Korean soldiers on Twitter, while the people facing them on the battlefield know they’re dangerous and capable. The same disconnect exists here. Experts who actually study the Russian economy - like Janis Kluge, whom I interviewed recently, Alexandra Prokopenko, or even the Kyiv School of Economics experts in their January report - are clear that a collapse is highly unlikely in the foreseeable future. But if you rely on headlines and surface-level commentary, it can easily seem like we’re basically there already.

That’s a dangerous situation to be in. It distorts public expectations and feeds the assumption that Russia’s war effort will eventually unravel on its own, simply because the economy will force it to. But that may not happen, and it’s unlikely to happen anytime soon unless something shifts dramatically.

So yes, Russia's economy is degrading. Yes, the risks keep piling up and it will be getting worse. But still - if you're waiting for an economic collapse, you might end up waiting a very long time.