Putin's war economy has jammed

MILAN – It may seem like a paradox, but the latest bad news for the Russian economy risks also bearing Moscow's signature. Today the major oil producing countries gathered in OPEC + will launch a new increase in crude oil production, even higher than that decided and reiterated in recent months. Arabia

Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Oman, Iraq, Kazakhstan and Algeria have in fact reached a basic agreement to further open the taps of extraction by 548 thousand barrels per day starting in August. A surprising decision, when most observers expected an increase of 400 thousand barrels, in line with the increases decided in the previous months.

For the cartel countries, it is a move to regain market share: more supply translates into lower prices, excluding countries with higher extraction costs. A gamble in an international context in which the slowdown of the world economy suggests a drop in demand, with the risk that excess supply will push prices down even further.

Bad if not terrible news for Russia, whose war economy – explains the Wall Street Journal – is starting to show the first cracks. Manufacturing activity is declining, inflation is still on the threshold of double digits, consumers continue to reduce spending and the state budget is increasingly under pressure.

The end of a model

“The growth model based solely on military spending has failed,” Janis Kluge , a Russian economics expert at the German Institute for International and Security Affairs, was quoted by the Journal as saying. “Civilian capacity must be reduced, freeing up workers so that the war machine can continue to grow. But that is not sustainable.” Russian Economy Minister Maxim Reshetnikov warned last month that Russia “is on the brink of recession ,” while Finance Minister Anton Siluanov called the situation a “perfect storm.”

The economy slows down

Macroeconomic indicators confirm these signals. In the first quarter of the year, Russian GDP grew by 1.4% compared to the previous year, down 4.5% compared to the fourth quarter of 2024. The manufacturing PMI , the index of corporate purchasing managers considered the most up-to-date “thermometer” on the state of health of manufacturing companies, recorded a worrying 47.5 in June, the lowest figure in three years and below the threshold of 50 points, which separates phases of contraction from those of expansion of production activity.

War doesn't pay like it used to

The huge investment in war therefore does not seem to pay off as it used to. Military spending today is around 6% of GDP, double that of the United States and the highest since the Soviet Union. Defense and security spending – the Wall Street Journal always reminds us – represents about 40% of total Russian public spending this year.

The price race

But the surge in military spending has pushed inflation up, forcing the central bank to keep rates high to contain the surge in prices, which fell for the first time in May, from 21 to 20% . Higher rates obviously limit credit options for businesses and families, to the detriment of the country's economic growth.

Alarm bells have also been ringing for the country's main banks, which in recent months have seen the share of NPLs , or impaired loans that are difficult to collect, grow, with VTB , the country's second largest state-controlled credit institution, recording a rate of impaired loans in the retail segment of 5% in May 2025, up from 3.8% at the end of 2024. These numbers, however, do not frighten the Russian central bank, which was quick to reassure that the risks of insolvency are largely covered by the banks' capital buffer.

The risk of low-cost oil

But the Russian war machine, even though it is heavily sanctioned , has been fueled over the years by the consistent sale of oil, even though it was already sold at a discount compared to international prices. Now the drop in prices “driven” by the producers’ cartel could add further elements of uncertainty. A recent report by the Finnish central bank shows how Moscow has set an oil price of 70 dollars a barrel in its budget forecasts. If prices were to drop further, the public deficit could grow further. In detail, according to the study, if the average export price of Russian crude oil were 55 dollars a barrel in 2025 and 54 dollars in 2026, instead of the 70 and 60 dollars respectively forecast by the budget framework, Russian GDP would lose one point each year. Not a small amount for an economy that is already slowing down.