In a move that has unsettled Washington’s European allies, former U.S. President Donald Trump is pushing for a swift resolution to the ongoing war in Ukraine. However, his approach—excluding both Ukraine and its European partners from initial discussions with Russia—has raised eyebrows. Trump’s narrative, which places blame on Ukraine for Russia’s 2022 invasion, has given Moscow a significant political advantage while also potentially yielding economic benefits.
Russia’s Economic Dilemma
Amid this geopolitical shift, Russia faces a tough choice, according to Oleg Vyugin, former deputy chairman of Russia’s central bank. Moscow can either curb its escalating military expenditures or continue its aggressive campaign at the risk of prolonged economic stagnation, high inflation, and declining living standards—all of which pose political risks for the Kremlin.
While government spending typically fuels economic growth, excessive military spending has led to economic overheating. With interest rates soaring to 21%, corporate investment is being stifled, and inflation remains uncontrolled. Vyugin emphasizes that Russia has a vested interest in negotiating an end to the war, as continued military-driven spending could further strain its already limited resources, increasing the risk of stagflation.
The Economic Ramifications of Peace Talks
Although a sudden reduction in defense spending is unlikely—given that military funding comprises about one-third of Russia’s budget—the possibility of a peace agreement offers some economic relief. Experts suggest that such a deal could lead to a gradual easing of Western sanctions, potentially paving the way for the return of foreign businesses.
Alexander Kolyandr, a researcher at the Center for European Policy Analysis (CEPA), notes that Russia may begin by reducing its military personnel, alleviating labor market pressures. War-related recruitment and widespread emigration have driven Russia’s unemployment rate to a record low of 2.3%.
A peace agreement could also curb inflation, especially if the U.S. becomes less inclined to enforce secondary sanctions on companies from nations like China. This would simplify trade, making imports more accessible and reducing costs.
Market Reactions and Economic Trends
The Russian ruble has already experienced a surge, reaching a near six-month high against the U.S. dollar, fueled by hopes of sanctions relief. While Russia’s economy rebounded strongly after a minor contraction in 2022, growth is expected to slow from 4.1% in 2024 to around 1-2% this year.
The Central Bank of Russia has maintained interest rates at 21%, citing an imbalance where demand growth outpaces production capacity. Governor Elvira Nabiullina acknowledged that the government’s aggressive fiscal stimulus has played a role in this economic imbalance. Russia’s budget deficit ballooned to 1.7 trillion rubles ($19.21 billion) in January alone—a staggering 14-fold increase compared to the previous year—due to front-loaded spending for 2025.
Winners and Losers in Russia’s War Economy
While some Russians have benefited from war-driven economic changes, others are struggling. Workers in defense-related industries have seen wage increases due to government spending, whereas those in civilian sectors face mounting costs for basic necessities.
Some businesses have seized new opportunities amid shifting trade dynamics. For instance, Melon Fashion Group has expanded significantly over the past two years, capitalizing on rising consumer demand. The company reports that since 2023, the average size of its newly opened stores has doubled.
Conversely, high interest rates pose major challenges for businesses reliant on financing. Elena Bondarchuk, founder of warehouse developer Orientir, highlights how steep lending rates have made it difficult to launch new projects, limiting investment opportunities.
Trump’s Carrot-and-Stick Strategy
Despite dangling the prospect of concessions over Ukraine, Trump has simultaneously threatened harsher sanctions if Russia refuses to negotiate. This dual approach underscores Washington’s significant leverage over Moscow’s economy.
Chris Weafer, CEO of Macro-Advisory Ltd, notes that Russia is keen on dialogue because of this pressure. “The U.S. is essentially saying: ‘We can ease sanctions if you cooperate, but if you don’t, we can make things significantly worse.’”
As the geopolitical landscape shifts, the world is watching to see whether Russia will prioritize military ambitions over economic stability—or seize the opportunity to negotiate an end to the war.
($1 = 88.5000 rubles)
