How long can Russia continue the war in Ukraine?

Despite the Kremlin's optimistic rhetoric, international sanctions continue to exert significant negative pressure on Russia's economic system. The Russian economy has been grappling with prolonged military expenditures and the devaluation of the ruble.

A major issue lies in the one-sided development of the economy, which is heavily focused on military production without creating real added value or diversifying industries. This economic policy could lead to decreased labor efficiency, rapid inflation, the shutdown and bankruptcy of enterprises, personnel shortages, and the implementation of stringent monetary measures.

Since the summer of 2023, the Central Bank of the Russian Federation has raised the key interest rate eight times, reaching 21%—the highest level since 2003. By late October 2024, financial institutions in Russia anticipated that this would be the peak rate. However, another hike to 23% is expected in December 2024, with a further increase to 25% projected by February 2025.

If the Central Bank raises the rate to 25%, it will be the highest since 2000, when Vladimir Putin began his first presidential term. Prolonged high rates could push annual inflation in Russia to 20%.

As the vast majority of imported goods are paid for in foreign currency, their prices in the domestic market automatically rise when the ruble weakens. This affects not only consumer goods but also raw materials, components, and industrial equipment.

Russian importers, anticipating sharp price hikes, are reluctant to ship goods from warehouses to end consumers. This could cause shortages of certain products. In cases where importers fail to meet delivery terms (while waiting for peak prices), there could be a breakdown in both domestic and international trade agreements. This might result in some essential goods disappearing entirely from the Russian market.

A further drop in the ruble’s value would significantly raise the costs of pharmaceutical products, particularly medical equipment and medicines, as approximately 80% of medicines in Russia are made from imported substances. Manufacturers may attempt to offset the costs of vital drugs by increasing the prices of other medicines, potentially leading to quality issues. Additionally, some medicines may be discontinued if production becomes unprofitable.

Russia, as an exporter of natural resources, benefits from a weak ruble in certain ways. The depreciation allows the Ministry of Finance to ensure an inflow of rubles by converting foreign currency revenue. To support this, the Ministry has even lowered mandatory foreign exchange reserves for exporters.

However, for the Russian population, the weakening ruble is a significant problem. It results in higher inflation, stagnant wages, and a slower economy—a scenario often referred to as the "middle-income trap." This means that as a country reaches a certain income level, its economic growth decelerates.

For the average Russian citizen, a weaker ruble translates to higher prices, increased interest rates by the Central Bank, slower growth, a reduced standard of living, high unemployment, and personnel shortages. According to the Central Bank, 73% of enterprises face personnel shortages, and Rosstat reports that factory capacity utilization has surpassed 80%, a historical high.

Another interest rate hike to curb inflation could result in widespread bankruptcies and a severe impact on Russians' incomes due to skyrocketing prices for basic goods.

The exact date for the end of the war remains uncertain, but by 2025, the Russian population is expected to bear even greater hardships. Combined with significant casualties on the front lines, a faltering economy could weaken Russia’s capacity to sustain its offensive and potentially force the war to end.