Russia: Economy in deep crisis

In Russia , the country with potentially the largest agricultural land area, potatoes and onions have run out. Even President Vladimir Putin (72) has noticed the shortage. "It turns out we're short of potatoes," the Kremlin chief complained a few weeks ago. He also admitted there are shortages of sugar beets and some vegetables.

Previously, potato prices in Russian stores had skyrocketed. According to official figures, they have almost tripled within the past year, and the price of onions has doubled. Cabbage costs over 50 percent more than a year ago, according to the statistics office Rosstat. The perceived increase is even higher.

In June, Russians had to spend just over one euro for a kilo of potatoes. With average incomes of just under 1,000 euros before taxes, according to Rosstat, and pensions of just over 200 euros, that's not a small amount. Rising food prices are one of the main drivers of inflation in Russia. According to the Ministry of Economic Affairs, it currently stands at 9.6 percent.

The central bank is trying to control inflation with a high key interest rate – currently 20 percent. The rationale behind this is that if high interest rates make it more difficult to borrow, the money supply in circulation will decrease. Less money means less demand and lower inflation.

But this has now brought Russia further complications. Economics Minister Maxim Reshetnikov (45) issued an unusually clear warning of problems for the domestic economy at Putin's major showcase, the Saint Petersburg International Economic Forum (SPIEF): "According to the figures, we are experiencing a slowdown; according to the current sentiments of entrepreneurs, we are already on the verge of entering a recession," he said.

The current interest rate level is discouraging entrepreneurs from investing, Reshetnikov said. The minister estimates that investments in the third and fourth quarters could be below the previous year's level.

Central Bank Governor Elvira Nabiullina (61) defended herself against accusations of misguided monetary policy, but she also predicted difficulties. Russia's economy had grown for two years despite the sanctions through import displacement programs – thanks to money from the Prosperity Fund and existing capital reserves in the banking system. "We must understand that many of these resources have indeed been depleted, and we must think about a new growth model," she said.

Indeed, the Russian economy has held up remarkably well after the attack on Ukraine ordered by Putin – despite Western sanctions. This is primarily due to a rigorous shift of the economy toward war production. Putin confidant Sergei Chemezov (72), who heads the arms industry, recently boasted of an increase in ammunition and weapons production "tens of times over 2021."

Critics argue that Russia's gross domestic product (GDP) growth does not reflect the economy's potential to produce new goods for citizens or a rising standard of living. Rather, it merely indicates that the budget-funded defense industry is producing more and more drones, missiles, and tanks.

Civilian sectors, on the other hand, have been ailing for some time. They are struggling with high costs, staff shortages, and technological lag, which has only become more apparent due to the sanctions. The construction and real estate sectors, for example, are in deep crisis. Auto manufacturing has also stagnated since Western producers and suppliers turned their backs on Russia. While China is increasingly selling cars in Russia, it is not producing them locally itself.

AvtoVAZ, the Lada manufacturer belonging to the Chemezov empire, was unable to fill the gap left by Western automakers. Although the company presented the Lada Azimut at the St. Petersburg Economic Forum, which is scheduled to enter series production next year, thousands of predecessor models are still sitting in the dumps that no one wants.

Demand for new cars has collapsed again after a temporary peak in 2024. In the first five months, only around 450,000 vehicles were sold, a decline of 26 percent. AvtoVAZ also forecasts a decline of 25 percent for the year as a whole.

The agricultural machinery manufacturer Rostselmash is also in crisis. The combine harvester and tractor manufacturer has just placed more than 15,000 employees on furlough. It is unclear whether they will ever be able to return to work. Short-time work was already implemented at the factory in March, and 2,000 workers were laid off in April.

Paradoxically, even Rostselmash is unable to benefit from the widespread withdrawal of its Western competitors. Sales of combine harvesters are stagnating: Last year's 20 percent market collapse was followed by a decline of 10 to 15 percent so far this year. 40 percent of annual production is backed up in Rostselmash's warehouse. Farmers lack the money for new technology. High interest rates and rising production costs are causing problems.

And this has an impact on the harvest. In the first year of the war, 2022, Putin proudly reported a record harvest. That year, farmers harvested 157 million tons of grain. Since then, yields have declined noticeably.

The Kremlin chief has indeed ordered an increase in grain harvests to 170 million tons and exports to 80 million tons by 2030. "But based on recent trends, we are moving in the opposite direction," warned Deputy Prime Minister Dmitry Patrushev (47), who is responsible for the agricultural sector. This must be corrected quickly.

The government is hoping for a better harvest than last year. Potatoes are expected to be dug as early as next week. Due to the increasing supply, prices could fall again temporarily.

Otherwise, Putin will have to resort to the recipe of his longtime ally, Belarus's ruler Alexander Lukashenko (70), who is known as the "potato dictator." A few days ago, Lukashenko recommended that his subjects eat potatoes only once or at most twice a week. Otherwise, they would gain weight, Lukashenko said.