While Trump is easing more sanctions, Putin is growing worried about the Russian economy

By Darya Korsunskaya, Guy Faulconbridge and Gleb Stolyarov

MOSCOW (Reuters) – President Vladimir Putin is increasingly concerned about the deteriorating state of Russia’s wartime economy as Donald Trump pushes for an end to the Ukraine conflict, five sources told Reuters.

Russia’s economy, led by oil, gas and mining exports, has grown strongly over the past two years despite a number of Western sanctions imposed after it invaded Ukraine in 2022.

But domestic activity has accelerated in recent months due to labor shortages and high interest rates, with military spending to curb inflation.

According to two sources familiar with Kremlin thinking, this has contributed to the perception within the Russian elite that compromise is needed for war negotiations.

Trump, who returned to office on Monday, vowed to quickly resolve the conflict in Ukraine, Europe’s largest since World War II.

This week, Putin announced more sanctions and tariffs on Russia unless they negotiate, saying Russia is heading for a “big problem” in its economy. A senior Kremlin aide said on Tuesday that Russia had not yet received any specific proposals for talks.

Russian Central Bank Vice-Chairman Oleg Vyugin said in an interview that Russia’s turbo-military and military accusations as a growing threat of economic disruption, “Russia, of course, is in the economic interest to negotiate a diplomatic end to the conflict.” defense costs.

Vyugin was not one of the five sources, all of whom spoke on condition of anonymity because of the sensitivity of the situation in Russia. The extent of Putin’s concerns about the economy, revealed by his sources, and its impact on attitudes about the war in the Kremlin are documented here for the first time.

Reuters previously reported that Putin was ready to discuss ceasefire options with Trump, but that Russia would have to accept its gains in Ukraine and that Ukraine should drop its bid to join the US-led NATO military alliance.

Asked about the Reuters report, Kremlin spokesman Dmitry Peskov acknowledged “problems” in the economy, but said it was growing at a rapid pace and was “increasing all military requirements” as well as meeting all security and social needs.

“There are problems, but unfortunately, problems are now partners of all countries in the world,” he said. “The situation is assessed as stable, and there is a security gap.”

Trump is “focused on ending this barbaric war” involving multiple stakeholders, White House National Security Council spokesman Brian Hughes told Reuters in response to questions. In recent weeks, Trump’s advisers have pushed back on claims that the three-year war could be resolved in a day.

Days before Trump’s inauguration, outgoing US President Joe Biden’s administration dropped a broad package of sanctions to target Russian oil and gas revenues, a move Biden’s national security adviser, Jake Sullivan, said would prompt Trump to take economic action on any speech. Pressure on Russia.

Putin says Russia can fight as long as it needs to and Moscow will not bow to another power on key national interests.

Russia’s $2.2 trillion economy has until recently shown remarkable resilience during the war, and Putin has praised top economic officials and businesses for bypassing some of the toughest Western sanctions on a large economy.

In the year After contracting in 2022, Russia’s GDP grew faster than the EU and the United States in 2023 and 2024. This year, however, the central bank and the International Monetary Fund predict it will be below 1.5%, although the government has a slightly higher outlook.

In October, the central bank raised interest rates to 21 percent, but inflation is close to double digits.

Putin said at his annual press conference on December 19, “There are some issues here, namely inflation, the economy warming up. “The government and the central bank have already given the time to take it down.

‘Goals of War’

Last year, Russia made its most significant territorial gains since the early days of the war and now controls nearly a fifth of Ukraine.

Putin believes the main objectives of the war have already been met, including controlling the land connecting mainland Russia with Crimea and weakening the Ukrainian military, one of the sources familiar with Kremlin thinking said.

The Russian president understands the pressure the war is having on the economy, the source said, citing “big problems” such as the impact of high interest rates on non-military businesses and industries.

Russia has raised defense spending to a post-Soviet high of 6.3% of GDP, accounting for a third of budget spending. The cost has become inflationary. With wartime labor shortages, wages rose.

In addition, the government needs higher tax revenue to reduce the budget deficit.

Former Deputy Governor Vyugin said that continued high rates will put pressure on the balance sheets of businesses and banks.

Russian coal and steel producer Meshel, owned by businessman Igor Zyuzin and his family, said on Tuesday it had restructured its debt amid low coal prices and high interest rates.

Putin’s threat

Putin’s frustration was on display at a meeting with business leaders in the Kremlin on the evening of December 16, where he clashed with top economic officials, two sources with knowledge of the economic discussions in the Kremlin and the government said.

One of the sources briefed after the meeting said Putin was visibly upset after hearing that private investment had been cut due to borrowing costs.

The Kremlin released Putin’s introductory remarks praising trade but did not identify any trade participants in the mostly closed meeting. Reuters confirmed with a source that Central Bank Governor Elvira Nabiullina was not present.

In televised remarks to ministers on Wednesday, Putin said he had recently discussed with business leaders the risk of slowing credit activity for long-term growth, referring to the December meeting.

Some of Russia’s most powerful businessmen have publicly criticized the high interest rates, including Rosneft CEO Igor Sechin, Rostec CEO Sergei Chemezov, aluminum tycoon Oleg Deripaska and Alexei Mordashov, the largest shareholder in steelmaker Severstal.

Nabiullina is under pressure from her former boss, Sberbank CEO German Greif and VTB CEO Andrey Kostin — two Russian investors who fear Russia is heading for stagflation, an expert source of discussion on the economy. he said.

In his comments on December 19, Putin called for “balanced pricing.” The next day, at the year’s final monetary policy meeting, the central bank was expected to raise it by 200 basis points, but it held 21 percent of the market.

In his speech after the decision, Nabiullina said he had to give in to the pressure. Criticism of central bank policy has increased when prices are high, she said.

Nabiulina, Greif and Costin did not immediately respond to requests for comment for this story.

Nabiulina

Nabiullina, a former economic aide to Putin who served as economy minister, is one of Russia’s most powerful women: she has served as governor of the central bank since June 2013, and the three sources said Putin trusted her.

In the year A few weeks after sending troops into Ukraine in 2022, Putin proposed Nabiulina to head the central bank for a third term. Her term expires in 2027.

Her supporters say critics miss the root cause of inflation – the massive spending on war – and say economic stability would be at risk without her.

Some lawmakers have called for her replacement, an unlikely outcome, according to the two sources.

“No one will change the central bank governor in this situation,” said one of the sources familiar with the economic discussions. “Nabiullina’s authority is indisputable, the president trusts her.”