Can Putin extract an economic victory from Trump?

Spectator

19 hours ago

The Alaska summit taking place today isn't just about war – economics looms equally large. Vladimir Putin, with his forces pressing forward in Ukraine, faces neither military urgency nor economic desperation to halt the fighting. For him, this has never been a territorial grab but an existential struggle against Western hegemony. His challenge is to decouple the war from bilateral cooperation with America: the former proceeds too favourably to abandon, while the latter promises diplomatic triumph and relief from mounting economic pressures.
Putin's delegation tells the story. Finance Minister Anton Siluanov and Kirill Dmitriev, Putin's special envoy for international investment, signal that sanctions and economic cooperation will be discussed. Putin has long insisted that what he deems illegitimate Western sanctions harm their architects more than Moscow, and he remains open to renewed trade – provided his geopolitical ambitions receive due recognition.
For Trump, cooperation follows peace, which Russia supposedly needs to salvage its economy. Here, Putin and Trump diverge. Trump declares Russia's economy troubled; Putin claims stability and 'balanced growth'. Both misjudge the situation. The Russian economy, to borrow from Chernobyl, is 'not great, not terrible'. Contrary to Western hopes, it isn't collapsing. Contrary to the Kremlin's statements, it is not a paragon of stability either.
After three years of fiscal-fuelled growth, Russia's economy is slowing. The initial war-stimulated boom brought with it inflation, budget deficits, labour shortages, and technological underinvestment. In the second quarter of 2025, Russia barely escaped recession. Year-on-year growth limps on above 1 per cent, with analysts predicting near-zero figures towards the end of 2025. After 4 per cent growth in 2024, 2025 forecasts for the whole year hover around 1 per cent.
Days before the summit, Putin's economic ministers painted a grim picture, according to people familiar with the details of the meeting. Amid deteriorating forecasts and falling oil revenues, they expect to muddle through – unless conditions worsen – but only through spending restraint and squeezing more from citizens and businesses. This marks a shift from having a 'war economy on steroids' to fiscal containment without de-escalation: permanent militarisation under constraint. As civilian production slows, the military's share rises. Russia can no longer afford guns and butter, so butter gets cut.
Short-term, this seems manageable. Russian incomes have grown for over two years, and consumption has increased despite double-digit inflation. A cooling-off hardly spells disaster. But a managed soft landing risks becoming a prolonged decline.
Several factors explain the collapse in growth. The Bank of Russia's prohibitively high base rate, maintained to combat inflation, which was only recently reduced to single digits, tops the list. The Central Bank faces constant pressure from industrialists and bankers to cut rates but resisted until lending constraints and falling consumption finally forced prices down.
Inflation stems from rising government spending and labour market constraints. The military industry and the fighting army drain workers from the open market. Up to 700,000 young professionals have fled since 2022, while authorities have limited migrant employment to appease nationalist sentiment. This drove up salaries and fuelled consumption and lending in 2023 and 2024.
Now, the consumer party is ending – or at least has been put on hold. As the economy slows in 2025, salaries are stagnating, dampening consumption. After two years of retail exuberance, Russians are growing frugal. While overall retail sales remain stable, consumers are spending increasing shares on food – the one essential they cannot cut.
Slowing consumption and high borrowing costs reduce manufacturing growth. Companies are struggling to purchase new equipment and upgrade machinery due to sanctions and borrowing costs. Growth is now concentrating in the military sectors. To boost productivity and cut costs, the Kremlin would welcome technological sanctions and machinery bans being lifted.
Russia has become a two-tier economy, with civilian and military sectors diverging. Just as during the Soviet era, the Kremlin sees military production as the primary economic driver. Combined with restocking needs, this ensures continued high defence spending at the expense of human capital.
Unrestrained fiscal spending, lower oil prices, and economic slowdown have widened the budget deficit. By the end of June, it reached 3.7 trillion roubles (£34 billion) or 1.7 per cent of GDP – roughly the amount forecast for the whole year. A month later, it hit 2.2 per cent. Without changes, it could reach 3 per cent or more. While unremarkable for Western countries with open capital markets, Russia can't finance its fiscal deficit with borrowing abroad.
Before the war, foreigners held a quarter of Russian sovereign debt. Now, only domestic borrowing remains. Additional state borrowing increases state debt servicing costs and business borrowing costs as firms compete with the government for funds. Easing the ban on international investors buying Russian debt would help the Kremlin.
In global trade, Russia has adapted to financial sanctions by using more roubles, yuan, and local currencies for export settlements. But easing banking sanctions to allow dollar settlements would reduce costs, risks, and volatility.
Trump cannot immediately lift all the sanctions against Russia, even if he is willing to. He would need congressional persuasion for some; convincing Europeans would prove harder. But even promising not to tighten US restrictions – let alone easing them – would give the Kremlin a political victory and an economic lifeline.
This need for economic oxygen isn't yet as acute as it was for the Soviet Union in the mid-1980s. Despite wishful thinking, Russia's economy isn't collapsing. Economic headwinds alone won't force Putin to negotiate. But the risks are accumulating, and the future has arrived faster than the Kremlin hoped.