In Siberia, there are not enough men to drive the buses. On Russian farms, milkmaids are commanding wages similar to those of IT workers, while hotels struggle to hire waiters, cleaners and cooks.

Instead of cratering as had been widely predicted with the Western sanctions regime after Russia’s full-scale invasion of Ukraine in 2022, the Russian economy is running hot and in danger of overheating.

Massive military spending including high payments to soldiers has fueled economic growth, as well as high wages and inflation, as companies are forced to match military salaries to attract workers.

Russia can afford to fund its war on Ukraine for several more years, according to economists, because of massive oil revenue and Western sanctions failures, particularly the oil price cap put in place by the Group of Seven nations, which has failed to squeeze Russia’s oil income.

The economy is overheating partly because of President Vladimir Putin’s need to replace the 20,000 soldiers killed or wounded monthly, according to losses reported by the Institute for the Study of War in June. Russian regional governors are paying unheard of sign-up bonuses to attract soldiers, with Belgorod recently breaking the record with a $31,200 bonus.

The result is nearly full employment in Russia and skyrocketing wages. The economy’s labor force and production capacity were “almost exhausted,” warned Central Bank governor Elvira Nabiullina, who has done more than almost anyone else in the Russian government to sustain the war through her stewardship of the economy, in July. “This is actually a scenario of stagflation that could only be stopped by way of a deep recession.”

She announced a sustained period of high interest rates to try to slow the economy and reduce inflation – but so far, it has not worked. In a sign of the continued seriousness of the problem, the bank on Friday raised its key interest rate from 19% to 21%, the highest level in more than two decades, exceeding the 20% most analysts had expected.

Inflation was “significantly higher” than forecast in July, the bank said in a statement. The bank has forecast growth of 3.5% to 4% in 2024, then a drastic shrinking to between 0.5% and 1.5% in the next year.

The Central Bank’s rate rise has angered some of the nation’s top oligarchs, with one powerful figure recently warning that manufacturers would go bankrupt, in a sign of the elite tensions on containing the pressures in Putin’s war economy.

Running out of workers

Private companies can barely compete with the high military wages. A survey by the Russian Union of Industrialists and Entrepreneurs this month found that 82.8% of firms were having difficulties attracting workers. Unemployment sank to 2.4% in June, according to Rosstat, the state statistical agency.

The tone in recruitment ads for welders, farmworkers, drivers, couriers and packers on online site Avito borders on hysterical.

“Urgently required!” ran an ad for a Snickers chocolate bar packer in recent days. “Easy! No experience required! Free three meals a day and accommodation!” it said, offering more than $4,100 a month – in 2023 the average national wage was just $763. Meanwhile a warehouse packer in Astrakhan could earn more than $3,600.

Russia’s real wages grew 12.9% year-on-year during the first six months of 2024, according to Rosstat, although independent analysts have questioned its figures. Incomes for the poorest workers grew fastest, spiking by 67%, reported the independent Russian outlet the Bell in March.

Alexander Tkachyov, a Putin ally and one of Russia’s biggest agricultural oligarchs, recently groused about the high wages of dairy farmhands, once the lowliest of workers. They were now demanding monthly wages of $1,550 – equal to a junior IT worker.

“We don’t have these funds. And probably we won’t have them in the near future,” he said earlier this month at an agroindustry exhibition in Moscow.

Anton Petrakov of Yandex Taxi (Russia’s version of Uber) said last month at an economic forum in Vladivostok that Russia faces a shortage of 130,000 taxi drivers.

In Siberia, there are not enough men to drive the buses, with routes being shut down, long queues or buses that never arrive, because drivers can earn twice as much in the military. Sergei Kuznetsov, head of the small Siberian city of Novokuznetsk, proposed setting up a “women’s battalion” of bus drivers because of the staff shortages

In the past, Russia filled low-income jobs with Central Asian migrants, but after group of Tajiks were implicated in the March terrorist attack on the Crocus City Hall shopping mall, it deported tens of thousands of Central Asian migrant workers and denied entry to another 143,000 during the first half of the year.

Many migrant workers have also been rounded up and sent to war, according to Russian independent media, making it an increasingly unattractive destination for work.

Resources for war

Putin’s economic priorities were spelled in Russia’s recent budget, with military and security spending set to reach $142 billion in 2025, 40% of budget spending or more than 8% of gross domestic product, and will remain high in 2026 and 2027, a sign of his determination to fight on. But the massive spending will further fuel inflation, and Nabiullina on Friday conceded the bank would miss its 4% inflation target for 2025 and would only reach it in 2026.

Some independent analysts say that real inflation is running even higher than official statistics claim. A report last month by the Stockholm Institute of Transformational Economics doubted the credibility of recent official inflation figures, noting that the main economic indicators were “now part of Russian war propaganda.”

“Inflation and economic growth are particularly important components of the propaganda narrative,” it found, but it added that a full-blown economic crisis was unlikely in the short term.

Inevitably, Putin will squeeze social spending on education, health and civilian infrastructure, according to analysts, but he will pay no political price, having built a closed, repressive autocracy where major opposition politicians are jailed, harassed or barred from running for office.

Despite the intense pressures in the economy, U.S.-based Russian economist Vladislav Inozemtsev, co-founder and senior fellow at the Center for Analysis and Strategies in Europe said that Russia could afford to wage the war in coming years.

“It can sustain this war for a time in which Ukraine and probably the West cannot afford to wage it. That’s the problem,” Inozemtsev said. “Putin seems very confident that he can go further for maybe one, two or three years. For now, the situation looks quite stable.”

“The military industrial complex cannot produce any modern, up-to-date weaponry,” he said. “They are producing Soviet tanks and artillery. They are producing a lot of shells and missiles, short-range missiles, which are quite primitive. But nevertheless, they can do this in huge numbers.”

But Alexandra Prokopenko, of the Carnegie Endowment for International Peace, said Russia could not ramp up military production further because of labor shortages and Western sanctions.

“While continued trade with countries such as China aids the Russian economy, sanctions have significantly restricted the Kremlin’s ability to modernize its military, squeezing access to essential components and creating bottlenecks in supply chains and financial transactions,” she said, adding that the long-term prospects were gloomy.

Sanctions failure

Russia’s capacity to continue waging war for years comes with a series of failures of Western sanctions due to backroom lobbying in Europe and a lack of political will, according to Robin Brooks, senior fellow at the Brookings Institution.

Soon after the invasion, Germany and several other major European nations including Italy, Spain, the Czech Republic, Poland and Austria began shipping huge amounts of goods via Turkey and Russia’s neighbors including Kazakhstan, Kyrgyzstan, Georgia and Armenia, clearly destined for Russia, he said.

There was no incentive for other nations to curb trade in microchips, dual-use goods or other goods to Russia if Germany and other big European powers were shipping luxury cars and other goods via Russia’s neighbors.

“In the end, you want the war to be felt by ordinary citizens in Russia,” Brooks said. “If it’s not felt by ordinary citizens, then what are we doing? You want them to be grumbling about Putin and his decisions, but if they are able to get Western cars, no problem, we’re not being effective.”

Brooks said the West could also squeeze Russia’s oil revenue by putting sanctions on more Russian tankers, including its shadow fleet used to transport 45% of its oil. It could also tighten and enforce the oil cap, under which G-7 nations deny shipping services and insurance to Russian tankers whose oil is sold at more than $60 a barrel.

The failure of sanctions was closely watched by autocrats, he said.

“The big message it sends to the Kremlin and to Beijing and any other autocratic potential troublemaker is that the West isn’t serious. The West is more interested in making money in the short term than in confronting autocrats. That’s the number one message, and that is deeply harmful,” he said.

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Natalia Abbakumova contributed to this report.