How The Russian Economy Has Reacted To The 'Peace Talks'

On February 10, 2025, Russian President Putin celebrated his moment of triumph: He got a phone call from President Donald Trump.[1] Their exchange made the world believe that Russia and the United States may become partners once again, and "the Ukrainian problem" may be solved – probably in the same way as some different problems were solved in Munich several decades ago.

No one knows, these days, how the Russia-U.S. talks, which had already started in Saudi Arabia, might evolve – but both the call and its initial consequences have provided us with some quite important information about the Russian economy, even if Russian policies remain unpredictable. I am talking about an immediate – and quite strong – reaction of the Russian financial markets on the long-awaited news. Even if it was evening in Moscow when the call occurred, the RTSI and Moscow Exchange indices grew by 2.14 and 5.21 percent, respectively, closing at their highest levels since the summer of 2024, while the shares of the largest companies facing Western sanctions – Transneft, Rosneft, Gazprom, VTB, Sberbank, Aeroflot, Novatek – shot up from 6.5 to 9.5 percent.[2]

(Source: Rbc.ru)

The Euphoria Expanded To The Currency Market

The euphoria expanded to the currency market as well – and the ruble strengthened against the dollar (calculated by the cross-rate through Chinese yuan) by 3.2 percent,[3] and broke below 94 rubles per dollar also for the first time since last August. In addition, the Ministry of Finance held one of the most successful auctions for short-term government bonds, where demand exceeded the offered volume by 1.5-3 times, and the yield decreased to 16.5-17.4 percent per annum,[4] which is significantly lower than the Bank of Russia's key rate. In the following days, the rally continued, and by the morning of February 18, the gains accumulated since January 1 in ruble-denominated Moscow Exchange index had reached 15.8 percent,[5] and in dollar-denominated RTS – 31.1 percent.[6] The dollar was trading at 91.3 rubles compared to 97.8 one day before "the historic talk."[7] In between, the Bank of Russia kept the key rate unchanged the second time after December 14,[8] and many commercial banks started to lower their deposit rates, signaling the ongoing "return to normalcy." Russian citizens began to withdraw money from their foreign accounts and to reinvest it in Russia in larger quantities, securing the first inflow of private funds into Russia since early 2022.[9]

Later on, as negotiating teams from Moscow and Washington convened in Riyadh, the Russian markets turned sour: During the day, both major indexes lost between 1.3 and 1.7 percent of their value with most of the shares falling significantly (with VTB Bank, Gazprom, and Novatek leading the correction with 5.69, 3.49, and 3.19 percent daily declines), and the dollar strengthened towards 92.9 rubles.[10] The reason was obvious: Investors decided that ceremonial words aired from the Saudi capital, as well as the decision to bring back to normal the work of Russian Embassy in the U.S. and of the U.S. Embassy in Russia fell far short of real proof of an inevitable détente that might lead to a lasting peace in Ukraine.[11]

Russian Economy Is Not Too Militarized

Why were these fluctuations, to my mind, worth mentioning? I would say that for many experts the Russian economy these days can be seen as a completely militarized one where a significant part of the workforce works directly or indirectly for the Kremlin's war in Ukraine. When the 2025 federal budget was approved by the State Duma, the most common comment was that its military allocations are the highest since the Soviet times, with up to eight percent of GDP granted to the Ministry of Defense.[12] The fiscal stimulus has been considered the major, if not the only, source for Russian economy's spectacular performance during the war (last week, Prime Minister Mishustin reported to President Putin that Russia's GDP expanded by 4.1 percent in 2024, beating even the boldest forecasts).[13] And, because of all this, many experienced scholars believe that the Russian economy may face greater challenges when the war stops than it does as it continues. Just one year ago Michael Rochlitz, Associate Professor in the Economies of Russia, Eastern Europe and Eurasia at Oxford School of Global and Area Studies,[14] insisted that the Russian economy is so war-driven that the termination of hostilities in Ukraine will ruin it in the same way the end of the Cold War has destroyed the Soviet economy.[15]

I had never supported such exotic views and insisted several times that the armistice, were it to be reached, may not necessarily result in the lifting of sanctions (or even in easing some of them), but it will change the mood of Russian society,[16] ignite hopes for a "return to normalcy," decrease savings, and accelerate consumer spending – so it might, in one way or another, stimulate a speed-up in the Russian economy rather than its slowdown.

My belief was based on a simple comparison that suggests that the Russian economy is in fact not too militarized: Budget allocations for the Defense Ministry staying at eight percent of GDP are still at least two to three times smaller than those of the USSR;[17] moreover, the spendings are grossly inflated since a soldier at the frontline earns these days not less than 210,000 rubles per month, while a Soviet private in Afghanistan earned from nine to 11 rubles per month in 1987.[18] Russia today produces from two to ten times fewer armaments and ammunition than the Soviet Union did 40 years ago,[19] and the share of workforce employed by the military-industrial complex remains at least two times lower these days than it was in 1984.[20] Moreover, the resources allocated to the military production are bought at the market price with the money benefiting other sectors of the economy, and there are no visible shortages of anything that might be attributed to the over-consumption of resources by the defense enterprises.

Furthermore, if the war in Ukraine were to stop, the Russian authorities would be unable to cut the defense expenses dramatically. Today, out of 14 trillion rubles allocated to the military, up to three trillion rubles is spent on salaries for the servicemen and for the death gratuities for the families of those killed in action;[21] between 3.5 and 4.5 trillion rubles goes for supply and logistics at the frontline and for everyday costs of the acting army; not less than one trillion rubles is spent on infrastructure – from securing the immediate rear in Ukraine to relocating the bases of the Black Sea Fleet – and the rest, or up to six trillion rubles might be channeled to the military industrial complex. In the event of a prolonged armistice or a peace treaty, the Kremlin would most probably decrease the size of the army and lower the salaries for the soldiers – but to my mind it looks questionable whether it will demobilize many of the troops. Russian sources have reported in recent days that commanders at the frontline have started pressing the soldiers to sign open-ended contracts that may indicate their willingness to preserve the army staff from being sent home.[22] Also, it should be noted that a year ago, in February 2024, President Putin promised the "workers" at Uralvagonzavod that the military-industrial complex would be filled by new orders for the coming five to ten years – which seems a realistic forecast as the Russian army has lost significant part of its weapons during the ongoing war.[23] Therefore, I would expect the spending on the military production to remain relatively stable, the salaries, gratuities and infrastructural costs to be halved, and the cost of the fighting to be limited at 20-25 percent of the current level – so the overall military budget may be lowered to eight or nine trillion rubles at current prices, or to less than five percent of GDP in 2026, as the 2024 GDP is estimated at roughly 200 trillion rubles.[24] This means that either the budgetary outlays might be cut, or they can be redirected to some more productive tasks. Such adjustments, to my mind, cannot cause any crisis or even significant slowdown in the Russian economy.

Russian Businesses And Investors Prefer Peace To War

This all explains why the Russian businesses and investors prefer peace above war even while some experts believe otherwise. The reaction to the first signs of rapprochement between President Putin and President Trump was positive since the vast majority of Russian entrepreneurs know quite well that the ongoing conflict is squeezing resources from the country's economy and undermines any prospects for further development – even the Kremlin is generally right when it believes the Russian economy can provide adequate finances, armaments, and people needed for the war, for another several years. Business is more flexible in its projections and so it catches up much faster with the changing reality.

All of the above suggests that in the coming months one should be very aware of the changing mood of Russian business since it seemingly provides perfect estimates of how the political decisions might resonate in Russian society. As in recent days President Trump and his team started to almost take Russia's side in the showdown between Moscow and Kyiv, accusing President Zelensky of many wrongdoings and claiming he has lost his legitimacy,[25] the Russian stock market indexes has resumed their rally on February 20 while the ruble rate has reached 90.4 to the dollar – but, to my mind, these fluctuations are just small "aftershocks" following the main news, and the new direction will be determined with the course of the dialogue on the top level, were it to happen.[26] But, to conclude, I would reiterate: Russian business these days has no fear of peace – quite the contrary: It would welcome it with great enthusiasm.

*Dr. Vladislav Inozemtsev is the MEMRI Russian Media Studies Project Special Advisor, and Founder and Director of the Moscow-based Center for Post-Industrial Studies.