Sweden: Russia’s Economy is Worse Than It Appears

Russia’s economy is in trouble, even according to Russia’s own metrics. Last week, we learned that GDP had contracted 1.8% in January and February compared to last year.

President Vladimir Putin on Wednesday demanded explanations from the government and Central Bank over why Russia’s economy is performing worse than expected this year, calling for urgent measures to revive growth in his second public complaint about economic weakness in a month.

According to the Economic Development Ministry, GDP in January and February was 1.8% lower than in the same period last year. The Russian Academy of Sciences’ Institute of Economic Forecasting (INP) estimated a 1.5% year-on-year contraction for the first quarter, while the Central Bank had previously forecast GDP growth of 1.6% over the same period.

That 3.1% swing from growth to contraction is big and higher oil prices connected to the Iran war are expected to be very temporary.

The Kremlin-linked macroeconomic research center CMAKP raised its forecast for Russia’s Urals crude export price to $81.6 per barrel this year, but said this would lift growth by no more than 0.5 percentage points, keeping overall expansion below 1.3%.

Prospects for a significant rebound remain limited. Interest rates are high and the Central Bank has signaled it will maintain tight monetary policy for an extended period. Investment fell by 2.3% last year and is expected by the Economy Ministry to decline further in 2026.

The head of Sweden’s intelligence community, Thomas Nilsson, said yesterday that unless oil prices remain high for another year (highly unlikely) they won’t solve any of Russia’s underlying economic problems.

Thomas Nilsson, head of Sweden’s Military Intelligence and Security Service, told the FT that Russia would need prices for Urals crude, its main blend of oil, to remain above $100 a barrel for a year to close its budget deficit, and for significantly longer than that to smooth over its other economic problems…

“They still have a systemic problem,” Nilsson said in a rare interview in his Stockholm office. “It’s not a sustainable growth model to produce material for the war that is then destroyed on the battlefield,” he said.

As bad as all of that sounds, according to Nilsson the real story may be far worse. He claims Sweden has evidence indicating that Russia is fudging its own economic numbers. He says they are doing it in order to convince European leaders Russia is surviving the war well and can continue to keep fighting.

Sweden had intelligence indicating that Russia was systematically manipulating data to fool Ukraine’s western allies into believing its economy had withstood the strain of its lavish war spending and western sanctions, Nilsson said…

Nilsson said the real situation was even worse and the Russian central bank was underestimating inflation, which it believed was closer to the 15 per cent key interest rate than the official 5.86 per cent.

Sweden agreed with the BND, Germany’s foreign intelligence agency, that Russia was understating its budget deficit by $30bn, and had also noticed some financial indicators that could point to a future banking crisis, he added…

Sweden thinks Russia is “living on borrowed time”, Nilsson said. “The Russian economy can only enter one of two scenarios: long-term decline or shock. Either way, they will continue on a downslope to a financial disaster.”

Obviously 15% inflation would be a disaster but even the official inflation rate, which jumped up to nearly 5.9% this month, seems pretty bad. That’s especially true when you consider that Russia inflation has only briefly dropped below 5.9% in the past five years and has been as high as 12%.

In any case, the sooner Trump wraps up the war with Iran, the sooner oil will drop and Russia will go back to be out of cash.

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