More supply translates into lower prices, excluding countries with higher extraction costs. A risk in an international context in which the slowdown in the world economy suggests a decline in demand, with the risk that excess supply will further reduce prices. Bad news, if not terrible, for Russia, whose war economy, explains the Wall Street Journal – is starting to show the first cracks
Oil prices are falling, inflation is approaching 10%, interest rates are high and public spending has been drained by conflict. Expert in the Wall Street Journal: “The growth model based exclusively on military spending is fMILANO – It may seem like a paradox, but the latest bad news for the Russian economy risks holding Moscow’s firm. Today, the main oil-producing countries gathered in OPEC+ will launch a new increase in crude oil production, even higher than that established and repeated in recent months. Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Oman, Iraq, Kazakhstan and Algeria have in fact reached a basic agreement to further open the extraction taps of 548 thousand barrels per day starting in August.
A surprise decision, when most observers expected an increase of 400 barrels, in line with increases set in previous months.
For the cartel countries it is a move to regain market share: more supply translates into lower prices, excluding countries with higher extraction costs. A risk in an international context in which the slowdown in the world economy suggests a decline in demand, with the risk that excess supply will further reduce prices. Bad news, if not terrible, for Russia, whose war economy – explains the Wall Street Journal, is starting to show the first cracks. Manufacturing activity is falling, inflation is still on the verge of double digits, consumers continue to cut spending and the state budget is increasingly under pressure.
THE END OF A MODEL
“The growth model based exclusively on military spending has failed,” said Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs, quoted by the WSJ. “The capacity of the civilian sector must be reduced, freeing up workers so that the war machine can continue to grow. But it is not sustainable.” Russian Economy Minister Maxim Reshetnikov warned last month that Russia “is on the brink of recession,” while Finance Minister Anton Siluanov called the situation a “perfect storm.”
THE ECONOMY IS SLOWING DOWN
Macroeconomic indicators confirm these signals. In the first quarter of the year, Russian GDP grew by 1.4% compared to the previous year, falling by 4.5% compared to the fourth quarter of 2024. The manufacturing PMI, the corporate purchasing managers’ index that is considered the most up-to-date “thermometer” on the state of health of manufacturing companies, registered a worrying figure of 47.5 in June, the lowest figure in three years and below the 50-point threshold that separates the phases of contraction from those of expansion of production activity.
WAR IS NO LONGER WORTH IT AS IT WAS BEFORE
Therefore, the huge investment in war no longer seems to be as worthwhile as it once was. Military spending today is about 6% of GDP, double that of the United States and the highest since the Soviet Union. Defense and security spending – as the Wall Street Journal always reminds us – represents about 40% of total Russian public spending this year.
PRICE COMPETITION
But rising military spending has fueled inflation, forcing the central bank to keep interest rates high to contain price increases, which fell for the first time in May, from 21% to 20%. Higher rates undoubtedly limit credit opportunities for businesses and families, to the detriment of the country’s economic growth.
Alarm bells have also been raised by the country’s major banks, which in recent months have seen an increase in the share of NPLs, that is, impaired loans that are difficult to collect, with VTB, the country’s second-largest credit institution and controlled by the State, recording a rate of impaired loans in the retail segment of 5% in May 2025, up from 3.8% at the end of 2024. Figures that do not scare the Russian central bank, however, which has rushed to ensure that bankruptcy risks are largely covered by the banks’ capital buffer.
THE RISK OF LOW-COST OIL
But the Russian war machine, despite being heavily sanctioned, has been fueled over the years by the continued sale of oil, even though it was already sold at a discount compared to international prices. Now the price drop “driven” by the producers’ cartel could add further elements of uncertainty. A recent report by the Finnish central bank shows how Moscow has set an oil price of $70 per barrel in its budget projections. If prices were to fall further, the public deficit could widen further. In detail, according to the study, if the average export price of Russian crude oil were to be $55 per barrel in 2025 and $54 in 2026, instead of the $70 and $60 respectively projected by the budget framework, Russian GDP would lose one point each year. Not a small amount for an economy that is already slowing. (The Republic)
