Russian government nervous as country faces economic challenges

At the St Petersburg International Economic Forum, a Russian MP came up to me.

“Are you going to bomb Iran?” he asked.

“I’m not planning to bomb anyone!” I replied.

“I mean you, the British…”

“Don’t you mean Donald Trump?”

“He’s told what to do by Britain,” the man smiled. “And by the deep state.”

It was a brief, bizarre conversation. But it showed that in St Petersburg this week there was more on people’s minds than just the economy.

Take President Vladimir Putin.

On Friday, the Kremlin leader delivered the keynote speech at the forum’s plenary session. It focused on the economy.

But it’s what the Kremlin leader said in the panel discussion afterwards that made headlines.

“We have an old rule,” Putin declared. “Where the foot of a Russian soldier steps, that’s ours.”

Imagine you’re the leader of a country that’s hosting an economic forum, seeking foreign investment and cooperation. Boasting about your army seizing foreign lands wouldn’t appear to be the most effective way to achieve this.

But that’s the point. Since Russia’s full-scale invasion of Ukraine in February 2022, the state of the economy has been secondary to the goal of winning the war against Ukraine. That is the Kremlin’s overarching priority. True, Russia’s economy has been growing, but largely due to massive state spending on the defence sector and military-industrial complex.

And even this war-related growth is now petering out.

Putin didn’t sound overly concerned.

“As far as the ‘murder’ of the Russian economy is concerned, as a famous writer once said – ‘rumours of my death are greatly exaggerated,'” the Russian president declared.

But the Russian government is clearly nervous.

At the forum, Russia’s Minister for Economic Development, Maxim Reshetnikov, warned that the country’s economy was teetering “on the brink of recession”.

“We grew for two years at a fairly high pace because unused resources were activated,” said Russian Central Bank Governor Elvira Nabiullina. “We need to understand that many of those resources have truly been exhausted.”

The St Petersburg International Economic Forum was conceived as a shiny showcase for the Russian economy. A lot of that shine has faded due to the thousands of international sanctions imposed on Russia over the war in Ukraine. Many Western companies pulled out of Russia.

Might they return?

After all, US President Donald Trump has made it clear he wants better relations with Moscow.

“Today we had breakfast with the American Chamber of Commerce and lots of investors came from the US. We get a sense that lots of American companies want to come back,” Kirill Dmitriev, President Putin’s envoy on foreign investment, told me. We spoke on the sidelines of the St Petersburg forum.

“I think the American administration understands that dialogue and joint cooperation is better than sanctions that do not work and hurt your businesses.”

Western businesses, though, are unlikely to return in large numbers while Russia is waging war on Ukraine.

“I think it’s clear you have to have some sort of an end to the conflict before American companies are going to seriously consider going back,” said Robert Agee, president of the American Chamber of Commerce in Russia.

“Have you asked the Trump administration to remove some sanctions from Russia?” I asked him.

“We’ve been to Washington,” he replied. “We have made an analysis of the impact of American sanctions on American businesses. We passed that on to the administration.”

“Do you accept that the idea of Western businesses returning is controversial in light of the war in Ukraine?” I asked.

“Western businesses have made decisions based on what happened three or four years ago,” replied Mr Agee. “And it’s up to them to decide whether it’s the right time to return.”

After more than three years of war and mass sanctions, Russia faces tough economic challenges: high inflation, high interest rates, reports of stagnation, recession. The problems in the economy are now openly discussed and debated.

It’s unclear how soon they will be resolved.