Russia is facing a 'time bomb' at the heart of its economy, economist says

• Russia is breaking down institutions and "borrowing from the future," Konstantin Sonin says.
• The economist notes Russia is taking measures to exert more control over its economy.

Russia is dealing with an economic "time bomb," according to one top economist.

Konstantin Sonin, a professor at the University of Chicago Harris School of Public Policy, said he foresaw a dark economic future ahead for Russia. That's because the war in Ukraine has put Moscow in a position where it needs to exert more control over the economy, leading it to break down key market institutions and "borrow" funds from the future, Sonin wrote in an op-ed for Project Syndicate on Friday.

Sonin pointed to a handful of measures Russia has taken to prop up its economy, including implementing export restrictions on key commodities to counter Western sanctions.

The change has prompted some companies to issue steep price hikes, Sonin said, and it's an example of market levers breaking down in the nation.

Russia has also taken steps to block firms from leaving the country. Some companies, like Heineken, have been forced to sell their operations in Russia for as little as one euro.

The Kremlin is also financing the war by "borrowing from the future," Sonin said, pointing to cuts to key public spending programs, while military spending soars. The Kremlin is still planning to spend more on national defense than healthcare or education for the next two years, according to plans Russia's finance ministry published in 2023.

"Even more important, Putin's borrowing from the future takes the form of a gradual, yet pervasive dismantling of the market institutions that the Russian people paid such a high price to acquire during the reforms of the 1990s," Sonin wrote.

"Investing massively in military production and simultaneously dismantling market institutions may strengthen Putin's hand in the short term, but it sets a time bomb under longer-term economic development."

Still, Russia's economy isn't close to collapse, Sonin noted. Russia's GDP is estimated to grow another 3.2% this year, according to the International Monetary Fund, which experts have attributed to Moscow's hefty war spending.

Yet, Sonin sees a challenging economic future.

"Whenever the Ukraine war ends and Russia returns to international trade (beyond raw materials), all the nationalizations of recent years will come back to haunt it. Putin's war not only imposes on today's Russians a worse life than they otherwise would have had. It also condemns future generations," he added.

Other forecasters have also warned of weak growth prospects in Russia over the long run. While GDP continues to grow, longer-term indicators of economic health are in decline, with the nation suffering from a major worker shortage and labor productivity falling more than 3% last year, according to CEIC data.