Russia's war with Ukraine has its economy facing 'death by a thousand cuts,' economist says

• Russia's war with Ukraine has its economy facing "death by a thousand cuts," a British economist wrote.
• The country faces many headwinds, from inflationary pressures to a low birth rate to a bloating fiscal deficit.

Russia's economy seems to be getting along amid its protracted war in Ukraine and harsh sanctions from the West, but that can't go on forever, according to one economist.

"Russia's economy faces death by a thousand cuts," British economist Roger Bootle wrote in the Telegraph on Sunday.

In spite of heavy sanctions, Russia's economy actually grew 3.6% last year, faster than most countries in Europe, Bootle noted. And the economy is expected to grow again this year too, by around 3%. War spending is booming, and as war production rises, its gains spill into other pockets of the economy.

"But these gains are limited," Bootle wrote. "They can only occur in economies with unemployed resources and they end when the unemployed resources are exhausted."

And it seems like Russia is reaching that end.

Take inflation as an example. The country's robust wartime economy has also stoked demand, and as the amount of underused resources dwindles, supply can no longer meet that demand, which drives prices up. Last year, Russia's inflation rate averaged 5.9%. It's forecast to increase to 7.5% this year.

The nation's feud with the West is also likely to impact supply in the long run.

"It seems likely that the damage to Russia's productive capacity from the loss of Western technology and key supplies will increase over time," Bootle said.

Another headwind facing the country is its demographic time bomb. The country's birth rate, about 1.5, has been far below the 2.1 replacement level. That matters a lot for the economy amid losses in the war and young people fleeing the country to avoid the conflict.

And there's the problem of military spending. As Russia's defense spending is forecasted to rise 70% this year to about 6% of GDP, its deficit is going to go up with it. And while the forecast deficit looks low at around 3% of GDP, it's not what a country bankrolling a war can sustain. As Bootle said, Russia actually needs a surplus of about 2% to keep itself afloat.

"The big vulnerability is energy prices," he added. "If they were to fall sharply then the budget deficit would balloon and the current account surplus would dwindle, putting pressure on the rouble and causing inflation to rise further. If that were to happen, then the economic screw would really tighten."