The Kremlin has pumped so much money into the economy that it's creating a boom — but this house of cards could topple anytime soon

• Russia's wartime economy is thriving, the New York Times reported Monday.
• The Kremlin implemented measures to boost military equipment output, benefits, and mortgage subsidies.

Nearly 18 months after the Ukraine war started, Russia's economy appears to be humming along — baffling economists who predicted catastrophic outcomes following sweeping sanctions against Moscow's invasion of Ukraine.

While some economists have questioned the quality and veracity of Russian data releases, a New York Times report on Monday offered a nuanced picture of the country's wartime economy and how it's helping drum up popular support for Vladimir Putin.

Russia's economic strength so far is due to the Kremlin's measures — the Times reported that Putin is boosting the production of military equipment and raising pensions, salaries, and other benefits for people who are not well-off. The state is also subsidizing mortgages.

Soldiers fighting the war are also earning far higher salaries than average earnings in poorer regions of Russia, the Times reported. For instance, Russia was offering a minimum of 160,000 rubles, or about $1,740, in monthly wages for contract soldiers last September — three times the national average, Reuters reported at the time.

Large payouts for those who died in the war — for example, a 5 million rubles payout for families of Wagner Group fighters who died in the war — are circulating in the economy.

These measures have boosted the demand — and prices — for a range of products and services in Russia, the Times reported.

Corporate loans have increased 19% in the year to June as investments grew, the Times said, citing the Russian central bank's figures. Meanwhile, the value of mortgages taken out from Russia's top 20 banks surged 63% in the first half of the year from a year ago, the Times reported, citing the state-run lender Dom.RF, and the real estate research firm Frank Media.

Russia's economy is running so hot that its central bank raised interest rates by one percentage point on July 21 — double the 0.5 percentage point analysts polled by Reuters had expected — to tame inflation that hit 3.25% in June from a year ago.

But the boom may not last.

The house of cards could soon crumble

"As an economist, I don't know how this bubble can be deflated," Alexandra Prokopenko, a researcher with the Carnegie Russia Eurasia Center and a former advisor at the Russian central bank, told the Times.

"One day it could all crash like a house of cards," she added.

Russia's central bank has also been candid about its gloomy assessments of the economy — which at times were at odds with more bullish statements from the Kremlin. But the institution has come under pressure from Moscow to give a more "upbeat assessment" about the country's economy, Bloomberg reported in February.

Economy experts, however, are not optimistic about Russia's economic outlook even as they acknowledge the current robustness of its economy.

In April last year, the Russian central bank's governor Elvira Nabiullina said the country's reserves wouldn't last infinitely. In December, she also expressed concerns about inflation and the tight labor market due to Putin's military draft. She repeated her concerns about price rises and the labor shortage in her July rate hike announcement.

Ariel Chernyy, an economist at Italian bank UniCredit, forecasts Russia's GDP to grow by 1% this year — reversing a 2.1% contraction last year, according to a July 6 note seen by Insider.

Chernyy said the country's economic resilience is due to government spending and the implementation of import-substitution projects that are boosting the domestic industry.

But it "does not mean a higher GDP growth rate that can be sustained in the long term" due to a shrinking labor pool and other issues like inferior import substitutes, he added.

Correction: August 1, 2023 — An earlier version of this story misstated the pronoun of one of its sources. Alexandra Prokopenko should have been referred to as "she," not "he."