Over the past few years, Americans have been vocal about their concerns regarding inflation. However, when compared to Russia, the price surges are staggering, reflecting an economy that is rapidly overheating. According to official statistics, the cost of butter, certain meats, and onions has increased by approximately 25% compared to the previous year. Some supermarkets have resorted to locking away butter in secure cabinets due to thefts, as evidenced by Russian social media. The overall inflation rate is hovering just under 10%, significantly higher than what the central bank had forecasted. The inflation is primarily fueled by the swift increase in wages, as the Kremlin invests billions into military industries and deploys millions of soldiers to Ukraine. Amidst warfare, businesses outside the defense sector struggle to compete for labor without offering substantially higher wages, leading to higher prices and perpetuating the cycle. Alexandra Prokopenko from the Carnegie Russia Eurasia Center in Berlin stated, "Prices are rising because of the war. The demand in the economy is skewed towards unproductive expenditures. Wages rise as employers compete for labor." Other economists refer to this phenomenon as growth without development, where national income increases without a corresponding improvement in health, education, technology, and infrastructure.

In an attempt to mitigate inflation, the central bank raised its key interest rate to a record high of 21% in October. However, a prominent group of Russian economists warned on Telegram this week that "increased inflationary pressure will not only continue but may even intensify." Russian President Vladimir Putin recently indicated that the Russian economy requires nearly a million new workers due to an unemployment rate of only 2.4%, which he described as "virtually no unemployment." Putin highlighted Russia's labor shortage as "currently one of the main barriers to our economic growth." He elaborated that the construction industry alone could absorb 600,000 additional workers without noticeable impact, and the manufacturing sector would need at least 250,000 more. High labor costs and interest rates are putting pressure on companies. Russia's Alfa Bank reported last month that "companies are already struggling, and with the central bank rate increased to 21%, it will become even more challenging, so we cannot rule out the risk of increased bankruptcies." Like most economists, Alfa anticipates the central bank rate to climb to 23% next month.

The root of the overheating lies in the Kremlin's spending. The military budget is set to increase by nearly a quarter in 2025, representing one-third of all state expenditures and 6.3% of the gross domestic product. When other "national security" spending is included, it accounts for 40% of the federal budget. According to the draft budget published in September, defense spending next year will be at least double that of social spending, which encompasses benefits and pensions. Analysts do not foresee the Russian economy collapsing but rather a slowly escalating crisis. Prokopenko remarked, "With a steady flow of commodity revenues, a competent economic team, and escalating repression domestically, the Kremlin can continue financing its war efforts for the foreseeable future." The International Monetary Fund predicts Russian GDP to grow by 3.6% this year, in contrast to its 2.8% forecast for the United States. International sanctions have not delivered a decisive blow. Russia has managed to evade sanctions by importing Western technology through third countries, particularly via Central Asia and Turkey. Despite the Western sanctions, EU imports from Russia still amounted to nearly $50 billion last year. The Russian state continues to benefit from exporting oil and gas to India and China, largely through a clandestine fleet of ships that circumvent a $60 per barrel price cap imposed by Western governments.

Domestically, state revenues are increasing, especially through sales tax as Russians spend more. Russia's State Statistics Service reported that incomes, adjusted for inflation, rose by 5.8% last year as companies sought to attract workers. For millions of Russians working overtime, particularly in IT, construction, and manufacturing, times are prosperous. The wealthy, who used to spend a significant portion of their money in European resorts, are now spending it domestically, further stimulating the economy. Families are also benefiting from higher pay and bonuses offered to men enlisted in the armed forces. Russian contract soldiers earn nearly three times the average wage and receive a signing-on bonus ranging from $4,000 to $22,000. In the event of their death in combat, their families receive an additional payout of over $100,000, depending on the region, leading Russian economist in exile, Vladislav Inozemtsev, to coin the term "deathonomics." This influx of cash is driving a spending spree far from the front lines.

Official figures indicate significantly higher spending on domestic tourism and leisure. However, not all are benefiting from rising incomes. Public sector workers, including doctors and teachers, as well as pensioners and social benefit recipients, are the most severely affected by rising prices, according to Prokopenko. There is no immediate solution to the chronic labor shortage.

Russia has traditionally relied on Central Asia for unskilled labor, and Putin recently suggested the need for more foreign workers. In 2023, 4.5 million foreign workers arrived in Russia, primarily from Central Asia. Following a wave of Russian xenophobia after a terror attack in Moscow last March, "Immigration from Central Asia could therefore fall short of expectations in 2024," Prokopenko said, "especially as Russia is also competing with the Middle East and South Korea for Central Asian workers. Russia has virtually nowhere else to find new workers." Moreover, its long-term demographics are grim. The United Nations expects the Russian population to decrease to 142 million by 2030 from just under 145 million currently. Its average age is also increasing: Over a fifth of the population is now aged 60 or older. The UK Defense Ministry estimated that approximately 1.3 million people left Russia in 2022, when Moscow launched its full-scale invasion of Ukraine, exacerbating a 15-year trend of a shrinking workforce. Many of those who left were young professionals. While it is challenging to determine the exact number of emigrants, the Atlantic Council noted that "if 700,000 Russians now registered as living in Dubai is any indication, the number of emigrants may be far greater than 1 million." Despite its surprising resilience over the past few years, the Russian economy remains vulnerable to shocks in an uncertain global environment. Lower commodity prices, a slowdown in Chinese demand for Russian oil, and trade wars would all have an impact. And when the war concludes, Russia will have to adapt to a post-war economy, reducing state spending, reintegrating a large number of demobilized soldiers, and reorienting companies away from military industries. The major Russian cities are currently enjoying the benefits of a wartime economy, but there may be a reckoning on the horizon.