Jacques Sapir is a French economist and Russia expert who teaches at the School of Economic Warfare in Paris and at the Moscow School of Economics, and is a member of the Russian Academy of Sciences. He defended a doctoral thesis on the organization of labour in the USSR between 1920 and 1940, as well as a state doctorate in economics at the University of Paris X. He taught macroeconomics and financial economics in Nanterre and at ENSAE Paris, and later at the School for Advanced Studies in the Social Sciences (EHESS). He headed the IRSES research group at the Foundation for the Maison des Sciences de l’Homme (FMSH), and co-organized the Institute for National Economic Forecasting (IPEN-ASR).
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How long can Russia finance its war against Ukraine?
Well, at the current rate, for five years, ten years—maybe indefinitely. There is no problem for Russia to maintain its war effort. We compute that the percentage of military expenditure in the GDP is between 6.5 and 7 per cent. It’s very high by comparison to European countries. But, as a matter of fact, that was the level of defence expenditure in France and in the United States in the 60s. It was the war in Vietnam and also the rebuilding of all the deterrence sector with nuclear submarines in the United States, but we knew that countries could sustain this level of defence expenditure quite indefinitely. That’s the first point.
The second point is the fact that, so far, the defence industry has developed without encroaching on the civilian sector. And this is the big difference between an economy at war and a war economy. What defines a war economy is the fact that some civilian industries are converted to produce defence products. This is not the case in Russia. In Russia, we still have a civilian industry which is developing by itself and a military industry which, of course, has increased. It’s sustainable for quite a long period.
There are two views on the Russian economy: 1) it’s resilient and strong enough to even upgrade the Russian army, 2) it’s overstretched, has fiscal problems, no access to critical technologies, and difficulties selling energy. Which view is closer to reality?
Well, the last two points are fake. Actually, Russia has no problem exporting its energy or other products to other countries. We know that oil and gas are exported largely to China and India. It’s not a problem. The problem with the budget is not the deficit. In Russia, it will reach 3 per cent, which is exactly the mandatory level in the EU. For France, a 3 per cent budget deficit is a miracle. We are actually at 5.6 or 5.8 per cent in France.
But there is still a problem in Russia, and that is the lack of a quality workforce. The unemployment rate is 2 per cent, which is actually very low. That means that unemployment is now nearly completely frictional, with no more permanent unemployment. So there is a problem of labour force, and this problem should be solved by an increase in labor productivity and by immigration.
‘There is no problem for Russia to maintain its war effort’
Nobody wants to speak loudly about that in Russia, mostly for political reasons, but we know that some very large Russian companies have opened hiring offices in China and in Vietnam to hire people. Russia needs to import around 5 million people until 2030, and it could be a solution for the medium term. The long term solution is, of course, the improvement of productivity. And yes, in the end, the Russian economy is resilient. It’s digested the Western sanctions without any problem.
Some economists say there are structural problems in Russian economy; there are queues for gas at the gas stations, and there are signs of uncontrolled inflation or recession. Is it true or not?
The problem of gas is linked to the fact that by August and September, traditionally, Russian refineries go into reparations. So every year, there is a lack of gas in Russia at this time of year. Of course, Ukrainian attacks against some refineries worsen the problem, but it is a short-term issue. You have to understand that a drone with a warhead between 30 and 50 kilograms can destroy a huge tank, making a huge flash, big flames—something that is extremely spectacular—but which doesn’t modify the situation of a refinery. Of course, the refinery has to be stopped for two or three days until the fire is put out by the fire brigade. But after that, the refineries resume their activities. We are now talking about some dozens of Ukrainian drones, each with tiny warheads. We see these attacks against Russian refineries.
What about the looming recession and inflation?
It’s a fight against inflation. The central bank hiked the interest rate too much. We had inflation in December 2024 at around 10.5 per cent, which is high, but this must also be related to pre-war inflation, which was already 6 per cent. So the increase in inflation linked to the war was 4.5 per cent. Of this, probably half—2 per cent—was linked to sanctions, because sanctions have not prevented imports, only increased their costs.
For example, last year I went to meet Audi dealers in Moscow, asking whether they had problems replenishing their stock. They said they are still importing cars from Germany—not directly, because that is forbidden, but through different countries like Turkey, Georgia, or Armenia. It costs 20 per cent more, but people can afford an Audi with 20 per cent more. It’s not a problem for the upper class.
But what about the middle class?
The middle class is largely buying Russian-made cars or Chinese imports, which are more or less the same cost as before. The problem was more with the level of interest, which was raised by the Russian Central Bank. They set the nominal interest—the interest set by the Central Bank minus the inflation rate—much too high. Last January, the nominal rate was 21 per cent with an inflation rate of 10.5 per cent, implying a real interest rate of 10.5 per cent, which is too high. Real interest rates should have been raised to 4 or 5 per cent.
This had no impact on industry because 90 per cent of industrial investment is financed without bank loans, relying instead on company reserve funds or inter-company loans. However, for households, a 10 per cent real interest rate makes loans prohibitively expensive. Many people also preferred putting their money into bank deposits, because the real interest on deposits was probably around 5 per cent. At the beginning of this year, deposit interest rates were around 15 per cent, while loan rates were at 23–24 per cent.
‘Of this, probably half—2 per cent—was linked to sanctions, because sanctions have not prevented imports, only increased their costs’
Many experts say the problem for Putin begins when the populations of Moscow and St Petersburg start feeling the fall in their standard of living—the full effects of the war. When is this turning point likely for Russian society?
Well, for the upper class, the war has no influence and will continue to have none. For the upper middle class—which is not the same—the war does have an effect, mostly because the fiscal system focuses on them through a progressive income tax system. But for the rest of the population, the war has had little influence. In fact, it has entailed a significant rise in real wages: 10 per cent in 2023, 8.7 per cent in 2024, and around 5 per cent this year.
People working in distribution have been less affected by these wage increases, but those in industry have seen wages rise by more than 15 per cent per year. The upper middle class makes up only 10–12 per cent of the Russian population, which is why the government largely ignores them.
I guess two factors count in changing a leader’s mind about the war: when the population gets frustrated, and when the supplies are running out. What are the long-term vulnerabilities of the Russian economy?
Any move toward a real war economy that is doubling or tripling the level of defence expenditures could make sense only if Russia wanted to go to war with NATO countries—to wage an open war with NATO. And I don’t see that coming, because I think there is still the shield of nuclear deterrence which is preventing such a high-level war in Europe.
And if we are not thinking about this war, of course, there is no reason why the Russian government has to change the present level of defence expenditure, which is between 6 or 7 per cent of GDP. It’s enough to destroy the armed forces of Ukraine and to build an increasing armed force toward the Europeans, because we in Europe are spending about 2 per cent of GDP.
By an analysis in the Foreign Affairs magazine, Russia spends almost 40 per cent of its federal budget on defence. It is a huge number, 40 per cent.
It’s bad propaganda, and I will immediately explain why.
What is the real data?
People are forgetting that there are two budgets in Russia: the state budget is actually split between the federal budget and the budget of the regions, because Russia is a federal state. This is quite frequently not understood. It’s like Germany: they have a federal budget and a budget of the regions. So when we are talking about the Russian budget, we have two. So the 40 per cent applies only to the federal budget, not to the whole. And a lot of the payments are made by the regional budgets: teachers, secondary school professors are paid by the regional budgets.
‘There is still the shield of nuclear deterrence which is preventing such a high-level war in Europe’
Russia spends a lot on military, yet it can’t win the war clearly and dominantly. What’s the reason for that?
First, the Russian army is not committed completely to Ukraine. The best estimates of Russian forces operating in Ukraine are between 600,000 and 1.3 million soldiers. So a large part of the Russian army is not deployed in Ukraine.
The second point is: what are the real goals of Russia in Ukraine? It is not the conquest of Ukraine. If the Russians really wanted to conquer Ukraine, they would have mobilized the whole population—in World War II the Soviet Army had to deploy 3 million people in Ukraine. Actually, the goal of the Russian forces in Ukraine is to destroy the Ukrainian Armed Forces, to wage warfare against them, to kill their people, to destroy their equipment. This is what they are doing right now: they dismantle all the fortifications made by Ukrainian forces in the Donbas. You know Pokrovsk will fall, because it is the very end of the battle of Pokrovsk, and the Russians have a second, much larger encirclement taking place at Kramatorsk and Slavyansk.
The Russians have never had the idea to invade all of Ukraine, and for a good reason: they don’t want to manage a Ukrainian population that would be against them. So they don’t want to invade the whole country. They aim to conquer all of the Donbas oblasts and some other regions, Zaporizhzhia and Kherson, but no more. They want the neutralization of Ukraine, the disarmament of the Ukrainian Armed Forces, more or less on the same scale as what they imposed on Finland by the Paris Treaty, and then the Moscow Treaty in 1946 and 1947—and that’s all.
That’s quite a lot.
That’s enough because they have sent a message to NATO: you are not so strong, we can fight you, so don’t try. And they will turn their focus on to other problems that will be probably the problems of the Middle East and things like that.
So are the fears of the Baltic States and Poland irrealistic?
Yes.
But they have historic experiences with the Russians.
Of course.
And doesn’t it apply for the present situation?
Of course, the Baltic states are very vulnerable to Russia, but so is Kaliningrad to Poland. And there is a kind of balance. So far, there is no risk of things going out of control in the Baltic. But one problem remains: would NATO increase its presence? If there were no provocations, then there is no reason for Russians to go further. And no willingness to go on, either.
‘They aim to conquer all of the Donbas oblasts and some other regions, Zaporizhzhia and Kherson, but no more’
What could be the most realistic outcome of this war?
The outcome will be bleak, sorry to say. A peace agreement should be reached, the sooner the better. We have a Ukraine that is partly destroyed due to the strategic bombings by Russian forces against its infrastructure. Part of the Ukrainian population has fled their own country. There were 41.8 million people in Ukraine in 2021; by 2025, only 28.5 million remain. At best, 10 per cent will return. There are 2.5 million Ukrainians who have fled to Russia, and they are not from the Donbas or Crimea, because those parts of Ukraine have now legally become part of Russia, so these people are no longer counted as Ukrainians but as Russians. Ukraine will be an empty country. And if you combine that with the destruction of its infrastructure, there could be a risk of instability.
The second reason why the future will be bleak is that Russia has probably turned away from Europe for the next 20 or 30 years. The mood in Russia now is not only extremely anti-Western, but also extremely pro-Asian, pro-China, and partly pro-India. I will just give you an example. We asked students at Moscow University to conduct a survey among other students as a kind of exercise in sociology, and the results were extremely interesting. 80 per cent of students wanted to go on a trip to China. Only 30 per cent wanted to go on an equivalent trip to the United States or Europe. And the second important question was: why do you want to go to China? Among the reasons given was that China is the true country of the 21st century. There is a fascination with the technology developed by China.
At least for the next 20 or 30 years, I cannot see a real improvement in relations between Russia and Europe. Europe, Hungary, and Romania will have to cope with a deeply unstable Ukraine. There is a fraction of the Ukrainian population that is strongly nationalist, which we can understand because of the war, and another fraction that despises this nationalism and wants an end to the war at any cost. So there is a major split in the Ukrainian population.
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