The cost of war: Inside Russia's economic unease

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1:50Hello, welcome to the documentary from the BBC World Service. My name's Ed Butler and today we're asking what is going on inside the Russian economy? Everything here is closed down. Here was a cafe, now it's for hand. How painful, how frustrating. Yes, stories of growing economic struggle in one of the oil and gas producing powerhouses of the world. Is the toll of the Ukraine war beginning to tell? We understand it's going wrong. No future. They stop investing in people in the future and in the long run. They try to survive. Unpicking the reality of Russia's economic pain. That's coming up on Business Daily, exploring how work and money impact people around the world.

2:46Filling up at gas stations in Russia seems to be getting increasingly stressful these days. This was an argument over alleged queue jumping. Russians are having to wait six hours or more sometimes to fill their fuel tanks. The reason? Well, largely this is due, it seems, to Ukraine's sustained drone attacks on Russia's oil refineries.

3:15And not just those. Ukraine's extended its attacks to include retail warehouses as well, like the Wildberries chain, known as Russia's Amazon. This was the scene of panic after one recent strike in Yekaterinburg. Some small business owners who house their commercial products inside Wildberries say they've been ruined.

3:45That's it. That's over. My brand officially no longer exists because we have nothing left. The Kalendina warehouse burned down. No inventory and no savings to keep going somehow. I've been wiped out. I'm officially broke. The lament of one former small business owner. Prices are rising rapidly, and the struggle to get by in Russia is affecting all aspects of life. Take the picturesque Black Sea town of Sochi, Vladimir Putin's favourite resort, which hosted a recent edition of the Winter Olympics. After repeated Ukrainian drone strikes there, locals say it's become a commercial ghost town.

4:34A lot of empty commercial property. Look, one, two, three, four, five, six. I used to come down here and buy sweets. All these businesses closing down. But is it really so bad across Russia as a whole? Yes, it's true, inflation and interest rates are up. But President Putin points out that unemployment remains low. And in a press conference last month, he said that the economy was actually still growing. Economic dynamics are generally modest, but positive. GDP growth is around 1%. It is clear that economic growth is affected by a number of factors, including external pressure and terrorist attacks on industrial facilities and infrastructure.

5:25Of course, there are no critical consequences from such attacks. But economists say that this growth is unsustainable long term because it's only government spending that's driving it. The state coffers are running low, the deficit is rising and the low unemployment rate may not be the sign of strength that Vladimir Putin claims. The BBC Russian service economics editor is Olga Shamina. Russia had very poor demography. It's fallen population. It's very, very bad. And of course, this leads that Russian have a big shortage of working force. So Russia has very low unemployment rate due only to this lack of working people.

6:10So the new wave of mobilization will make this labor shortage again more even more sharper. So it's a big problem. And it push out of the country, people who have opportunities to live, who has competence, who have money, who have skills and so on. So it will be frustrating for Russian economy because it also loses good human capital, actually. Meanwhile, certain indicators like inflation and interest rates are historically high still in Russia. Actually, they are not getting high because Russian economy was very underfinanced before the war. The government didn't invest in the economy, in society, and so on.

6:54They made reserves. And so on. When the war started, it pushed a lot of money into economy. And it led to these big, big numbers on inflation. And Russian Central Bank, it made rates very high to fight with it. So when it came to the point now that Russian small, middle business which is not connected to military section it is under finance because it can't actually go to bank and take a loan because it's too expensive they can't compete for this labor and it can go to banks so this all this small business is very in very bad state Olga Shamina of the BBC's Russian service here on Business Daily from the BBC Self-directed investing, trading, full-service wealth management, automated investing, financial planning, thematic investing, retirement planning.

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8:48I'm Ed Butler and today we're looking at the state of Russia's economy. Just how bad is it? Sergei Petrov is a former Russian billionaire who built a car sales and rental business from nothing back in the 1990s. Now the Kremlin critic lives in exile after he says his business was targeted following criticism from the government and allegations of corruption on both sides. Still, he retains close ties with business people inside the country. He also says that while some can profit from the sanctions and government military spending, most regular businesses are struggling. They describe it like an earthquake.

9:30They understand it's going wrong. No future. They stop investing in people in a future, in a longer run. They try to survive without questions. They tell me we are ready to suffer together with our population. And how much are they suffering? How bad is it? For example, Mr. Abdu Shalafvili just came to me. He's in charge of headhunting company and he started new businesses because big companies left Russia and a lot of space open for him. and he is flourishing now. But he understands it's temporary. Sooner or later, we will be exhausted with such a niche business. They couldn't find the stuff for their new projects, for old projects.

10:10A lot of people went to military because the state paid very well. And the rest of the business have to pay more taxes. You know, new VAT, new taxes system. They try to go in a black market. The middle side, they can't afford such a luxury. So to get by, to succeed in business in Russia now, you need to deal with the black market or you need to pay bribes to the government. I mean, is that what you're saying? Yes, yes. It's an alternative for surviving. Businessmen can't see the end of this opportunity. They understand it should be grasped now. And there are now, of course, these attacks on the wild berries stores.

10:51there are attacks on the petrol supply, petrol and diesel supply, all the fuel around the country. People are feeling that, are they? Yes, because you know that the price for fuel reach 150 rubles, it's absolutely unacceptable for Russia. And maybe 25 % of the gasoline stations now are available to get some fuel and they're complaining. Sergei Petrov. While more superstitious Russians have been calling the last few weeks Black August. It's a month when it's believed things historically often turn sour in the country. But some think this is just the beginning. There are growing rumours that after Vladimir Putin's victory in this month's election, something which is presumed to be a formality in this highly authoritarian state, his government will launch another round of mobilisations, forcing hundreds of thousands of people to join the armed forces.

11:49Some, like this man, who's just crossed the border into Georgia, are posting online that they're not waiting to find out.

11:59Folks, it's the end of August, the end of the holiday season. People are fleeing from Russia. Queues to borders are increasing each hour. But be aware that the Russian authorities will try to close this gap to escape. They will create obstacles. Are people escaping abroad still? Yes, who can afford? It's not the easy one, because you know, there are a lot of barriers, a lot of obstacles for Russians. They are not ready to walk outside of Russia. It's not their competence. Only young people are ready to walk under such circumstances. Former Russian billionaire Sergei Petrov says that the steady brain drain of wealthier Russians fleeing abroad is a factor now.

12:42But for the majority who are left behind, the feeling is just one of hopelessness. Do you expect the government to reintroduce more conscription to boost the army this year? I don't know. My expectation, it's not going to happen. They'll find another solution because a lot of problems it's raised. They're still thinking. Authorities, one of their militaries, of course, they insist. Yeah, we have to do it, otherwise we can't. But another economic bloc and others try to tell no, it's not the case. A new mobilisation also runs the risk of driving the regular economy, which is already struggling with labour shortages, into deeper recession.

13:22And there's the psychological impact as well. In May, a leading economist at one of Russia's biggest banks, Andrei Klepac, caused shockwaves by warning that the strains already risked what he called a social crisis. Sergei Petrov agrees that this is now a real possibility. Next year, maybe next two years, it might be people who raise the questions, why we are here? And the situation inside of society might show a lot of unstable things which we can't predict, we can't see it now. Do you think there could be a revolution? If it's going a long time, I can tell you not. Normally Russia doesn't like revolution, it's really difficult.

14:02But do you remember in the 90s, the people prefer Mr. Yeltsin, who demolished the fact Soviet Union, to Mr. Gorbachev, who tried to save Soviet Union. Until our population is not impoverished, they need to be hungry in order to start to demand some changes, some real new politics. Right. They're not hungry enough yet. Yeah, it's not hungry. But if it started, it's already impossible to stop it. Russia is so unpredictable. No rules. They don't believe in the rules. They are living inside, and they see how the authorities don't follow their own rules. You know, the position of authorities in hierarchy depends upon how many rules you can break.

14:45And it might be a consequence, of course, of any reject reaction from the, not from the people, but from the people who are near Putin. But they have to feel this pressure from the people. It might be dangerous for him. It might be. You mean there might be somebody near to him who will try to get rid of him?

15:28will cause a crash, big crash and big blood on the street. Sergei Petrov. But others are more cautious. I've been speaking to Ekaterina Shulman, a Russian political scientist, now a non-resident expert at the Carnegie Center in Berlin. What was her assessment of the public mood? Every week they ask people whether those around them are mostly calm or mostly anxious. Respondents, They don't speak about their own mood, but about the mood of those around them. And since spring of 2026, the levels of anxiety are reaching almost as high as they were at the beginning of this war. This is one parameter.

16:10Another is things like consumer optimism, consumer behavior, whether people spend or whether they avoid spending their money. So we have an anxious society with diminishing levels of trust towards those institutions that have been considered trustworthy. How worried do you think Vladimir Putin would be by those kinds of reports? We know that Russian state is obsessed with polling. Every Russian gets polled, I think, every week of their lives. They care about polls, but only when it's big numbers. If it's a significant downward trend, yes, they care about that. We see a state with a remaining high coercive capacity.

16:55Repressive activity is going on swimmingly, but we don't see a very effective state machine, even on its own terms, on inauthoritarian terms. For example, the way they conduct this electoral campaign is unlike any previous one. They make decisions and then they go back and cancel them. Bureaucrats get arrested every week and they are given extremely high sentences of imprisonment. So the system is spasmodic. It's anxious. It still can preserve a facade of unity. But the preservation costs more and more. And we see, I think, the spasmodic mode is something new. It has not been this way before. So society is becoming ever more constrained.

17:39Of course, some would say these problems that Russia is facing could potentially end with a ceasefire in the war, couldn't they? I mean, a normalisation of economic relations with the rest of the world would make a huge difference. Do you think that Vladimir Putin is considering that as a possibility? Can he afford peace on Ukraine's terms? Well, we don't know what is he considering, we can see what he is doing. And what the state machine is doing, it's escalating. So perhaps the realisation of this very situation that we've been describing together is leading the machine and the leadership to very different conclusions.

18:17That yes, they can hardly afford another year of the war in the same mode that it has been conducting this war for the last four plus years. So it needs to end it. But in order to end it, it needs to escalate. Some will argue, some do argue that Vladimir Putin cannot contemplate peace on anything that doesn't look like his terms for his own political survival. I mean, do you think that that is true? I would not agree to this proposition. Society is heartily sick of this war. Not just a peace agreement, but even a pause in hostilities will very likely be greeted with a national euphoria. And it's quite simple in terms of political technologies to capitalize on this jubilant societal mood, on this all-nation holiday and festivities.

19:09So I don't think there will be immediate political danger to Vladimir Putin's hold on power if he stops his war effort. Problems will come afterwards, but they can be managed. But this is what I'm thinking as an analyst and an expert. What he's thinking may be very different. Making this program, we have heard some dire forecasts. The reality, I guess you would say, is that authoritarian leaders like Vladimir Putin, it takes an awful lot to shift them from the seat of power. It's unlikely that he's going to be forced out by a popular revolution, at least. No, that's extremely unlikely. Nothing is impossible politically that is possible physically.

19:54That's one of the very few laws that we have in our science. Personalist autocracies fall victims to coups more often than to popular uprisings. So that is a more likely scenario, but still the likelihood strikes me as low. Political scientist Katerina Shulman. That's it for this episode of The Documentary from Business Daily, made by me, Ed Butler, and my producer, Victoria Holland. You can hear more of our global business stories and discover how they affect workers, entrepreneurs and companies around the world at bbc.com or by searching for BBC Business Daily wherever you get your podcasts.

20:34Thanks very much for listening.