Putin is trying to solve a 'trilemma' in Russia's fragile wartime economy now, a former Russian official says

• Vladimir Putin is trying to solve a "trilemma" in Russia's economy, a former Russian official has said.

• He said Putin needed to keep spending on the war and appear to deliver on the economy.

• He also said Putin had to keep macroeconomic stability after imposing extraordinary measures.

Russia's economy appears to be booming even 21 months into the Ukraine war.

But behind the scenes, Russian President Vladimir Putin is trying to solve a tricky "trilemma" as the country's economy heads into 2024, Alexandra Prokopenko, a former central bank official, has said.

"At the moment, the economy looks resilient. But it's like Putin navigates it the way he navigates his yacht, as if it's an icebreaker. But it's not," Prokopenko, a former advisor to the Bank of Russia, told the Carnegie Russia Eurasia Center think tank in a podcast last week.

Prokopenko, who is now a non-resident scholar at the Carnegie Russia Eurasia Center, explained this was because Putin needed to negotiate three key issues.

First, he said the Russian leader had to keep spending on the war in Ukraine to keep up economic growth. Russia reported 5.5% GDP growth in the third quarter of this year — reversing a 3.5% decline in the same period last year.

"The current pace of GDP growth is mostly because of these war expenditures, which basically means that once the Russian state stops spending on the war, the growth will stop or slow significantly," Prokopenko added.

He said that since economic growth would cause inflation, the country's central bank needed to keep interest rates high to tame war-time price raises. On Friday, Russia's central bank raised its key interest rate to 16% in its fifth straight hike.

Prokopenko said Putin also had to keep up the appearance that he was still delivering because he had a social contract with the people that "everything is going according to plan." Putin is seeking a fifth term in Russia's March presidential election when he is almost certain to win.

"War is not a global war, but it's still a 'special military operation,' and people can continue their lives as usual, business as usual," Prokopenko said.

He said Putin also needed to maintain macroeconomic stability after imposing extraordinary measures such as capital controls and breaking the country's budget rule to support the flagging ruble.

"Abandoning these institutions means that in the future, it will be more complicated for the financial leadership, for the Kremlin, and for Putin to deal with future shocks," Prokopenko said.

While Putin's administration has managed to keep up a rosy facade for Russia's economy, the country's official economic statistics are nearly impossible to verify, and reports suggest that much of the country's growth is due to massive military and government spending.

Igor Lipsits, a prominent Russian economist, told Reuters last month that "the real situation is bad" for the country's economy.

Prokopenko also cited a key quantitative signal that the Russian economy isn't quite all it's hyped up to be.

"Next year, the key rate will be in double digits. It's also a sign that the economy is not healthy," said Prokopenko. "If you have a healthy economy and moderate, sustainable growth, you don't need a double-digit key rate. You don't need such costly money within the economy."

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