By Darya Korsunskaya, Guy Faulconbridge and Gleb Stolyarov

MOSCOW (Reuters) – President Vladimir Putin has grown increasingly concerned about distortions in Russia’s wartime economy, just as Donald Trump pushes for an end to the Ukraine conflict, five sources with knowledge of the situation told Reuters.

Russia’s economy, driven by exports of oil, gas and minerals, grew robustly over the past two years despite multiple rounds of Western sanctions imposed after its invasion of Ukraine in 2022. 

But domestic activity has become strained in recent months by labour shortages and high interest rates introduced to tackle inflation, which has accelerated under record military spending.

That has contributed to the view within a section of the Russian elite that a negotiated settlement to the war is desirable, according to two of the sources familiar with thinking in the Kremlin.

Trump, who returned to office on Monday, has vowed to swiftly resolve the Ukraine conflict, Europe’s biggest since World War Two. This week he has said more sanctions, as well as tariffs, on Russia are likely unless Putin negotiates, adding that Russia was heading for “big trouble” in the economy. A senior Kremlin aide said on Tuesday that Russia had so far received no specific proposals for talks. 

“Russia, of course, is economically interested in negotiating a diplomatic end to the conflict,” Oleg Vyugin, former deputy chairman of the Central Bank of Russia said in an interview, citing the risk of growing economic distortions as Russia turbo-charges military and defence spending.

Vyugin was not one of the five sources, who all spoke on condition of anonymity due to the sensitivity of the situation in Russia. The extent of Putin’s concerns about the economy, described by the sources, and the influence of that on views within the Kremlin about the war, are documented here for the first time.

Reuters has previously reported that Putin is ready to discuss ceasefire options with Trump but that Russia’s territorial gains in Ukraine must be accepted and that Ukraine must drop its bid to join the U.S-led NATO military alliance.

The Kremlin did not immediately respond to requests for comment about Putin’s view on the economy and Ukraine talks. 

Trump “is focused on ending this brutal war,” by engaging a wide range of stakeholders, White House National Security Council spokesperson Brian Hughes said in response to Reuters’ questions. In recent weeks, Trump’s advisers have walked back his boast that the three-year-old war could be resolved in a day.

Just days before Trump’s inauguration, outgoing U.S. president Joe Biden’s administration imposed the broadest package of sanctions to so far target Russia’s oil and gas revenues, a move that Biden’s national security adviser, Jake Sullivan, said would give Trump leverage in any talks by applying economic pressure on Russia.

Putin has said that Russia can fight on as long as it takes and that Moscow will never bow before another power over key national interests.

Russia’s $2.2 trillion economy had until recently shown remarkable endurance during the war, and Putin has praised top economic officials and business for circumventing the most stringent Western sanctions ever imposed on a major economy.

After contracting in 2022, Russia’s GDP grew faster than the European Union and the United States in 2023 and 2024. This year, however, the central bank and the International Monetary Fund forecast sub-1.5% growth, although the government projects a slightly rosier outlook.  

Inflation has edged toward double digits despite the central bank hiking the benchmark interest rate to 21% in October.

“There are some issues here, namely inflation, a certain overheating of the economy,” Putin said in an annual news conference on Dec. 19. “The government and the central bank are already tasked with bringing the tempo down,” he said. 

‘WAR GOALS MET’

Last year, Russia made its most significant territorial gains since the early days of the war and it now controls nearly a fifth of Ukraine.

Putin believes key war goals have already been met, including control of land that connects mainland Russia to Crimea, and weakening Ukraine’s military, said one of the sources familiar with thinking in the Kremlin.

The Russian president also recognizes the strain the war is putting on the economy, the source said, citing “really big problems” such as the impact of the high interest rate on non-military businesses and industry. 

Russia has hiked defence spending to a post-Soviet high of 6.3% of GDP this year, accounting for a third of budget expenditure. The spending has been inflationary. Along with wartime labour shortages, it has driven wages higher.

On top of that, the government has sought higher tax revenues to reduce the fiscal deficit.

Vyugin, the former deputy governor, said sustained high rates would put pressure on the balance sheets of businesses and banks.

Russian coal and steel producer Mechel, owned by businessman Igor Zyuzin and his family, on Tuesday said it had restructured its debt, under pressure from low coal prices and high interest rates.

PUTIN CONCERN

Putin’s frustration was evident at a Kremlin meeting with business leaders the evening of Dec. 16, where he scolded top economic officials, according to two of the sources, who have knowledge of discussions about the economy in the Kremlin and government. 

One of the sources, who was briefed after the meeting, was told Putin was visibly displeased after hearing private investment was being cut because of the cost of credit.

The Kremlin released Putin’s introductory comments praising business but did not identify any of the business participants at the mostly closed-door meeting. Reuters confirmed with one source that Central Bank Governor Elvira Nabiullina was not present.

On Wednesday, Putin said in televised comments to ministers that he had recently discussed with business leaders the risks of a decrease in credit activity for long-term growth, in an apparent reference to the December meeting. 

Some of Russia’s most powerful businessmen, including Rosneft CEO Igor Sechin, Rostec CEO Sergei Chemezov, aluminium tycoon Oleg Deripaska and Alexei Mordashov, the largest shareholder in steel-maker Severstal, have publicly criticised the high interest rates.

Nabiullina has faced pressure not to raise rates further from two of Russia’s most powerful bankers – her former boss, Sberbank CEO German Gref, and VTB CEO Andrei Kostin – who feared that Russia was heading towards stagflation, one source with knowledge of discussions about the economy said.

In his Dec. 19 comments, Putin called for a “balanced rate decision.” The next day, at its last monetary policy meeting of the year, the central bank held the rate at 21% despite market expectations that it would hike by 200 basis points.

In a speech after the decision, Nabiullina denied caving in to pressure. She said criticism of central bank policy increased when rates were high.

Nabiullina, Gref and Kostin did not immediately respond to requests for comment for this story.

NABIULLINA 

Nabiullina, a former economic aide to Putin who also served as his economy minister, is one of Russia’s most powerful women: she has served as central bank governor since June 2013 and three of the sources said that Putin trusts her.

Just a few weeks after sending troops into Ukraine in 2022, Putin proposed Nabiullina take a third term as central bank chief. Her term ends in 2027. 

Her supporters say critics miss the underlying cause of the inflation – the vast spending on the war – and say that without her, economic stability would have be threatened. 

Some lawmakers have called for her to be replaced, an unlikely outcome, according to two of the sources.

“No one in such a situation will change the governor of the central bank,” said one of the sources, who is acquainted with discussions about the economy. “Nabiullina’s authority is indisputable, the president trusts her.”