President Vladimir Putin is increasingly concerned about distortions in Russia's wartime economy - just as Donald Trump is pushing for an end to the conflict in Ukraine, five sources familiar with the situation told "Reuters".
Russia's economy, driven by exports of oil, gas and minerals, has grown steadily over the past two years despite a raft of Western sanctions imposed after Russian forces invaded Ukraine in 2022.
In recent months, however, domestic activity has been strained by labor shortages and high interest rates introduced to deal with inflation that has accelerated amid record military spending.
This has contributed to the emergence of the view among some in the Russian elite that a negotiated settlement of the war is desirable, according to two sources familiar with Kremlin thinking.
Trump, who returned to the White House on Monday, has vowed to quickly resolve the Ukraine conflict, Europe's biggest since World War II. This week he warned that more sanctions, as well as tariffs, against Russia were likely unless Putin came to the negotiating table, and noted that Russia was headed for "big problems" in its economy. A senior Kremlin adviser said on Tuesday that Russia had not yet received any concrete proposals for talks.
"Russia, of course, is economically interested in negotiating a diplomatic end to the conflict," said Oleg Vyugin, a former deputy chairman of Russia's Central Bank, citing the risk of growing economic distortions as Russia turbocharges military and defense spending.
Putin had previously been reported to be open to discussing ceasefire options with Trump, but that Russia's territorial gains in Ukraine must be accepted and Kiev must drop its bid to join NATO.
Trump is "focused on ending this brutal war", engaging a wide range of stakeholders, said White House National Security Council spokesman Brian Hughes.
In recent weeks, however, Trump's advisers have played down the praise. that the three-year war could be resolved in a day.
Just days before Trump took office, the administration of outgoing US President Joe Biden imposed the broadest package of sanctions ever targeting Russia's oil and gas revenues, a move that Biden's national security adviser Jake Sullivan said would give Trump leverage in potential negotiations by putting economic pressure on Russia.
Putin has said Russia can fight for as long as necessary and that Moscow will never bow to another power over key national interests.
Russia's $2.2 trillion economy has so far shown remarkable resilience during the war, and Putin praised senior economic officials and businesses for circumventing the toughest Western sanctions ever imposed on a major economy.
After contracting in 2022, Russia's GDP grew faster than that of the European Union and the United States in 2023 and 2024. This year, however, the central bank and the International Monetary Fund are forecasting growth below 1.5%, although the government's outlook is somewhat rosier.
Inflation has reached double digits, even though the central bank raised the benchmark interest rate to 21% in October.
"There are some problems here, namely inflation, some overheating of the economy," Putin said at an annual press conference on December 19. "The government and the central bank are now tasked with slowing the pace," he added.
Last year, Russia made its most significant territorial gains since the early days of the war and now controls nearly a fifth of Ukraine.
Putin believes key military goals have already been achieved, including control of land that connects mainland Russia to Crimea and weakening the Ukrainian army, one of the sources familiar with Kremlin thinking said.
The Russian president also acknowledges the strain the war is putting on the economy, the source added, and singled out "really big problems," such as the impact of high interest rates on non-military businesses and industry.
Russia has increased defense spending to a post-Soviet high of 6.3 percent of GDP this year, accounting for a third of budget spending. The spending has been inflationary. Along with the labor shortage during the war, this led to higher wages.
The government is also seeking higher tax revenues to reduce the fiscal deficit.
Vyugin said that persistently high interest 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, said it had restructured its debt under pressure from low coal prices and high interest rates.
Putin’s frustration was evident at a Kremlin meeting with business leaders on December 16, where he reprimanded senior economic officials, two of the sources familiar with the Kremlin and government’s economic discussions said.
One of the sources was told that Putin was visibly upset after hearing that private investment had been cut back because of the cost of credit.
Central Bank Governor Elvira Nabiullina did not attend the meeting.
Yesterday, Putin told ministers that he had recently discussed with business leaders the risks of a slowdown in lending to long-term growth, apparently with a meeting in December in mind.
Some of Russia's most influential businessmen, including Rosneft CEO Igor Sechin, Rostec CEO Sergei Chemezov, aluminum tycoon Oleg Deripaska and Alexei Mordashov, the largest shareholder in steelmaker Severstal, have publicly criticized high interest rates.
Nabiullina is facing pressure not to raise interest rates further from two of Russia's most influential bankers - her former boss, Sberbank CEO German Gref, and VTB CEO Andrei Kostin - they fear that Russia is heading towards stagflation.
In his speech on December 19, Putin called for a "balanced decision on interest rates". The next day, at its last monetary policy meeting of the year, the central bank kept the rate at 21% despite market expectations for a 200 basis point increase.
In a speech after the decision, Nabiullina denied that she had succumbed to pressure. She pointed out that criticism of the central bank's policy increases when interest rates are high.
Nabiullina, a former economic adviser to Putin who also served as his economy minister, is one of the most powerful women in Russia: she has been governor of the central bank since June 2013. and Putin trusts her, three of the sources said.
Just weeks after sending troops to Ukraine in 2022, Putin proposed that Nabiullina serve a third term as central bank chief. Her term ends in 2027.
Her supporters say critics are missing the main cause of inflation - huge military spending - and stress that without her, economic stability would be at risk.
Some lawmakers have called for her to be replaced - an unlikely outcome, two of the sources said.
"Nobody in such a situation would replace the central bank governor," said one of the sources familiar with the economic discussions. "Nabiullina's authority is unquestioned, the president trusts her."