The Recession Putin Can't Hide: Why Xi Won't Save Russia's Failing Economy

Because it won't be enough.

Andrei Klepach, chief economist of VEB, a state-run Russian bank, has declared that Russia has entered a recession.

Two quarters of GDP decline. Technical recession. He could have said the truth—that Russia is in stagflation, with low-to-negative growth paired with high-to-very-high inflation. But I guess there are one too many windows at the VEB bank. So the chief economist took the diplomatic approach.

But if we look at the source of the decline, we would realize very clearly we are looking at the start of a sharp decline. Economic indicators reveal that the sharp rebound in 2023 and 2024 was due to aggressive spending by the state—on war, on subsidies, and through direct payments to many different parts of Russian society.

Putin took as much money as he could from oil revenue and pumped it relentlessly into the economy, particularly on the production front. As sanctions drove output down, military production ramped up, compensating for it.

An aggressive artificial boost. Artificial because Putin did not match spending with revenue during this period. He generously dipped into the National Wealth Fund as well. But the NWF was not an unlimited resource—it was finite.

Now he has slowed down his NWF raid and is desperately selling debt, forcing banks and other large institutions to buy bonds at punishing interest rates. This is a stopgap measure with an extremely short shelf life. It's also risky, because if any of these institutions collapse due to their inability to service loans, it could trigger a mini-contagion.

So there's not much runway left with the NWF, and not much runway with debt to the domestic market either.

This means Putin cannot spend as much as he did in 2023 and 2024. He needs to sharply contract spending—which he has already started this January—and he still needs to cut further. This makes the next two quarters an extremely vulnerable moment for Russia. They will most likely experience negative growth.

I think Putin will now be looking to China or other partners to buy some critical resources from Russia. He may even sell off large tracts of mineral, oil, and gas resources—perhaps forever, perhaps for 100-year leases. India is another option.

He needs to raise money. He needs to do it fast. Not that it's going to help the economy get back on its feet, because raising one-time cash is not a fix—it's a band-aid. And band-aids run out.

I actually thought Putin would do this last year. I even wrote about this option briefly. Putin likely tried and was most probably rebuffed by China. It's very difficult to predict how Xi Jinping will respond. Europe needs to move fast to block this from gaining momentum. If China attempts to rescue Putin's war machine by participating in a fire sale, then Europe will have no choice but to respond with two things:

1. Remove their resistance to expanding NATO to Asia.

2. Join America in tariffs against products manufactured in China.

Xi Jinping doesn't like either option. His affection for Putin isn't deep enough to absorb economic costs for China. "Assistance lite" is what Xi will prefer—not Putin's "phone a friend" lifeline. This lifeline can be severed with diplomatic effort. Back-to-back calls from Starmer, Macron, and Merz to Xi Jinping should be enough to get this done. But acting preemptively is much better than responding post-crisis.

So Prime Minister Starmer, President Macron, and Chancellor Merz, please pick up the phone and talk to President Xi Jinping. Coordinate your approach and deliver it to China. It will work, and it will be enough.

This is Europe's job, and Ukraine needs to stay focused on what it does best—degrading Russia's war machine through strategic strikes. Two days ago, Ukraine attacked Russia's Novokuybyshevsk Oil Refinery, one of the largest refineries in Russia. It was a massive attack with 17 drones that took out 4.1% of Russia's refining capacity in a single strike.

But it wasn't the size of the attack or the amount of capacity that went offline that caught my attention. What's truly significant is that this was the second attack on the same refinery in just three weeks. The first strike hit on August 2nd, the second on August 28th.

This reveals a critical weakness: Putin cannot defend his most valuable assets. I suspect this isn't due to lack of effort—there must be at least mobile gun units around that refinery, perhaps even short-range air defense systems protecting such a strategic facility.

If they had adequate protection and Ukraine still managed to penetrate their defenses, that's deeply troubling for Moscow. If there was no meaningful defense at all, that's even worse. Either scenario demonstrates a fundamental problem for Putin's war effort.

The implications are staggering. If Ukraine can strike a refinery sitting +1,000 kilometers from the border with double-digit drone formations, then everything of value Putin possesses within that 1,000-kilometer radius now carries a "potential destruction" label. His entire western industrial infrastructure has become vulnerable to systematic degradation.

This is precisely why Chinese financial assistance to Putin would be economically irrational. If Xi provides 100 billion dollars in support, Ukraine can systematically destroy 100 billion dollars worth of Russian infrastructure. It's a losing proposition for Beijing. I hope Starmer, Macron, and Merz stress this mathematical reality to Xi Jinping during their diplomatic outreach. It makes no sense for China to hurt itself trying to prop up Putin's failing war machine. It would be a waste of resources and, more importantly, a waste of China's own future trade prospects with Europe and the West.

I also need to address something crucial I overlooked yesterday—the kind of strategic miscalculation I consciously try to avoid, but somehow missed in the moment.

Remember the Russian attack on the American company Flex in Ukraine. This wasn't random violence—it was Putin deploying his signature "test-to-pivot" strategy, probing to see if the United States would respond to direct provocation against American property and investments. This was the same test that Obama catastrophically failed in Syria, the same test that Biden failed when North Korean weapons began flowing to Russia with impunity.

But this time, something different happened. General Caine understood exactly what Putin was attempting and refused to let the provocation succeed. The decision to clear the sale of 3,350 ERAMS to Europe moved escalation control decisively out of Putin's hands and back to the United States. Caine's timing was pitch perfect—a textbook example of how to manage escalation through strength rather than accommodation.

By approving this massive weapons transfer in direct response to Putin's test, Caine did not allow America's strategic credibility to fail. Putin threw his punch at American interests, expecting the usual Western retreat. Instead, he got 3,350 precision strike weapons that will soon be aimed at his most valuable war assets in occupied territory.

This may not feel dramatic to outside observers, but for the Kremlin, these calculated responses matter enormously.

And finally, after years, Europe has learned the art of playing the Russians using their own KGB tactics. In almost one voice, they went after Putin for refusing to meet Zelensky after he agreed to do so during a call with President Trump. Putin most likely didn't say it outright, but he would have done everything to make Trump feel like he was agreeing to a direct meeting with Zelensky.

Trump himself started pushing this idea after the EU-US summit in Washington. Europe was fully aware that Putin would not agree to meet Zelensky. Now that the two weeks have lapsed, they have gone after Putin for refusing to honor the commitment.

What this does is remove the usual escape routes Trump deploys to keep giving Putin endless sets of two-week deadlines. He will still be tempted to try, but now that Europe has dropped its narrative into the information sphere, they've dented Putin's options while cutting any path for Trump to move toward Putin again.

I'm impressed. For too long, Europe never understood the game Putin was playing. Now they're not only showing they can play the same game, but they can play it together.

Macron, Zelensky, and Kallas all said the same thing, using different words.

Coordinated information warfare.

By Europe.

I like that.

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