When Russian President Vladimir Putin addressed an annual big-business gathering this month, he could not help but crow about how Western sanctions against the economy had failed.

“The task was to deal Russia a strategic blow … to weaken industry, finance and services in our country,” Putin said at the VTB investment conference, pointing out that economic growth in Russia would reach 4% this year, far outstripping rates in Europe. “It is clear that these plans have collapsed.”

But despite the polite applause that greeted the Russian president, tension has been breaking out into the open among the Russian elite over the mounting cost of sanctions on the economy. Executives from major businesses have been warning in growing numbers that central bank interest rate hikes to combat rampant inflation — caused by sanctions and Putin’s wartime spending spree — could bring the economy to a halt next year.

There could be a rash of bankruptcies, including in Russia’s strategically sensitive military industry, where the boom in production fueling Russia’s war in Ukraine is forecast to slow next year, the executives have said. The result could be that Russia would no longer be able to replenish the equipment being lost on the battlefield at such high rates.

Even President-elect Donald Trump noted in a post on his Truth Social network this weekend about the shocking overthrow of the Kremlin’s ally in Syria, Bashar al-Assad, that Russia had been weakened partly because of “a bad economy.”

As expectations grow that the central bank will be forced to impose another interest rate hike this month, usually reticent members of Putin’s inner circle have joined in the unprecedented criticism of the policy that has kept the key rate at 21%.

However, annual inflation continues to soar beyond 9%, according to official data, raising the prospect of a prolonged “stagflation” or even recession next year.

Already, the central bank forecasts that growth will sharply slow to 0.5 to 1.5% next year. Tough new U.S. sanctions on 50 Russian banks, including Gazprombank, a key channel for energy payments, further increased transaction costs for Russian importers and exporters and caused the ruble to plummet to its lowest level against the dollar since Russia’s 2022 invasion of Ukraine.

The drop in the ruble also fueled inflation, and the rate surged an additional 0.5% between Nov. 26 and Dec. 2, according to the Russian statistics agency Rosstat.

Boris Kovalchuk, head of the country’s financial watchdog and son of one of Putin’s closest allies, St. Petersburg banker Yury Kovalchuk, warned Nov. 27 that the interest rate hikes were “limiting the investment possibilities of business and leading to a growth in federal budget spending.”

Igor Sechin, another close Putin ally heading the oil giant Rosneft, lambasted the central bank in his company’s quarterly financial report, saying the rate hikes were having a “negative impact on the cost of financing” for the company as well as its contractors and suppliers and were eating into profits.

Others are sounding an even louder alarm. Sergei Chemezov, the close Putin ally who heads Russia’s state arms conglomerate RosTec, warned at the end of October that if rates remained at current levels, “practically a majority of our enterprises will go bankrupt,” and he said Russia could be forced to curtail arms exports.

Steel magnate Alexei Mordashov, who owns Severstal, warned that “it is more profitable for companies to stop development, even reduce the scale of business and put funds on deposit, than to conduct business and bear the risks associated with it.”

The Russian Union of Shopping Centers said more than 200 malls face bankruptcy because of the high cost of financing.

While business executives and economists said it was natural for industry titans to exaggerate the impact of the high rates to seek subsidized loans and other state benefits, they also said the concerns being voiced were real, especially because corporate debt levels are high.

Among the hardest hit are contractors in the Russian defense industry, which, according to Alexandra Prokopenko, a former adviser to the Russian central bank and now a fellow at the Carnegie Russia Eurasia Center, are reporting non-payments and growing financing costs. “Businesses are not hiding that it is more profitable for them to put money on deposit than to invest in business.”

Some of those contractors have also been speaking out publicly. Andrey Gartung, head of the Chelyabinsk Forge and Press Plant, said in early November at an economic forum that key branches of mechanical engineering could “collapse.”

Russian news agency Interfax reported Dec. 3 that non-payments were spreading across the economy, with major and midsize businesses delaying 19% of payments between July and September, while small businesses had delayed 25% of payments over the same period.

Investment has been falling, according to the Russian Economic Development Ministry, and the impact of sanctions has gradually pushed up the costs of imports and financial transactions, further fueling inflation, said a former senior Russian financial official, speaking on the condition of anonymity to discuss sensitive matters. “What’s happening is a typical supply shock in the country.”

The growing cost of financing and importing goods comes at a critical juncture for the Russian defense industry. Even as Putin has poured ever greater amounts of state funding into the sector, with a record $126 billion allocated in next year’s budget, most of the increase in output has been fueled by boosting the workforce to run military plants round-the-clock and by refurbishing Soviet-era stockpiles.

But as the war extends well into its third year and losses of military equipment soar, Russia’s labor force is at capacity, and the Soviet weapon supply is dwindling. Growing costs — and ever-tightening sanctions on imports of equipment — are making it increasingly difficult for the Russian defense sector to build weaponry from scratch, said Janis Kluge of the German Institute for International and Security Affairs.

According to a report this year by Jack Watling and Nick Reynolds, research fellows at the Royal United Services Institute in London, 80% of tanks and other armored fighting vehicles used in the war are not new, but refurbished from existing stocks. Russia “will begin to find that vehicles require deeper refurbishment through 2025, and by 2026 it will have exhausted most of the available stocks,” according to the report.

As Soviet-era supplies diminish, “Russia will start to have to produce certain categories of weapons from the ground up,” Kluge said. But sanctions have made it more difficult and more expensive to import the equipment necessary for that, he added.

According to data presented by the Russian Economic Development Ministry to the Russian parliament, the surging output in the sector vaguely named “other transport systems and equipment” is due to plummet to 5% growth next year — from 30.2% in 2023, in a sign of the troubles in the tank-manufacturing sector.

The situation, however, does not seem to be causing worry in the Kremlin. A Russian academic with close ties to senior diplomats said concerns about the economic outlook were not enough to move the state to compromise.

“There is no panic mood,” the academic said. “From the point of view of people who sit in the Kremlin, everything is developing more or less well. Russia continues to advance militarily. … In these conditions, there is no need to make any serious compromise.” The disarray in Western capitals — with the no-confidence vote in France and another scheduled this month in Germany - combined with the belief in the Kremlin that Trump will reduce support for Ukraine — is further adding to the confidence.

Putin has batted away the mounting criticism of the interest rate hikes and of his central bank chief, Elvira Nabiullina, and he told the investment conference that reining in inflation was a priority.

With prices for basic foodstuffs such as potatoes rising nearly 80% this year, Putin will continue to protect Nabiullina — and her rate hikes — from big business’s complaints. “It is part of Putin’s political DNA that inflation must not be allowed to get out of control,” Kluge said. “This is very important for regime security, and this is why he has given a very strong mandate to Nabiullina.”

But Prokopenko, the former central bank adviser, said she believes the pressure from big business will not subside. “When you have inflation at 9% and the key rate at 21%, it means that the key rate is not working correctly, and other tools should be considered. Putin’s priority is the war and funding the war machine, and he does not have many allies, and the resources at his disposal are also shrinking. It is possible he will throw her under the bus.”

For Putin, the pressure is growing, despite the widespread view in the West that time is on the Russian president’s side, said Tatiana Stanovaya, founder of France-based political consultancy R.Politik.

“Putin is ready to fight for as long as necessary. … But Putin is hurrying. He can’t maintain such an intensity of military action and losses in terms of people and equipment as he has in the last months,” she said.

Mary Ilyushina in Berlin contributed to this report.