- Russia’s economy will be under significant strain next year, economists told Business Insider.
- High inflation, slowing economic growth, high energy prices and sanctions could damage its war machine.
- One expert told BI that the stagnation was similar to the Soviet Union in the early 1980s.
Russia’s economy is likely to enter a year of pain in 2025.
Since launching a full-scale invasion of Ukraine in February 2022, the Kremlin has restructured its economy to prioritize its war effort, imposing export bans, tapping its national wealth fund and strengthening trade with non-western countries.
But unprecedented defense spending, labor shortages and Western sanctions have come at a cost, and some believe the country is reaching the limits of its capacity.
Economists told Business Insider that while they don’t expect Russia’s economy to collapse, they said it faces a tough 2025 if it continues to fight in Ukraine.
Continuous inflation
“Russia has set in motion processes that will continue to eat away at its economy from the inside,” Roman Sheremeta, an associate professor of economics at Case Western Reserve University’s Weatherhead School of Management, told BI.
He said that if the war continued, it would “put a significant strain on the already bleeding Russian budget”.
Russia has increasingly increased its defense spending to support its war effort, from $59 billion in 2022 to $109 billion in 2023 and $126.8 billion set aside in 2025, when defense will account for 32.5% of the federal budget of Russia, from 28.3% this year. .
While increased defense spending has boosted Russia’s economy in recent years, it has also contributed to rising inflation, which Russian President Vladimir Putin said could reach 9.5% in 2025.
To curb this, the country’s central bank raised its key interest rate from 19% to 21% in October, a record high, which has hit companies’ profit margins.
The bank was expected to raise the rate again in December but held off, although it may need to raise it next year.
“The main question is how high inflation will be and how the slowdown will materialize,” Alexander Kolyandr, a financial analyst and non-resident senior fellow at the Center for European Policy Analysis, told BI.
Putin has admitted that inflation is at “a relatively high level”. Speaking at an investment forum in Moscow earlier this month, he urged his government and the central bank to rein it in.
TsMAKP, a Russian inflation watchdog, warned last month that Russia’s failure to tame inflation was driving the country toward stagflation, a scenario in which growth is low and inflation high and which is harder to escape than a recession.
“The overall trend is pretty bleak,” Kolyandr said. “I would say it’s a general stagnation similar to what the Soviet Union had in the early 1980s.”
The Soviet Union dissolved in 1991.
Slowing economic growth
Russia is expected to experience lower-than-expected economic growth in 2025. In its October World Economic Outlook, the IMF lowered its GDP growth estimate for Russia from 1.5% to 1.3%.
“Overall growth will be quite slow,” Iikka Korhonen, head of research at the Bank of Finland’s Institute for Developing Economies, told BI.
However, he said the Kremlin will make sure military production has sufficient resources.
But “many sectors are very likely to contract,” he said.
US sanctions on Gazprombank and other financial institutions in November sent the ruble tumbling, according to The Wall Street Journal, which also said companies were scaling back expansion plans.
It reported that more than 200 trading centers in Russia are under threat of bankruptcy due to increasing debt burdens, and almost a third of Russian freight carriers say they fear bankruptcy in 2025.
Russia’s largest mobile operator, MTS, also blamed a nearly 90% drop in third-quarter net profit on costs related to interest payments.
“The elites are fighting for survival, and while they remain loyal to Putin, they are increasingly disaffected,” Alexandra Prokopenko, a former Russian central bank official and now a fellow at Carnegie Russia’s Eurasia Center in Berlin, told the Journal.
In fact, in recent months, Russian CEOs and business leaders have stepped up their push against rising interest rates and Western sanctions.
Sergei Chemezov, CEO of defense conglomerate Roste, told Russian senators in late October that high interest rates are leaving companies struggling to turn a profit.
Oil and gas prices
While Russia’s share of oil and gas revenues has fluctuated in recent years and declined in 2023, Russia expects it to account for about 27% of the country’s total budget revenues in 2025.
“As long as Russia can sell as much crude oil as it is selling now at current prices, it will have enough tax revenue for the war until 2025,” Korhonen said.
Earlier this month, Russian state oil firm Rosneft agreed to a 10-year, $13 billion deal to supply crude oil to India, Reuters reported, citing three sources familiar with the deal.
However, Kolyandr of the Center for European Policy Analysis said he believes Russia’s revenue outlook is “over-optimistic”, as “global oil prices may be lower than the government thinks”.
Traders expect global oil prices to fall from a projected $80 a barrel in 2024 to between $65 and $71 in 2025, due to sluggish demand, production from non-OPEC+ countries and a shift to cleaner energies.
While the G7 countries have imposed a $60 price cap on Russian oil from December 2022, Russia has partly evaded the cap by using a shadow fleet, redirecting oil exports to countries such as China and India and raising ancillary costs to obscured purchase prices.
But tightening Western sanctions could further reduce Russia’s oil and gas revenues.
reserves
Russia’s economic performance in 2025 will ultimately come down to resource availability, Korhonen said.
“There will be a deficit, but initially it can be financed by the National Welfare Fund”, he said.
Russia’s National War Fund has assets totaling about $131.1 billion as of October, while the central bank has about $614.4 billion in international reserves.
Kolyandr, meanwhile, said that “whether Russia faces any crisis in 2025” will depend on everything that happens in 2025, including oil prices, sanctions, President-elect Donald Trump’s trade policies and the Russian oil market. work.
“The Russian economy will continue to decline,” said Sheremeta of the Weatherhead School of Management, “which will limit Russia’s ability to wage war.”
But he added: “Much will depend on Western support for Ukraine.”