Russian President Vladimir Putin said at an investment forum in early December that inflation was at a “relatively high level.”Sergei Bobylev, Sputnik, Kremlin pool photo via AP
Economists told Business Insider that the Russian economy will come under intense pressure next year.
High inflation, slowing economic growth, rising energy prices and sanctions could damage its war machine.
One expert told BI that the economic stagnation is similar to that of the Soviet Union in the early 1980s.
The Russian economy may enter a period of pain in 2025.
Since launching a full-scale invasion of Ukraine in February 2022, the Kremlin has reorganized the economy, prioritizing war efforts, imposing export bans, tapping national wealth funds, and increasing trade with non-Western countries.
But unprecedented defense spending, labor shortages and Western sanctions have taken a toll, with some arguing the country is reaching the limits of its capabilities.
Economists told Business Insider that while they don’t expect the Russian economy to collapse, they say 2025 will be difficult if Russia continues to fight in Ukraine.
“Russia has set in motion a series of processes that will continue to eat into its economy from within,” Roman Sheremeta, an associate professor of economics at Case Western Reserve University’s Weatherhead School of Management, told BI.
If the war continues, he said, “it will put huge pressure on Russia’s already tight budget.”
Russia continues to increase defense spending to sustain its war effort, increasing from $59 billion in 2022 to $109 billion in 2023, with $126.8 billion set aside in 2025, when defense will account for 32.5% of the Russian federal budget, higher than 28.3% this year.
Soaring defense spending has boosted the Russian economy in recent years, but has also led to rising inflation, which Russian President Vladimir Putin said could reach 9.5% in 2025.
To control the situation, the country’s central bank raised its key interest rate to a record high from 19% to 21% in October, which eroded corporate profit margins.
The bank was expected to raise interest rates again in December but later postponed it, although a hike may be needed next year.
“The main question is how high inflation will be and how the slowdown will materialize,” said Alexander Kolyandr, a financial analyst and non-resident senior scholar at the Center for European Policy Analysis.
Putin acknowledged that inflation is at “relatively high levels.” Earlier this month, he spoke at an investment forum in Moscow urging governments and central banks to curb the practice.
Russian think tank TsMAKP warned last month that Russia’s failure to curb inflation was leading the country into stagflation, a condition of low growth and high inflation that is harder to escape than a recession.
“The overall trend is pretty grim,” Kolyandr said. “I would say the overall stagnation is similar to what happened in the Soviet Union in the early 1980s.”
The Soviet Union collapsed in 1991.
Russia’s economic growth in 2025 is expected to be lower than expected.
“Overall growth will be quite slow,” Iikka Korhonen, head of research at the Bank of Finland’s Institute for Emerging Economics, told BI.
However, he said the Kremlin would ensure adequate resources for military production.
But “many industries are likely to contract,” he said.
U.S. sanctions on Gazprombank and other financial institutions in November caused the ruble to plummet, according to the Wall Street Journal, which also said companies were cutting back on expansion plans.
The report said that more than 200 shopping malls in Russia are facing the threat of bankruptcy due to rising debt burdens, and nearly one-third of Russian freight companies said they feared bankruptcy in 2025.
MTS, Russia’s largest mobile operator, also attributed a nearly 90% drop in third-quarter net profit to costs related to interest payments.
Alexandra Prokopenko, a former Russian central bank official and current fellow at the Carnegie Russia and Eurasia Center in Berlin, told the Wall Street Journal: “The elites are fighting for survival, and while they remain loyal to Putin, their But dissatisfaction is growing.
Indeed, Russian CEOs and business leaders have become increasingly acrimonious in recent months over rising interest rates and Western sanctions.
Defense group Roste CEO Sergei Chemezov told Russian senators at the end of October that extremely high interest rates made it difficult for companies to make profits.
Although Russia’s share of oil and gas revenue has fluctuated in recent years and declined in 2023, Russia is expected to account for about 27% of the country’s total budget revenue by 2025.
“As long as Russia can sell as much crude as possible at current prices, they will have enough tax revenue to fight a war in 2025,” Korhonen said.
Earlier this month, Russian state oil company Rosneft agreed to sign a 10-year deal worth $13 billion to supply crude oil to India, Reuters reported, citing three sources familiar with the deal.
However, the Center for European Policy Analysis’s Colliader said he believed Russia’s revenue prospects were “overly optimistic” because “global oil prices are likely to be lower than the government expects.”
Traders expect global oil prices to fall to between $65 and $71 a barrel in 2025 from an expected $80 a barrel in 2024 due to sluggish demand, production from non-OPEC+ countries and a shift to cleaner energy sources.
Although G7 countries have imposed a $60 price cap on Russian oil since December 2022, Russia has concealed purchase prices, in part, by using a shadow fleet, redirecting oil exports to countries such as China and India, and raising ancillary costs. circumvents this upper limit.
But tightening Western sanctions could further reduce Russia’s oil and gas revenues.
Korhonen said Russia’s economic performance in 2025 will ultimately depend on the availability of resources.
“There will be a deficit, but it can be financed initially from state welfare funds,” he said.
As of October, assets in Russia’s state war chest were approximately $131.1 billion, while the central bank’s international reserves were approximately $614.4 billion.
At the same time, Kolyander said that “whether Russia will face any crisis in 2025” will depend on everything that will happen in 2025, including oil prices, sanctions, President-elect Trump’s trade policies and the Russian labor market.
“The Russian economy will continue to decline, which will limit Russia’s ability to wage war,” said Sheremeta of the Weatherhead School of Management.
But he added: “A lot depends on Western support for Ukraine.”
