The Russian economy will most likely have a difficult year in 2025.
Since launching its full-scale invasion of Ukraine in February 2022, the Kremlin has restructured its economy to prioritize its war efforts, imposing export bans, tapping into its national wealth fund, and boosting industry with non-Western countries.
But unprecedented defense spending, shortages of hard labor and Western sanctions come at a cost, and in part the country is reaching the limits of its capabilities.
Economists told Business Insider that while they expected the Russian economy to collapse, they said 2025 would be a difficult year if fighting continued in Ukraine.
“Russia has initiated movement processes that will continue to devour its economy from within,” Roman Sheremeta, a professor of economics at Case Western Reserve University’s Weatherhead School of Management, told BI.
He said that if the war continues, “it will put serious pressure on the already bloodied Russian budget. “
Russia is increasingly allocating its defense spending to its war efforts, from $59 billion in 2022 to $109 billion in 2023, with $126. 8 billion set aside in 2025, when defense will make up 32. 5% of the federal budget. Russian, compared to 28. 3% this year. year. Training
While emerging defense spending has boosted the Russian economy in recent years, it has also contributed to emerging inflation, which Russian President Vladimir Putin has forecast could reach just 9. 5% in 2025.
To rein this in, the country’s central bank raised its key interest rate from 19% to 21% in October, a record high, which has eaten into companies’ profit margins.
The bank was due to raise its key interest rate in December, but abstained; possibly he would have to do it next year.
“The important thing is what the inflation target will be and how the slowdown will materialize,” Alexander Kolyandr, non-resident monetary analyst and senior researcher at the Center for European Policy Analysis, told BI.
Putin has acknowledged 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 curb it.
TsMAKP, a Russian think tank, warned last month that Russia’s failure on inflation was leading the country toward stagflation, a situation in which expansion is low and inflation high, and from which it is more difficult escape than a recession.
“The overall trend is bleak,” Kolyandr said. I would say it’s a general stalemate similar to that of the Soviet Union in the early 1980s. “
The Soviet Union was dissolved in 1991.
Russia is expected to experience a lower-than-expected economic expansion in 2025. In its October World Economic Outlook report, the IMF lowered its estimate for Russia’s GDP expansion from 1. 5% to 1. 3%.
“Overall growth will be quite slow,” Iikka Korhonen, the head of research at the Bank of Finland Institute for Emerging Economies, told BI.
However, he said that the Kremlin would like military production to have sufficient resources.
But “many sectors will probably contract,” he warned.
US sanctions against Gazprombank and monetary establishments in November sent the ruble tumbling, according to the Wall Street Journal, which also said corporations were scaling back their expansion plans.
It reported that more than 200 shopping centers in Russia are under threat of bankruptcy due to rising debt burdens and almost a third of Russian freight haulers say they fear bankruptcy in 2025.
Russia’s largest cellphone operator, MTS, also attributed the nearly 90% drop in third-quarter net profit to prices similar to interest payments.
“The elites are struggling to survive, and if they stand steadfastly before Putin, they are increasingly dissatisfied,” Alexandra Prokopenko, a former Russian central bank official and now a fellow at Carnegie Russia Eurasia, told the Journal Center in Berlin.
Indeed, in recent months, Russian CEOs and business leaders have more openly opposed interest rate increases and Western sanctions.
Sergei Chemezov, chief executive of defense conglomerate Roste, told Russian senators last October that incredibly high interest rates were leaving corporations scrambling to make profits.
Although Russia’s share of oil and fuel revenues has fluctuated in recent years and fell in 2023, Russia expects it to account for about 27% of the country’s overall budget revenues in 2025.
“As long as Russia can sell as much crude oil as it is now selling with the current prices, they will have enough tax revenue for the war well into 2025,” Korhonen said.
Earlier this month, Russian state-owned 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 Centre for European Policy Analysis said he believed Russia’s profit prospects were “too optimistic” because “global oil costs could simply 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 toward cleaner energies.
While G7 countries have set a $60 price cap on Russian oil since December 2022, Russia has partly evaded the cap by using a shadow fleet, redirecting oil exports to countries like China and India, and inflating ancillary costs to obscure purchase prices.
But strengthening Western sanctions could simply boost Russia’s oil and fuel revenues.
Russia’s economic functionality in 2025 will ultimately depend on the availability of resources, Korhonen said.
“There will be a deficit, but it can initially be financed from the National Welfare Fund,” he said.
Russia’s National War Fund had assets totaling about $131. 1 billion as of October, while the central bank had about $614. 4 billion in foreign reserves.
Kolyandr, meanwhile, said that “whether Russia is going to face any crisis in 2025” would depend on everything that will happen in 2025, including oil prices, sanctions, President-elect Donald Trump’s trade policies, and the Russian labor market.
“The Russian economy will continue to fall,” said Weatherhead School of Management’s Sheremeta, “which will restrict Russia’s ability to wage war.”
But he added: “Much will depend on the West for Ukraine. “
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