Russia’s economy is likely entering a year of pain 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, 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 expected a collapse in the Russian economy, they said 2025 would be a challenging year if it continued to fight in Ukraine.
“Russia has set in motion processes that will continue to eat out its economy from within,” Roman Sheremeta, an associate professor of economics at the Weatherhead School of Management at Case Western Reserve University, 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 predicted could reach just 9. 5% by 2025.
To curb this situation, the country’s central bank raised its key interest rate from 19% to 21% in October, a record level, which has affected companies’ profit margins.
The bank was expected to raise the rate again in December, but held off, though it may need to increase it next year.
“The most 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 stated that inflation is at “a maximum level. ” In a speech at an investment forum in Moscow earlier this month, he suggested his government and the central bank get the situation under control.
TsMAKP, a Russian think tank, warned last month that Russia’s failure on inflation was pushing the country toward stagflation, a situation in which expansion is low and inflation high, and from which it is harder to escape than a recession.
“The overall trend is pretty grim,” said Kolyandr. “I would say it’s overall stagnation akin to what the Soviet Union had at the beginning of the 1980s.”
The Soviet Union dissolved in 1991.
Russia is expected to revel in a weaker-than-expected economic expansion in 2025. In its October World Economic Outlook report, the IMF lowered its GDP expansion estimate for Russia 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 stated that the Kremlin wants military production to have sufficient resources.
But “many sectors will most likely contract,” he said.
U. S. sanctions on 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 says more than 200 food shopping hubs in Russia are in danger of bankruptcy due to emerging debt loads and nearly a third of Russian shippers say they fear bankruptcy in 2025.
Russia’s largest mobile operator, MTS, also attributed the nearly 90% drop in net profit in the third quarter to interest-related costs.
“The elites are struggling to survive and remain unwavering in the face of Putin, they are increasingly dissatisfied,” Alexandra Prokopenko, a former Russian central bank official and now a researcher at Carnegie Russia, told the Journal Eurasia Center in Berlin.
In fact, in recent months, Russian CEOs and business leaders have increased their vitriol against interest-rate hikes and Western sanctions.
Sergei Chemezov, chief executive of defense conglomerate Roste, told Russian senators last October that incredibly high interest rates were leaving corporations struggling to turn a profit.
While Russia’s share of oil and gas revenues has fluctuated in recent years, and dropped in 2023, Russia expects it to account for about 27% of the country’s total budget revenue in 2025.
“As long as Russia can sell as much crude oil as it currently does at current prices, it will have enough fiscal gains for the war until 2025,” Korhonen said.
Earlier this month, Russian state oil company Rosneft agreed to a 10-year, $13 billion deal to transport crude oil to India, Reuters reported, citing three sources familiar with the matter.
However, Center for European Policy Analysis’ Kolyandr said he believes Russia’s revenue outlook is “over-optimistic,” since “global oil prices might be lower than the government thinks.”
Traders expect global oil costs to fall from the expected $80 per barrel in 2024 to between $65 and $71 in 2025, due to weak demand and production from non-EU countries. OPEC+ and the transition towards cleaner energies.
While G7 countries have set a $60 cap on the value of Russian oil since December 2022, Russia has partly circumvented this cap by using a ghost fleet, redirecting oil exports to countries such as China and India and inflating comfortable prices to hide acquisition values.
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 first of all it can be financed through the National Social Protection Fund,” he stated.
Russia’s National War Fund had assets of about $131. 1 billion in October, while the central bank had about $614. 4 billion in foreign reserves.
Kolyandr, for his part, stated that “whether Russia will face a crisis in 2025” will depend on everything that happens in 2025, adding oil prices, sanctions, President-elect Donald Trump’s industrial policy and the tough Russian labor market. .
“The Russian economy will continue to fall,” said Sheremeta, of the Weatherhead School of Management, “which will limit Russia’s ability for wage war. “
But he added: “Much will depend on the West for Ukraine. “
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