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 strengthening industry with non-Western countries.
But unprecedented defense spending, a shortage of hard work, 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 complicated if it continued to struggle in Ukraine.
“Russia has initiated movement processes that will continue to devour its economy from within,” Roman Sheremeta, 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 bloody Russian budget. “
Russia has increasingly increased 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 account for 32. 5% of the budget. Russian federal, compared to 28. 3% this year.
While emerging defense spending has boosted the Russian economy in recent years, it has also contributed to emerging inflation, which Russian President Vladimir Putin says could reach just 9. 5% by 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 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 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 to control inflation is leading the country to 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 lower-than-expected economic growth in 2025. In its October World Economic Outlook, the IMF dropped its GDP growth estimate for Russia from 1.5% to 1.3%.
“The overall expansion will be slow,” Iikka Korhonen, head of research at the Bank of Finland’s Institute for Emerging Economies, told BI.
However, he said the Kremlin will make sure that military production has enough resources.
But “very likely many sectors will contract,” he warned.
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 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 mobile operator, MTS, also blamed an almost 90% drop in Q3 net profits on costs related to interest payments.
“The elites are fighting for their survival and, although they remain unwavering in the face of Putin, they are increasingly dissatisfied,” Alexandra Prokopenko, former head of the Russian central bank and now a fellow at Carnegie Russia Eurasia, told the Journal 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.
Although the percentage of Russia’s revenue from oil and fuel has fluctuated in recent years and has fallen in 2023, Russia expects it to account for around 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, Kolyandr of the Centre for European Policy Analysis said he believes Russia’s profit outlook is “too optimistic” as “global oil costs will 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 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 increase 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 totaling about $131. 1 billion in 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 Sheremeta, of the Weatherhead School of Management, “which will limit Russia’s ability for wage war. “
But he added: “Much will depend on the Western support of Ukraine.”
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