Officially, Russia’s economy grew by 3.6 percent in 2023 and it appeared set to expand at a similar rate in 2024. President Vladimir Putin boasts that the Western sanctions have only made Russia’s economy stronger, but at the same time, he persistently calls for an end to Western sanctions. In reality, Russia is in a very tough spot economically because of its costly war of aggression in Ukraine and Western sanctions.
The chairwoman of Russia’s Central Bank Elvira Nabiullina predicts a growth of 0.5-1.0 percent in 2025. Russians complain loudly about high inflation, elevated interest rates, extreme shortage of labor, and devastating competition from China. Suddenly, everybody, including Nabiuillina, laments stagflation, stagnation combined with high inflation, from which the West suffered in the 1970s. All these problems are likely to get worse in 2025.
Don’t take the Russian growth rates too seriously. The Russian government controls the official statistics, and it publishes even less. Since 2014, when the Western financial sanctions were imposed, Russia’s economy has grown by just 1 percent a year on average. The current economic “growth” takes only place in the military and related sectors, where state-owned companies deliver to the state. Their prices are not set on the market but are arbitrary. The government may raise prices at will and call it value-added, while it is really hidden inflation.
In the Soviet days, the government exaggerated its economic growth by about 3 percentage points each year through such hidden inflation. Independent Russian economists, notably ROMIR and Defense Minister Andrei Belousov’s old macroeconomic center claim that the hidden inflation is substantial – up to 5 percent. The civilian sector that sells its goods on a market is flat.
At the beginning of 2024, the Central Bank of Russia set an inflation target of 4 percent for the end of 2024, but inflation stayed high at 9 percent. Since the fall of 2023, the Central Bank has raised its key interest rate repeatedly from 7.5 percent to currently 21 percent and it is set to hike it further. Commercial lending rates are as high as 27-30 percent a year, infuriating Russia’s industrialists. Naturally, they are not criticizing the real causes, Putin and his war in Ukraine, but Nabiullina.
The Central Bank faces an impossible task, to check inflation, defend the ruble exchange rate and impede capital flight, but it fails on all accounts. In 2013, before the war in Ukraine, $1 was worth RUR34. After the latest US financial sanctions in November 2024, 1 US dollar bought 104 rubles. Undoubtedly, Russia is suffering from a massive capital flight, but no fresh statistics appear to be available.
Russia has long suffered from poor demographics and Putin has aggravated it with his war and his mobilization in September 2022. As a result, a net of about 1 million young well-educated men emigrated from Russia in 2022. With official unemployment at only 2.4 percent, Russia is suffering from an extreme shortage of labor. Almost three-quarters of Russia’s enterprises complain about the scarcity of labor, which has caused sharp increases in real wages. Recent immigrants, mainly Central Asians, are fleeing Russia fearing to be illegally drafted to fight in Ukraine. Strikingly, Putin seems not to dare to launch another mobilization, fearing the new emigration of able young men.
For years, Russia has planned to reduce its high military expenditures, but instead, it increases them, year after year. For 2025, Putin intends to raise military and security costs to $176 billion, that is, 41 percent of the federal budget expenditures and 9% of GDP. The real military costs are likely to be even higher since Russia does not classify all military expenditures as such, and large budget expenditures are now classified.
For the last three years, Russia has had a small budget deficit of about 2 percent of GDP, but Russia can only finance that much, that is, $40 billion, as its only financial reserve is the National Welfare Fund, whose liquid resources amounted to a mere $55bn at the end of March 2024. With current low oil prices and budget deficits, it is likely to run out in the fall of 2025. Putin has already minimized social expenditures, from 27-30 percent of federal expenditures in 2019-21 to 16 percent in 2025. So then, Putin will be forced to go for defense cuts or even worse repression.
Thus, the Russian economy is frailer than generally understood. The Western financial and energy sanctions do bite. Western financial sanctions blocks Russia from obtaining any international credits, even from China, and the energy sanctions have reduced Russia’s export revenues significantly.
2025 © The Baltic Times /Cookies Policy Privacy Policy