Russia's Economy Is Entering A Year Of Pain In 2025

President Vladimir Putin said inflation was at "a relatively high level" at an investment forum in early December.

Sergei Bobylev, Sputnik, Kremlin Pool Photo via AP

• Russia's economy will be under significant strain next year, economists told Business Insider.
• High inflation, slowing economic growth, energy prices, and sanctions could hurt its war machine.
• One expert told BI that stagnation was similar to the Soviet Union at the beginning of the 1980s.

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 its national wealth fund, and strengthening trade 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 don't expect Russia's economy to collapse, they said it would face a tough 2025 if it keeps on fighting in Ukraine.

Persisting inflation

"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 a significant strain on the already bleeding Russian budget."

Russia has increasingly boosted its defense spending to sustain its war efforts, from $59 billion in 2022 to $109 billion in 2023, and $126.8 billion set aside in 2025, when defense will make up 32.5% of Russia's federal budget, up from 28.3% this year.

While soaring defense spending has fueled Russia's economy in recent years, it has also contributed to rising inflation, which Russian President Vladimir Putin said could hit 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 expected to raise the rate again in December, but held off, though it may need to increase it next year.

"The main question is how high the inflation will be and how the slowing down will materialize," Alexander Kolyandr, a financial analyst and non-resident senior scholar 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 tame inflation was driving the country toward stagflation, a scenario in which growth is low and inflation high, and which 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 was dissolved in 1991.

Slowing economic growth

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%.

"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 the Kremlin will make sure that military production has enough resources.

But "many sectors will most likely contract," he said.

US sanctions on Gazprombank and other financial institutions in November caused the ruble to plummet, according to The Wall Street Journal, which also said that companies were slashing 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 survival, and while they remain loyal to Putin, they are increasingly discontent," Alexandra Prokopenko, a former Russian central bank official and now a fellow at the Carnegie Russia Eurasia Center in Berlin, told the Journal.

In fact, in recent months, Russian CEOs and business leaders have increased their vitriol against interest-rate hikes and Western sanctions.

Sergei Chemezov, CEO of defense conglomerate Roste, told Russian senators in late October that sky-high interest rates were leaving companies struggling to turn a profit.

Oil and gas prices

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 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, 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 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 the tightening of Western sanctions could further reduce Russia's oil and gas revenues.

Reserves

Russia's economic performance in 2025 will ultimately come down to the availability of resources, said Korhonen.

"There will be a deficit, but it can initially be financed from the National Welfare Fund," he said.

Russia's National Warfare Fund has assets amounting to about $131.1 billion as of October, while the central bank has about $614.4 billion in international 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 Western support of Ukraine."