Factbox – Five key challenges for the Russian economy in 2025 by Reuters
MOSCOW (Reuters) – Russia’s economy has shown strength amid the three-year war in Ukraine and Western sanctions. However, as the war approaches its fourth year, the economy faces a major challenge as key economic policymakers clash over how to resolve the crisis.
Economists describe the 2025 outlook as a “perfect storm” of several negative factors at play at once.
“After many years of very strong volatility, the economy may disappoint in 2025,” said Dmitry Polvoy from Astra Asset Managers.
He added that the economic crisis is the cause of Russian President Vladimir Putin’s discussion with US President Donald Trump about ending the war in Ukraine. Trump in 2016 On January 21, Putin said “Russia is being destroyed” and pointed to high inflation.
“Russia is interested in reaching a diplomatic solution to the conflict in Ukraine based on economic considerations,” said Oleg Vyugin, former deputy governor of the Central Bank.
In the year Below are five key challenges for the Russian economy in 2025.
Inflation
Russia’s annual inflation rate reaches 9.5% by 2024, driven by high military and national security spending, 41% of total government budget spending by 2025, government debt subsidies, and rising wage growth amid labor shortages.
Inflation over the past 15 years followed the annexation of Crimea in 2022, the first year of Russia’s invasion, and the economic crisis of 2014-15.
Inflation tops the list of economic problems in opinion polls, with prices of staples such as butter, eggs and vegetables showing double-digit growth last year.
Real pensions are down by 0.7% from January to November 2024, affecting the incomes of the most vulnerable groups.
The central bank is fighting inflation by raising interest rates.
President Putin said that interest rates should not be the only means of preventing inflation and asked the government to ensure a stable supply of goods and services to limit inflation.
High interest rates
Russia’s central bank raised interest rates to 21% in October, the highest level since the early years of Putin’s rule as Russia dealt with the chaos that followed the collapse of the USSR.
Critics argue that high tariffs hurt the economy of the civilian sectors, while the heavily subsidized defense sector is immune. According to prominent business leaders, investment has stalled in most sectors with the current cost of capital around 30% and profitability not exceeding 20%.
High rates are increasing the risk of corporate bankruptcy, especially in vulnerable sectors such as real estate, which has been hit by measures to delay lending, including the end of government housing loan subsidies.
Economic slowdown
Government projects will fall to 2.5% in 2025 from 4% in 2025 as a result of measures to cool the overheated economy, the International Monetary Fund (IMF) expects growth to start at 1.4% this year.
The pro-government economic think tank has estimated that many industrial sectors are on the defensive from 2023, raising the prospect of a combination of inflation and an economic slowdown.
Compounding the situation is a severe labor shortage, which has become a major impediment to economic growth as hundreds of thousands of Russians join the military or flee the country.
Economists warn that the flow of money into defense-related sectors at the current rate is creating imbalances in the economy and could end in recession and bankruptcy.
Budget deficit
In the year Russia’s budget deficit is expected to reach 1.7% of GDP by 2024, with the country’s national wealth fund, the main source of the deficit, depleted by two-thirds during the three-year war.
In the year The government has pledged to bring the deficit down to 0.5% of GDP by 2025, but revenue could fall due to recent US energy sanctions targeting Russia’s oil and gas sector.
Some economists believe that if military spending continues at the same level, the government will have no choice but to raise taxes.
RUBLE volatility
The ruble fell to its lowest level since March 2022 on Jan. 2 after months of volatility amid the impact of Western sanctions that have disrupted Russia’s global trade and foreign exchange earnings.
Although a weak ruble is helping the government narrow its budget deficit, it is set to increase the price of imported goods, further fueling inflation in the medium term.
Russia’s foreign exchange market has shifted under sanctions, while trading in the dollar and euro has shifted to an open sell market.