Barackface: The State Of Russia's Economy

Saturday, July 05, 2025

The State Of Russia's Economy

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Current State of Russia's Economy (July 2025)

As of mid-2025, Russia’s economy reflects a complex blend of resilience and structural fragility, shaped heavily by its protracted war in Ukraine, enduring Western sanctions, and a war-driven economic model. Although Russia saw strong growth in 2024, the economy is now cooling, facing mounting pressures such as labor shortages, high inflation, dwindling fiscal reserves, and an overreliance on energy exports.

Below is a detailed overview of key economic indicators and trends:

GDP Growth

Russia’s economic expansion has slowed sharply in 2025. In the first quarter, GDP grew by just 1.4% year-on-year, compared to 4.4% average growth in the second half of 2024. Growth in 2024 was driven by extraordinary levels of military spending and state intervention. However, as the economy overheats, supply-side bottlenecks—especially labor shortages and capacity constraints—are beginning to cap further expansion.

Inflation

Inflation remains elevated. As of May 2025, the annual inflation rate stood at 9.9%, slightly down from 10.2% in April, but still well above the Central Bank of Russia’s 4% target. Analysts note that real inflation for essential goods such as food may exceed 20%, disproportionately affecting vulnerable groups such as public sector workers and pensioners.

Monetary Policy

The Central Bank of Russia (CBR) continues to pursue a tight monetary policy. As of June 2025, the key interest rate stands at 20%, down modestly from its October 2024 peak of 21%. While intended to curb inflation, these high rates are also dampening private investment and straining corporate balance sheets, raising the risk of a banking crisis within the next year.

Fiscal Policy and Budget

The 2025 federal budget is increasingly dominated by military and security expenditures, which now account for 6.3–8% of GDP and 40–41% of federal spending—levels not seen since the Soviet era. Russia's budget deficit has been revised up from 0.5% to 1.7% of GDP, largely due to lower-than-expected oil revenues and continued war-related outlays. The National Wealth Fund has declined to $31 billion as of late 2024, down from $117 billion in 2021, drastically reducing fiscal buffers.

Energy Exports

Energy remains Russia’s main economic lifeline. Oil and gas exports have pivoted eastward toward China, India, and Turkey. However, revenues are slipping: the government reduced its 2025 oil revenue forecast by 24%, from 10.94 trillion to 8.32 trillion rubles, amid falling oil prices (hovering between $56–$70 per barrel). If Ukraine halts gas transit to Europe, Russia could lose an additional $7–8 billion annually.

Labor Market

The labor market is under intense strain. With the combined impact of war casualties, mass emigration (700,000 to 1 million since 2022), and mobilization in defense industries, unemployment has dropped to an artificial low of 2.3–2.5%. However, this shortage is driving wage inflation. Nominal wages are projected to rise 12.7% in 2025, while real wage growth is expected to slow to 3.2%.

Currency and Trade

The ruble continues to weaken, reaching its lowest value since March 2022. The exchange rate is expected to average 102–120 rubles per USD in 2025. Western sanctions have curtailed foreign currency inflows and redirected trade toward China’s yuan, now the most-used foreign currency in Russia. Export volumes have declined 20% since 2021 due to sanctions and logistical constraints.

Trajectory Over the Past 12 Months (July 2024–July 2025)

Over the past year, Russia’s war economy transitioned from a phase of rapid stimulus-driven growth to a period of deceleration, as wartime fiscal expansion collided with structural constraints and external shocks.

Rapid but Unsustainable Growth: In 2024, GDP grew by 3.6–4%, buoyed by a wartime spending surge, estimated at $250 billion through mid-year. However, this growth faded quickly in early 2025, with just 1.4% growth in Q1.
Rising Inflation: Inflation climbed from 7.5% in mid-2024 to over 10% by early 2025, triggered by a weak ruble, surging wages, and defense-sector overdrive. The CBR’s aggressive interest rate hikes (from 18% to 21%) helped dampen some pressure, but not enough to reverse the trend.
Sanctions Bite Harder: Sanctions on energy and technology have deepened. Oil revenues began falling in late 2024 due to stricter enforcement and lower global prices. Though trade with China and India has partly offset losses, access to Western capital, semiconductors, and machinery remains limited.
Budget Strains: The government’s 2024 budget relied on optimistic oil revenue forecasts. When those failed to materialize in 2025, non-military spending and infrastructure investments were either frozen or slashed.
Shrinking Workforce and Public Sentiment: The workforce shrank further due to continued conscription and emigration. Real wages rose by 8% in 2024, but consumer sentiment deteriorated. A January 2025 Levada Center poll found 38% of Russians reporting a worsening standard of living, and 30% citing reduced income opportunities.

Projections for the Next 12 Months (July 2025–July 2026)

The outlook for Russia's economy through mid-2026 is bleak, with heightened risk of stagflation or recession, depending largely on oil prices, sanctions, and the trajectory of the war in Ukraine.

GDP Forecast: The IMF forecasts 1.4–1.5% growth for 2025, while the Central Bank projects 0.5–1.5%. Growth in 2026 may slow further to 0.9–1.7%, given supply-side bottlenecks and weakening external demand.
Inflation: Inflation is expected to remain elevated, between 6–10%, until at least mid-2026. The CBR aims to reduce it to 4%, but ongoing military expenditures, a weakened ruble, and rising import costs may prevent that.
Interest Rates: The key rate is expected to hover around 20% in 2025, with a possible decline to 14–15% in 2026, contingent on inflation control. These elevated rates are likely to hamper business investment and increase debt defaults, especially in real estate and construction.
Budget and Fiscal Policy: The deficit is projected to remain between 1.5–2% of GDP, funded via domestic borrowing and what remains of the National Wealth Fund, which could be depleted by late 2025. Tax increases and import duties are being considered but may not plug the revenue gap.
Energy and Exports: Russia’s fiscal health depends critically on oil prices staying above $60 per barrel. A sustained drop could trigger a deeper downturn. Gas transit disruptions, additional sanctions, and limits on technology imports will likely suppress export volumes.
Labor and Society: Unemployment may edge up to 2.7% in 2026, but real wage growth will likely slow to 2.5–3.2%, weakening household consumption. The Kremlin’s focus on military resilience could further alienate ordinary citizens facing stagnant living standards.
Key Risks: A sharp decline in oil prices, new sanctions (e.g., tariffs on Russian energy), a potential banking crisis driven by rising non-performing loans, and escalation in Ukraine all pose serious threats. While the war economy provides near-term stability, it also amplifies long-term vulnerability.

Summary

As of July 2025, Russia’s wartime economy is entering a slowdown phase, with GDP growth dropping to 1.4%, inflation hovering near 10%, and oil revenues shrinking. Military spending, at over 6% of GDP, continues to crowd out investment in civilian sectors. The past 12 months showcased the fading momentum of war-driven growth, now replaced by economic stagnation, mounting inflationary pressures, and shrinking fiscal space.

Looking ahead, forecasts for 2025–2026 range from 0.5% to 2.5% growth, but recession or stagflation is a real possibility. The Kremlin’s wartime focus offers short-term stability but masks deep structural weaknesses: demographic decline, technological isolation, and a fragile banking sector. Unless major economic reforms or geopolitical shifts occur, the Russian economy may face escalating internal strain and deteriorating public sentiment through 2026.