Page 5 - bne IntelliNews Russia OUTLOOK 2025

emergency service workers and pensioners. Their salaries, pensions and subsidies are all indexed to inflation – so will rise only by 9% (even though inflation for individuals has long cleared 20%)," says Prokopenko. “The Russian economy in 2025 will be a fragile economy. There is money available to keep fighting the war for another 12 months: it has already been earmarked. And despite worsening expectations, business generally remains optimistic. The projected 0.5% budget deficit is manageable, albeit expensive at current rates.”
Nonetheless, significant risks are looming, warns Prokopenko. Stagflation – characterised by rising prices and economic slowdown – is becoming increasingly apparent. The weakening ruble and accelerating inflation are eroding household incomes, while the growing demand for military expenditure diverts resources from other sectors, exacerbating imbalances and stifling opportunities for modernisation.
The Kremlin appears intent on downplaying these challenges, but structural economic problems cannot be masked indefinitely by expanded state spending or deeper government intervention. “Slowly but surely, Russia is heading for stagnation and economic degradation that increasingly look unavoidable even if the fighting ends in Ukraine,” says Prokopenko.
CBR Governor Elvia Nabiullina had been hiking rates since the second quarter of 2023 to two-decade highs, without having any impact on inflation, which was around 9% at the end of 2024, and eventually teamed up with the Ministry of Finance (MinFin) to use non-monetary policy methods to try to cool parts of the economy to lower inflation, while MinFin increased military spending by a quarter to keep the war machine going, in what is a very unusual macroeconomic experiment.
In the second half of 2024, a slowdown in economic growth began due to Russia’s stretched labour supply and production capacity constraints.
Stagnation in 2025
Russia’s economy is cooling as the military Keynesian effects wear off. Russian economic growth should decelerate further in 2025 and 2026 to around 1%, a level close to the economy’s long-term potential growth rate, says the Bank of Finland institute for Emerging Economies (BOFIT). In 2025, the economy may be on the verge of stagnation with GDP increasing by only 0.5-1%, and growth rates for investment and private consumption may drop to zero.
A race has begun that will determine the health of the Russian economy in the next few years. On the one hand, the sky-high inflation and interest rates threaten to crush growth and investment; on the other, the CBR was promising a “breakthrough” in inflation in December
5 Russia OUTLOOK 2025 www.intellinews.com