The Russian economy in 9 graphs

Hello! Welcome to your weekly guide to the Russian economy – written by Alexandra Prokopenko and Alexander Kolyandr and brought to you by The Bell. As the year draws to a close, we take a step back to assess the state of the Russian economy in 9 different graphs. We also look at some of the ‘highlights’ of Putin’s annual press conference. 

This will be our last newsletter of the year, and we will resume normal service again on January 10. Festive greetings and best wishes for the New Year from everyone at The Bell!

How the Russian economy performed in 2024 & prospects for 2025

Despite its best efforts, the Kremlin has not been able to simultaneously fight its war in Ukraine, fund social and infrastructure projects, and keep inflation and the ruble under control. The economy hit a wall this year: there is no spare industrial capacity; there are no more workers; and exports are being squeezed by Western sanctions. From inflation, to GDP, imports, budget spending and labor shortages, we look at the Russian economy this year and try to assess how it is coping in nine graphs: 

Overheating economy starting to slow

Russia’s economy performed a bit like a marathon runner on steroids in 2024. But the effect of the drugs is already beginning to wear off. GDP growth is currently slowing, while inflation is rising. Quarterly numbers suggest that total growth this year could be as much as 4%. Next year, growth is expected to slow further until it settles at under 1.5%.

Even record-high interest rates have not tamed inflation

Demand, which has been fuelled by spending, is outpacing supply, driving prices relentlessly upwards. By the third week of December, annual inflation had hit 9.5%, which was significantly higher than the Central Bank’s most recent forecast of a maximum of 8.5%.

Between December 2023 and July this year, interest rates in Russia were 16%. Since then, however, inflation has forced the regulator to repeatedly hike rates until they hit 21 percent in October, a post-Soviet record. At the year’s final interest rate meeting Friday, the Central Bank decided to keep rates at this level for the moment (despite many analysts predicting a two percentage point rise). The Bank explained its decision by the fact that credit growth was slowing, and that it had financial data unavailable to the market. On the one hand, the Bank is being cautious, and wants to avoid tightening monetary policy any more than necessary. On the other hand, it has faced a barrage of criticism from Russian business and lawmakers in recent months. It’s hard to imagine political pressure wasn’t a factor in Friday’s decision, which flew in the face of all predictions. This could end up undermining trust in the regulator.   

Next year, interest rates will likely be about 20% (the current Central Bank forecast is for rates to average between 17% and 20%). The Central Bank recently postponed its plans to reduce inflation to under 4% until 2026.

The Kremlin can extract enough money from the economy to finance its war

The war continues to suck resources out of the Russian economy. As in previous wartime years, the biggest single item of state spending in 2025 will be the armed forces. Spending on national defense and security alone will top 8% of GDP (a post-Soviet record). And all the increase in non-oil-and-gas revenues (which are expected to rise 73% in 2025 because of tax hikes and GDP growth) will go to the military. Increased military spending will continue to bleed the civilian economy, slowing economic growth. Dampened growth and high inflation will, in turn, make inequality more visible, fuelling popular discontent.

Labor shortages are restricting the economy and exacerbating inflation

The main structural limitation on Russia’s economy is a labor shortage. Russia had demographic problems before the full-scale invasion of Ukraine in 2022, but, since then, they have only gotten worse. Part of the potential workforce has gone to the front; hundreds of thousands of men have been killed and injured; the defense sector is hungry for workers; and almost a million people left the country because of their opposition to the war. Unemployment is currently 2.3%, a statistic that officials like to trumpet, but which actually shows that there is nobody left to work. Even Kremlin-linked experts estimate Russia needs an additional 1.6 million workers. To attract staff, businesses are increasing salaries, which are rising faster than inflation and outstripping labor productivity. 

Businesses keep borrowing despite double-digit rates

A rise in corporate and consumer lending is another driver of inflation. Despite double-digit interest rates, businesses continue to borrow. In the first 10 months of 2024, Russia’s total corporate loan portfolio (including bonds) was up 16.4%. Taking this into account, the Central Bank has revised upward its forecast for the growth rate of the banking sector's loans to business. 

Only military-linked sectors of the economy are growing

Despite Russia’s subsidized mortgage programme being discontinued in the middle of this year, the construction sector still showed fantastic results (like many other sectors of the economy). Many industries are operating at over 80% capacity, with only Western sanctions and labor shortages preventing further expansion. Overall slowing growth is linked not only to reduced output in the extraction industries (this is driven by falling prices for raw materials), but also issues in the manufacturing sector. Indeed, the only manufacturing sectors where growth remains significant are those sectors that are directly linked to the military. In all other areas, growth is anaemic at best. 

Western sanctions are imposing costs on the Russian economy

Throughout this year, Western countries have been trying to close sanction loopholes while Russia searches for new ones. The West focused its efforts on disrupting supply chains for prohibited Russian imports, particularly dual-use imports, and pursuing Russia’s so-called “shadow fleet” of oil tankers. The year began with a U.S. decree allowing for secondary sanctions on banks in third countries that assisted forbidden transactions involving Russia. In 2025 the European Union, from which Russia obtains many items vital to its armed forces via third countries, is expected to require all exporters to verify – under pain of fines and other punishments – that the final destination for their goods will not be Russia.

It is unlikely that Western restrictions will end Russia’s ability to import sanctioned goods. But pressure on exporters, as well as other intermediaries, will likely continue to intensify, leading to higher costs and, ultimately, higher prices for Russian consumers.

The Kremlin has few options to prop up the Russian currency 

Western sanctions alongside demand outstripping supply are weakening the ruble. In the last week of November, the Russian currency experienced a dramatic collapse, down almost 25% from summer highs. The authorities don’t have many tools to tackle this problem: half of Russia’s gold reserves are frozen by sanctions, and the rest might well be needed to fend off threats to financial stability. The National Welfare Fund contains relatively little in the way of liquid assets. Without non-residents, who have largely exited Russian currency markets, and the free movement of capital (this has been restricted since 2023) interest rates are no longer an effective tool to stabilize the currency. Ruble volatility is the new normal.

Why the world should care

Those who have lost most economically in Russia this year are Putin’s core supporters: state employees. That means doctors, teachers, 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%).

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.

However, the risks are growing. Stagflation, a painful combination of rising prices and a slowing economy, is ever more visible. The ruble is falling and inflation is rising – which reduces household incomes. The need to increase military spending is squeezing resources out of other areas, leading to increased disbalances and limiting the scope for modernization.

The Kremlin is doing its best to ignore the problems. But structural issues cannot be concealed by just increasing state spending, or allowing the state to take an ever-greater role in the economy. Slowly but surely, Russia is heading for stagnation and economic degradation that increasingly look unavoidable even if the fighting ends in Ukraine.

‘Highlights’ from Putin’s end-of-year press conference

President Vladimir Putin's annual press conference Thursday lasted four-and-a-half hours – one of his longest public performances in a quarter of a century. It was only shorter than one of his annual phone-ins (in 2013), and a similar press conference he held in 2020. Apart from length, though, the event did not differ much from previous such press conferences, which have long since become a ritual in which Putin tries to convince journalists, Western observers, and maybe even himself that Russia is thriving.  

• As is traditional, Putin began by reciting what he considers to be impressive economic data. Of course, he didn’t mention how state spending has fueled inflation; that sustained low unemployment is a sign of a chronic labor shortage; or that even official forecasts see economic growth slowing to 1.5% next year.
• According to Putin, Russians themselves are to blame for rising food prices. “Price increases for butter, I know, are 33-34%. It’s just that we don’t have enough produce to keep pace with increasing consumption,” he explained. Apparently, it’s all down to Russians consuming more meat and dairy products.
• While Putin backed the independence of the Central Bank, he also drew attention to “experts who say the bank’s actions are untimely.” This veiled criticism might have been one reason the Central Bank did not raise rates Friday as many expected. 
• Putin refused to acknowledge that Russia had suffered a defeat in Syria. “Russia did not allow the establishment of a terrorist enclave in Syria,” he said. “Which means to a certain extent our goal was achieved.” He kept silent about the fact that Russia formally designates the rebel group that seized power this month as terrorists.  
• The Russian leader confirmed he was ready to meet with incoming U.S. President Donald Trump and admitted that they hadn’t spoken for four years. “Russia became much stronger in the last two years, we are becoming a truly sovereign country,” Putin said, making it clear he believes he has a good hand to play. 
• When speaking about Ukraine, Putin tried his best to convince his audience that there are no time pressures, that Russia is making steady progress, and that there is nobody in Kyiv worth negotiating with. 
• Perhaps the most provocative moment came when Putin proposed a missile duel over Kyiv: “Let’s try a technological experiment, a high-tech 21st-century duel. Let them pick out some object to hit, concentrate their air defenses and missile defenses there and we will fire our Oreshniks at it. And we’ll see what happens,” Putin said, referring to Russia’s new ballistic missile that was used against Ukraine’s city of Dnipro last month. “Do you think this is a rational human being? He’s just a scumbag,” Ukrainian President Volodymyr Zelensky responded shortly after.
• Putin complained a lot about European countries which, in his opinion, are losing their national identities. And he waxed lyrical about the good old days when Europe had leaders with whom he could do business including Helmut Kohl in Germany, Jacques Chirac in France, and Silvio Berlusconi in Italy. 

Why the world should care

“Putin appeared more sure of himself, his historical mission, and his ability to end the war in Ukraine than he’s ever been,” wrote political analyst Tatiana Stanovaya about Putin’s performance. Putin appears convinced Russia will win the war in Ukraine – at least, that’s what he wants others to think. This is also likely to be his starting position in negotiations with Trump, who has promised to end the war in Ukraine within a month of taking office.