"Russia’s Economy Is Entering A Year Of Pain In 2025"

" Russia's Economy Is Entering A Year Of Pain In 2025 \r\n \r\n\r\nSince 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.\r\n\r\n \r\n \r\n\r\nBut 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.\r\n\r\n \r\n \r\n\r\nEconomists 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.\r\n\r\n \r\n \r\n Persisting inflation \r\n\r\n \r\n \r\n\r\n\"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.\r\n\r\n \r\n \r\n\r\nHe said that if the war continues, \"it will put a significant strain on the already bleeding Russian budget.\"\r\n\r\n \r\n \r\n\r\nRussia has increasingly boosted its defense spending to sustain its war efforts, from $59 billion in 2022 to $109 billion in 2023, and\u00a0 $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.\r\n\r\n \r\n \r\n\r\nWhile soaring defense spending has fueled Russia's economy in recent years, it has also contributed to rising inflation, which Russian President Vladimir Putin said\u00a0 could hit 9.5% in 2025 .\r\n\r\n \r\n \r\n\r\nTo rein this in, the country's central bank raised its key interest rate from 19% to\u00a0 21% \u00a0in October, a record high, which has eaten into companies'\u00a0 profit margins .\r\n\r\n \r\n \r\n\r\nThe bank was expected to raise the rate again in December, but held off, though it may need to increase it next year.\r\n\r\n \r\n \r\n\r\n\"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.\r\n\r\n \r\n \r\n\r\nPutin has acknowledged that inflation is at \"a relatively high level.\" Speaking at an\u00a0 investment forum \u00a0in Moscow earlier this month, he urged his government and the central bank to curb it.\r\n\r\n \r\n \r\n\r\nTsMAKP, a\u00a0 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.\r\n\r\n \r\n \r\n\r\n\"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.\"\r\n\r\n \r\n \r\n\r\nThe Soviet Union was dissolved in 1991.\r\n\r\n \r\n \r\n Slowing economic growth \r\n\r\n \r\n \r\n\r\nRussia is expected to experience lower-than-expected economic growth in 2025. In its October World Economic\u00a0 Outlook , the IMF dropped its GDP growth estimate for Russia from 1.5% to 1.3%.\r\n\r\n \r\n \r\n\r\n\"Overall growth will be quite slow,\" Iikka Korhonen, the head of research at the Bank of Finland Institute for Emerging Economies, told BI.\r\n\r\n \r\n \r\n\r\nHowever, he said the Kremlin will make sure that military production has enough resources.\r\n\r\n \r\n \r\n\r\nBut \"many sectors will most likely contract,\" he said.\r\n\r\n \r\n \r\n\r\nUS 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.\r\n\r\n \r\n \r\n\r\nIt 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.\r\n\r\n \r\n \r\n\r\nRussia's largest mobile operator, MTS, also blamed an almost 90% drop in Q3 net profits on costs related to interest payments.\r\n\r\n \r\n \r\n\r\n\"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.\r\n\r\n \r\n \r\n\r\nIn fact, in recent months,\u00a0 Russian CEOs \u00a0and\u00a0 business leaders \u00a0have increased their vitriol against interest-rate hikes and Western sanctions.\r\n\r\n \r\n \r\n\r\nSergei Chemezov, CEO of defense conglomerate Roste, told Russian senators in late October that sky-high interest rates were\u00a0 leaving companies struggling to turn a profit .\r\n\r\n \r\n \r\n Oil and gas prices \r\n\r\n \r\n \r\n\r\nWhile Russia's share of oil and gas revenues has fluctuated in recent years, and dropped in 2023, Russia expects it to account for about\u00a0 27% of the country's total budget revenue in 2025.\r\n\r\n \r\n \r\n\r\n\"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.\r\n\r\n \r\n \r\n\r\nEarlier this month, Russian state-owned oil firm Rosneft agreed to a 10-year, $13 billion deal to supply crude oil to India, Reuters\u00a0 reported , citing three sources familiar with the deal.\r\n\r\n \r\n \r\n\r\nHowever, 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.\"\r\n\r\n \r\n \r\n\r\nTraders expect global oil prices to fall from a\u00a0 projected $80 \u00a0a barrel in 2024 to between\u00a0 $65 \u00a0and\u00a0 $71 \u00a0in 2025, due to\u00a0 sluggish demand , production from\u00a0 non-OPEC+ countries, \u00a0and a shift toward\u00a0 cleaner energies .\r\n\r\n \r\n \r\n\r\nWhile G7 countries have set a\u00a0 $60 price cap \u00a0on Russian oil since December 2022, Russia has partly evaded the cap by using a shadow fleet,\u00a0 redirecting oil exports \u00a0to countries like China and India, and inflating\u00a0 ancillary costs to obscure purchase prices.\r\n\r\n \r\n \r\n\r\nBut the tightening of Western sanctions could further reduce Russia's oil and gas revenues.\r\n\r\n \r\n \r\n Reserves \r\n\r\n \r\n \r\n\r\nRussia's economic performance in 2025 will ultimately come down to the availability of resources, said Korhonen.\r\n\r\n \r\n \r\n\r\n\"There will be a deficit, but it can initially be financed from the National Welfare Fund,\" he said.\r\n\r\n \r\n \r\n\r\nRussia's National Warfare Fund has assets amounting to about\u00a0 $131.1 billion \u00a0as of October, while the central bank has about $614.4 billion\u00a0 in international reserves .\r\n\r\n \r\n \r\n\r\nKolyandr, 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.\r\n\r\n \r\n \r\n\r\n\"The Russian economy will continue to fall,\" said Weatherhead School of Management's Sheremeta, \"which will restrict Russia's ability to wage war.\"\r\n\r\n \r\n \r\n\r\nBut he added: \"Much will depend on the Western support of Ukraine.\"\r\n\r\n "

"Russia’s Economy Is Entering A Year Of Pain In 2025"

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