Russia's economy in 2025: Is the Kremlin prepared to fully fund another year of war?
How the War in Ukraine Changed Russia's Economy
During the full-scale invasion of Ukraine by Russia, the cost of Russian borrowing surged "to dreadful levels," according to The Telegraph, as interest rates hit 21%, putting pressure on companies. "The strain is such that Putin has reportedly scolded officials for a drought in private investments. It's no surprise that Russian oligarchs, particularly Igor Sechin, head of Rosneft, and billionaire aluminum magnate Oleg Deripaska, have publicly criticized the high interest rates. In 2023, Deripaska warned that Russia may soon run out of money," the article states.
Russia's capital fund is being depleted, and the liquid portion of assets has now shrunk to just $38 billion from approximately $100 billion at the beginning of 2022.
"The 'fragility' of the Russian economy, which is noted by Western media, is confirmed by data from the Central Bank of Russia. According to a macro forecast presented there, the growth rate of Russia's GDP in 2025 is expected to be only 1-2%, and in 2026, it is projected at 0.5-1%. This indicates that the Russian economy is entering a state of stagnation.
Therefore, Russians will have to tighten their belts, as if in 2024 the purchase of goods and services in Russia increased by 5.5%, then in 2025, private consumption will add only 0.5-1.5% and the same the following year. Investment growth may even flatline, although it reached 10.2% last year.
Ultimately, although the Russian economy officially showed a relatively high growth rate of 4.1% in 2024, this is largely driven by the production of tanks, cannons, and other items that have little impact on the citizens' well-being. The Central Bank has nearly doubled its inflation forecast and now expects it to be between 7-8% by the end of 2025, whereas just in October it predicted a slowdown to 4.5-5%, and in April promised to curb price growth to 4%. But now, the return to the 4% target has been postponed to 2026.
According to the head of the Central Bank of Russia, Elvira Nabiullina, as of February 10, 2025, inflation in Russia accelerated to 10% from 9.5% at the end of last year and 7.4% in 2023. Nabiullina states that the peak of inflation will occur in April-May. "We do not expect a wave of bankruptcies," she said. At the same time, she acknowledged that there are companies for which the rising cost of debt servicing is a significant factor that substantially reduces their profits. However, she claimed that in general, Russian business "maintains financial stability."
The Central Bank has nearly doubled its inflation forecast and now expects it to be between 7-8% by the end of 2025.
However, while businesses may exhibit resilience, the Russian consumer is becoming poorer. The mobilization of resources for the war has not only led to a reassessment of social programs related to healthcare and support tools for construction but has also affected prices. Food prices in Russia increased by almost a third by the end of 2024. According to Rosstat, the consumer price index rose by 9.52% over the year (after a 7.42% increase in 2023), while annual food inflation reached 11.05%, marking a record high since 2015 (when food prices rose by 14%).
The final annual inflation rate in Russia is among the highest in the last 15 years: according to official statistics, prices only rose more in 2022 (11.94%) and during the economic crisis after the annexation of Crimea (11.35% in 2014 and 12.91% in 2015).
0 Like Robinson Crusoe: What Could "Cripple" the Russian Economy
If military actions by Russia against Ukraine are not undermined, at least they can be excluded this year, according to Ukrainian experts, including the head of the Institute for Economic Research and Political Consultations, Igor Burakovsky.
"The end of 2024 to early 2025 is a pivotal time. If sanctions are intensified and our partners do not backtrack... This is the moment when the Russian economy could be, if not crippled, then made military actions almost impossible," the expert noted during a telethon on February 25.
It is the drop in oil prices from $60 per barrel against the backdrop of stricter sanctions that will hit the Russian economy hard. However, the "G7" is still only discussing prices for Russian oil and has not made any fundamental decisions.
"The issue of sanctions for Russia is significant in the sense that the Russian economy cannot develop like Robinson Crusoe's economy on a deserted island. It needs foreign technologies, financial resources, and the ability to integrate into international value chains," said Igor Burakovsky.
Meanwhile, experts consider the latest European sanctions package against Russia more of a political demonstration of Europe’s unity with Ukraine.
1 Measures Against the War: Will New EU Sanctions Help Ukraine?
On the anniversary of the full-scale invasion, on February 24, the European Union announced the approval of the 16th package of anti-Russian sanctions, which took effect immediately.
The European sanctions include:
- disconnecting 13 Russian banks from the international interbank payment information system, Society for Worldwide Interbank Financial Telecommunication (SWIFT);
- sanctions on an additional 73 new shadow fleet vessels and 53 individuals and companies;
- suspending broadcasting licenses for 8 Russian media outlets in the EU;
- prohibiting aluminum imports for 11 ports and airports;
- prohibiting transactions that circumvent oil price restrictions.
Ukrainian experts do not believe that these new restrictions are critical or capable of significantly harming Russia's ability to finance the war, as the list of banks does not include major institutions like Gazprombank, which still uses SWIFT to pay for energy resources from some EU countries.
"The European Union continues its sanctions policy, so the 16th package contains both personal sanctions and certain secondary sanctions related to banks. But it cannot be said that this represents a qualitatively new stage of sanctions pressure on Russia. In the current situation, unfortunately, this is not possible. Even the 16th package had to be negotiated because Hungary traditionally blocked the decision-making process. The mere demonstration of sanctions pressure from the EU on Russia is what matters," explained Vladimir Fesenko.
The European Union continues its sanctions policy against Russia, even as Americans are publicly raising the issue of considering a phased lifting of sanctions in exchange for a ceasefire from Russia.
Analyst and member of the Ukrainian Society of Financial Analysts, Andrey Shevchishin, agrees with the expert. He adds that although this package imposes additional restrictions on the shadow fleet, it will not be effective without U.S. cooperation.
If Europe monitors compliance with sanctions and truly restricts the movement of vessels through its maritime routes, then the movement in the eastern part will become more active.
"Russia is increasingly integrating and orienting itself towards Asia. Take aluminum, for instance. This is one of the sanctions from Europe — the ban on importing primary aluminum. In 2024, Russia exported over 360,000 tons of aluminum worth 830 million euros. This is critical for Rusal (one of the world's largest producers of primary aluminum and alumina), but not critical for Russia. I would note that Russia produces about 4 million tons of aluminum, of which one million is consumed domestically. Another one and a half million is sent to Asia, with the rest distributed worldwide," the analyst added.
The share of Russian aluminum received by Europe is 360,000 tons (almost 10% of total production in Russia), which is a painful loss for the industry but not for Russia.
According to the specialist's calculations, the share of Russian aluminum received by Europe is 360,000 tons (almost 10% of total production in Russia), which is a painful loss for the industry but not for Russia.
At the same time, the specialist acknowledges that the most painful sanctions for Russia are related to cross-border payments, as transaction costs in 2024 rose by 5-11%, and payment terms reach 2-3 months.
"For Russia, the most pressing need now is to ease cross-border payments. The most significant impact of sanctions on Russia began precisely with secondary sanctions. Western banks started refusing to cooperate with Russia because it was easier for them to cease operations than to determine whether transactions were related to the war. This is why the cost of all operations has significantly increased. Logistics costs have also risen," She