From boom to brakes: Russia’s wartime economy hits wall

According to a recent article, The Economist unveils that Russia’s economy once defying expectations with wartime resilience and surging growth, is now hitting the brakes. 

The economy is showing signs of significant deceleration, with annualised growth dropping from approximately 5 per cent at the end of 2024 to near zero by early 2025. This shift is reflected in various economic indicators, including a high-frequency index by Goldman Sachs, monthly growth estimates from VEB (the Russian development bank), and a decline in business turnover tracked by Sberbank. 

The central bank has acknowledged that "a number of sectors recorded lower output because of plummeting demand," signaling a broader economic slowdown. ​ This downturn follows a period of unexpected resilience, where Russia's economy defied forecasts due to aggressive government spending, high commodity prices, and a pivot towards a war-driven industrial model.

After the full-scale invasion of Ukraine in 2022, economists predicted a contraction in GDP of up to 15 per cent. However, GDP fell by just 1.4 per cent that year, followed by growth of 4.1 per cent in 2023 and 4.3 per cent in 2024. Consumer confidence reached near-record highs, and there were expectations that improved relations with the US might further boost economic performance. ​ 

Three primary factors are driving the current economic slowdown: 

Structural Transformation of the Economy: Since 2022, Russia has shifted from a West-oriented market economy to a war-driven economy aligned with Eastern partners. This transformation required substantial investment in military production and the development of new trade routes with China and India. By mid-2024, real spending on fixed capital had increased by 23 per cent compared to late 2021. 

The central bank indicates that this adjustment phase is now "complete". Military spending is also slowing, with projections for a 3.4 per cent real-term increase this year, down from 53 per cent the previous year. President Putin has suggested that such a slowdown is acceptable if it allows for investment in productive sectors. ​ 

Monetary Policy and Inflation: Inflation has remained above the central bank's 4 per cent target, reaching over 10 per cent in early 2025. Factors contributing to this include increased military spending and a labour shortage due to conscription and emigration. In response, the central bank has maintained a high interest rate of 21 per cent, aiming to curb inflation. This policy has strengthened the ruble, making imports cheaper and slightly reducing inflation expectations. However, it has also led to reduced consumer spending and discouraged investment. ​ 

External Economic Pressures: Global economic conditions are impacting Russia's economy. The US-led trade war has escalated, leading to lower global growth forecasts and declining oil prices. China, a major buyer of Russian oil, has revised its 2025 GDP growth forecast down to 4 per cent. Falling oil prices have affected Russia's stock market, with energy companies—accounting for a quarter of the Moscow Exchange's value—experiencing significant losses. In March, oil and gas tax revenues fell by 17 per cent year-on-year, and the government anticipates a sharp slowdown in oil and gas sales this year. ​ 

The combination of internal structural changes and external economic pressures is leading to a slowdown in Russia's economic growth. While the government may view this as a necessary adjustment, the prolonged decline in oil revenues and the challenges posed by high inflation and interest rates could pose risks to economic stability in the coming years.

By Naila Huseynova