How Russia’s Economic Retreat Could Become a Rout

Russia’s economy is no longer overheating; its growth, which Vladimir Putin forever trumpets, is losing momentum. This will be unpleasant for some Russians, especially the 20 million or more living in poverty, but the military effort will probably be unaffected. That doesn’t mean the regime can be complacent; there’s plenty that can still go wrong.

Inflation is slowing, and the labor market is less tight than it was a year ago. The growth that remains in the Russian economy is concentrated in manufacturing, specifically the defense sector and related industries, and is being fueled by state spending. For Putin, who is consumed by the war in Ukraine, growth is not an end in itself. A gentle slowdown will not be a big problem, as long as it doesn’t spiral into a recession.

So what’s the current situation and what might go wrong?

Several signs indicate a slowdown in Russia’s economy in the first quarter of 2025.

Firstly, there is a drop in inflation. Seasonally adjusted inflation came in at 7.1% in March, down from 12.9% in the fourth quarter of 2024. Weekly inflation also indicates a steady slowdown, as price indices for non-food goods posted the slowest weekly gain in a year.

Secondly, companies and consumers are borrowing less. As higher interest rates impact borrowing, lending is significantly lower than it was last year. Geopolitical factors also hindered growth, including the sell-off on global financial markets in March and April, which had a cooling influence on investment in Russian assets.

Meanwhile, declining imports, hopes for a ceasefire, and the possible easing of sanctions, along with a weakening US dollar, have pushed up the price of the ruble. This, in turn, slows inflation, as there are fewer rubles to be paid for a dollar’s worth of imports. There are signs of lower demand for workers and on factory capacities. On top of that, tax spending is also slowing from its winter levels,

Consumer spending, one of the key drivers of growth, is also declining, and companies expect it to remain suppressed for the rest of the year. The preference for savings remains high amid record-high deposit interest rates, while wage increases are expected to moderate as demand for workers cools.

Industrial output is also slowing. The output of extractive industries (like coal and oil) continues to decline amid lower commodity prices. The manufacturing sector posted 3.2% annual growth in February, but more than 60% of that is attributed to military production. The gap between the military and civil production is widening. 

Increased costs for parts and raw materials, the cooling of domestic demand and a labor shortage are holding back any increase in output, according to a Central Bank study.

After three years of militarizing the country, Russia’s economy is cooling. According to official forecasts, economic growth is expected to slow this year from 4.1% to 2.5%. More conservative forecasts, such as those of the International Monetary Fund (IMF) and the Bank of Russia, anticipate a pace of around half that.

So far, this has amounted to soft landing, rather than a crash. While the economy is in orderly decline, the war effort will remain fully financed. The Kremlin views the military-industrial complex as the primary driver of the economy, and its financing is a top priority. Lower inflation would remove some of the pressure on military expenses. Moreover, a drop in labor demand and subsequently a slower pace of salary growth would allow the army to attract more contract soldiers for less money —the Russian state currently pays around $22m a day in sign-up payments alone.

The economy is not demobilizing; it is just running out of steam.

That said, a drop can easily become a dive. Bad decisions by policymakers, a further dip in oil prices, or carelessness with inflation, and Russia could find itself in trouble.

Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA) specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.  

More on this and other aspects of the Russian economy in a weekly summary produced by an independent publication, The Bell

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