Quagmire or catastrophe
Since the start of the war in Ukraine, the Russian economy has been either slated as heading for total collapse or praised for its stability and resilience. But while many economists spoke of a large safety margin at the outset of 2024, pessimistic voices have grown louder as the year draws to a close.
The Russian economy has held on despite numerous predictions of its inevitable decline ever since the country launched its invasion of Ukraine nearly three years ago. In 2022, experts had forecast an economic decline of 10% to 15% and Russia’s isolation from the global economy. In 2023, the economic bogeyman was a huge hole in the state budget brought on by the West’s embargo and price cap on Russian oil. But neither of these negative predictions came true: the economic decline in the first year of the war was marginal, and the budget saw even more oil revenue than expected due to high prices and Russia’s shadow fleet of tankers.
For the coming year, the bogeymen chosen by the more pessimistic economists are impoverishment and rising prices. The war is increasingly taking its toll on the poorest people in Russia, economist Igor Lipsits said in an interview with Novaya Europe, as the Central Bank’s measures to combat galloping inflation — which include hiking the key interest rate up to a record-breaking 21% — will inevitably lead to fewer goods and services, higher retail prices, and a fall in real incomes.
Speculation about how deeply the economy is mired in issues that will “make 2025 a disaster” usually involves listing a number of symptoms, including the record-high key interest rate, inflation, and an overheating economy.
Things are likely to get much tougher for the Kremlin in 2025, Alex Isakov, Bloomberg’s economist for Russia and Central and Eastern Europe, predicted in December, as Putin “can no longer guarantee both guns and butter”.
Speculation about how deeply the economy is mired in issues that will “make 2025 a disaster” usually involves listing a number of symptoms, including the record-high key interest rate, inflation, and an overheating economy. Curiously, these problems are acknowledged both by experts loyal to the Russian authorities and by independent economists.
But symptoms are only that, and fighting them is pointless unless the underlying disease is identified and eradicated. Inflation, overheating, and the inevitable high interest rate are mere consequences of current policies. They would not have occurred had it not been for massive government spending, a structural bias towards the military-industrial complex, the loss of most export markets, and Russia gradually being cut off from trade even with “friendly” countries.
Novaya Europe identified four fundamental risks that will loom over the Russian economy in the coming year and beyond: the possibility of falling oil and gas prices, new sanctions, militarisation of the economy, and ongoing technological degradation.
Drill, baby, drill
Oil and gas revenues account for nearly a quarter of the 2025 Russian federal budget. Oil is expensive now — a sign that prices have “plenty of room to decline”, Richard Connolly, director of Eastern Advisory Group and associate fellow at the Royal United Services Institute in London, told Novaya Europe, adding that a drop in prices “would be hastened if Saudi Arabia decides to increase output”. An additional risk of lower prices comes from Donald Trump’s campaign promise of a “drill, baby, drill” policy, which should bring an increase in US oil production.
According to calculations by Sofia Donets, chief economist at Russian investment broker T-Investments, if Russian oil costs less than $50 (€48) per barrel — it traded for $63.6 (€61) in autumn 2024 — the liquid assets of the National Wealth Fund will be exhausted within a year. If this happens, the authorities have three possible methods for raising revenue: cutting spending, raising taxes, or — worst of all — printing more money.
Measures that reduce Russia’s ability to export oil and gas, import goods, and make cross-border financial transactions will hit the economy the hardest.
When it comes to sanctions, the measures that reduce Russia’s ability to export oil and gas, import goods, and make cross-border financial transactions will hit the economy the hardest, a EU-based economist who asked not to be named told Novaya Europe. This year has demonstrated the efficacy of targeting Russian imports and the foreign banks that enable them: shipments are falling and transaction costs are rising.
By contrast, measures against energy exports have had less of an impact. While the ruble initially plunged to its lowest level since the outbreak of the war in November, after Gazprombank, a Russian bank which mediated export payments, was hit by sanctions, it soon bounced back to its previous values. The recovery was aided by exporters developing new payment chains and finding ways to bring that revenue back into Russia.
Another set of UK and EU sanctions approved in November appeared to have dealt a fresh blow to Russia’s shadow fleet, a network of vessels used for exporting Russian oil to circumvent international restrictions. But while total oil export revenues are indeed falling — down 5% week-on-week to $1.36 billion (€1.3 billion) in the week of 9–15 December — Bloomberg believes that this reduction is caused as much by ongoing maintenance work at one of the country’s main export terminals and mounting pressure to abide by its OPEC+ production target as it is by shadow fleet sanctions.
However, the Russian economy could be isolated further from external financial transactions in 2025 as Trump begins his new term, considering that the US introduced its harshest pre-war sanctions against Russia under Trump.
Degradation vortex
Structural imbalance and technological underperformance are two other long-lasting risks that will continue to poison the Russian economy as long as military spending takes up a third of the budget and the “‘iron curtain” separating it from the rest of the world grows heavier.
Structural imbalance occurs when huge sums of money are injected into the military-industrial complex, depriving the civilian economy of labour and cheap loans. As a result, Russia is repeating the path trodden by the Soviet Union, which effectively produced tanks and missiles — though even these now need Chinese or even Western electronics — but couldn’t build cars or computers.
“There is neither an improvement in the quantity or quality of the products themselves, let alone in Russians’ quality of life,” Oleg Buklemishev, director of the Centre for Economic Policy Research at Moscow State University, told state-affiliated broadcaster RTVi.
Russia is repeating the path trodden by the Soviet Union, which effectively produced tanks and missiles — though even these now need Chinese or even Western electronics — but couldn’t build cars or computers.
If the war lasts for years, the quantitative damage will manifest itself with a sharp drop in investment, economist Dmitry Nekrasov told Novaya Europe. Household consumption will also fall, albeit more gradually.
Qualitative damage, Buklemishev explains, happens when the country is sucked into a vortex of declining labour productivity and quality of goods and services. And this is a much bigger threat than an “instant” economic collapse along the lines of the 1998 Russian currency crisis, since sharp crises like in 1998 and 2008 are usually followed by a rapid recovery. Today, however, the crisis will be much worse due to technological underperformance caused by the military-industrial complex siphoning off all investment.
This problem dates back to before the war, when Russia imported a lot of technology and equipment, failing to set up its own production of cars, planes and computer chips.
In an interview with Novaya Europe, economist Vladislav Inozemtsev characterised such a prospect as “growth without development”, stressing that the Russian economy “has no future. All it can do is reuse Soviet technologies.”
No tomorrow
Since the economy still has a considerable safety margin, degradation will be a slow and gradual process. Even a sharp drop in oil prices and more radical sanctions won’t crash the economy. The National Wealth Fund still has reserves, and the government has the opportunity to borrow money on the domestic market, albeit at high interest rates, or to raise taxes again. Therefore a number of more optimistic economists insist that the Russian economy has enough of a cushion to avoid an economic crisis in the coming years.
Inozemtsev estimates that the safety margin will keep Russia afloat until the early 2030s. His colleague Dmitry Nekrasov agrees. “In the next 3 to 5 years, the Russian regime will not face catastrophic economic problems such as an inability to finance military operations or the state apparatus, or pay for critical imports,” he told Novaya Europe. However, he added, this forecast will only be true if no unpredictable “black swan” events arise.
While Russia is mass-producing tanks and scrabbling around the world for spare aeroplane parts, it risks missing another technological leap forward, leaving it further behind more developed countries.
This is exactly what happened during the computer revolution of the late 20th century: Russia still cannot produce basic components for electronics. A similar trend now will impact one of the most promising areas of development, artificial intelligence, economist Ruben Yenikolopov explained to Novaya Europe. “It is impossible to work in isolation. These are exactly the kinds of technologies that require full immersion in global processes,” he said.
While Russia is mass-producing tanks and scrabbling around the world for spare aeroplane parts, it risks missing another technological leap forward.
It is hard to predict which area of human activity will give the world the next great breakthrough, but it is unlikely that Russia, which can no longer fight its war without the help of the most regressive regimes like Iran and North Korea, will be part of that leap forward. Over time, Russians will have less and less access to the technological advances that developed countries already have and will continue to enjoy.
Quality of life will also suffer because the Kremlin is unlikely to manage without cutting non-military spending and raising taxes. It seems that the economic safety margin can only be maintained with those sacrifices.