Reports – based on which the American Bloomberg Agency relied – indicated that the Russian economy may enter a stage of decline during the next year, as the Kremlin faces increasing economic pressures resulting from the ongoing war in Ukraine and strict Western sanctions.
Bloomberg reported that Russia’s ability to balance military spending and supporting domestic consumers has become severely limited.
Decline in economic growth
Economists spoke to Bloomberg expect Russian economic growth to slow to only 1% in 2025, compared to 3.1% this year.
The International Monetary Fund also expected growth to decline to 1.3% next year, driven by weak private sector consumption and declining investment.
Even if the war ends, economists expect this slowdown to continue given the absence of structural drivers of growth, including declining productivity and weak financing.
Depletion of sovereign funds
Before the Russian-Ukrainian war in February 2022, Russia had about $140 billion in liquid assets in the National Wealth Fund, but it declined to about $55 billion last October, of which only 31 billion were tradable.
According to Alexei Isakov, an economist at Bloomberg, Russia relied heavily on selling the Chinese yuan to support its local currency (the ruble), which increased its exposure to market fluctuations and weakened its ability to mitigate inflationary pressures.
High inflation and interest rates
As financial reserves shrink, the Russian economy suffers from high inflation and increasing borrowing costs, and the Russian central bank’s base interest rate currently stands at 21%, and is expected to remain at high levels for years.
Isakov asserts that this situation will increase pressure on Russian consumers, who a recent poll showed support for the continuation of the war.
Alexei Isakov: Russia relied heavily on selling the Chinese yuan to support the ruble, which increased its exposure to market fluctuations and weakened its ability to mitigate inflationary pressures.
War economy
The Bloomberg report indicates that the Kremlin may have to redirect economic resources towards military priority sectors, such as industry and defence, at the expense of sectors such as services and construction.
Thus, Russia is entering a new phase of the “war economy,” a path that may leave it vulnerable to fluctuations in energy prices, the main source of its revenues.
The current challenges emerge – compared to the situation of the (former) Soviet Union in the 1980s – when the decline in oil prices and the lack of financial resources caused its collapse.
Although President Vladimir Putin may be aware of these risks, the options available to him appear limited, according to the US agency.
Bloomberg says – in its report – that in light of these developments, Russia remains stuck between the pressure of the need to finance the war and maintaining fragile internal economic stability, an equation that may be difficult to achieve in the coming years.
The share of defense spending in the gross domestic product is expected to rise from 3.7% in 2023 to 5.3% this year, and 6.1% in 2025.
Russia currently spends another 3.4% of its gross domestic product annually on national security, which can be included in the category of military spending, according to a “Spectator” magazine report last October.
