From Kaliningrad to Vladivostok, a noticeable shift in sentiment is being felt. According to a high-frequency index prepared by Goldman Sachs, Russia’s annual economic growth rate has dropped from about 5% to zero since the end of last year. Similar trends are noted by Vnesheconombank (VEB), which tracks monthly growth dynamics. The high-frequency business activity indicator compiled by Russia’s largest bank, Sberbank, is also declining. Although the authorities are cautious in their wording, even they have been forced to acknowledge the problems. In early April, the Central Bank of Russia noted that in several industries “production volumes have decreased due to a sharp drop in demand.”
This downturn comes after a three-year period during which Russia’s economy exceeded nearly all forecasts, thanks to a combination of budget injections, high commodity prices, and large-scale militarization. Following Russia’s full-scale invasion of Ukraine in 2022, economists expected a GDP decline of up to 15% annually. However, the actual contraction was only 1.4%. In 2023, the economy grew by 4.1%, and by 4.3% in 2024. Consumer sentiment reached near-record highs. Amid expectations that Donald Trump might offer Vladimir Putin terms to end the war in Ukraine, many forecasted even greater economic growth in 2025.
Nevertheless, the dynamics have now sharply changed. According to The Economist, three main factors are to blame.
1. Completion of the “Structural Transformation” of the Economy
The first factor is tied to the so-called “structural transformation” referenced by the Central Bank of Russia. After 2022, the country shifted its economic focus: from a Western-oriented model with limited private sector support to a mobilization model focused on the East. This required massive investments in arms and ammunition production, the construction of new trade logistics chains with China and India, and the development of domestic production.
According to the Central Bank, by mid-2024 real capital investments had risen by 23% compared to the end of 2021. However, the institution now claims that this phase is complete. Military expenditures are also beginning to slow down. Julian Cooper of the Stockholm International Peace Research Institute (SIPRI) estimates that real growth in military spending will be just 3.4% in 2025 compared to 53% in 2024.
The reduction in investment naturally leads to slower economic growth. However, Putin himself does not seem worried: “As strange as it may sound, given macroeconomic realities, we do not yet need such growth,” he said back in December.
2. Tight Monetary Policy
The second factor behind the slowdown is tighter monetary policy. Inflation in Russia significantly exceeded the Central Bank’s 4% target for months, reaching over 10% in February and March. This was driven not only by military spending but also by an acute labor shortage due to mobilization and the emigration of skilled workers. As a result, nominal wages rose by 18% in 2024, forcing companies to raise prices.
In response, the Central Bank raised the key interest rate to 21% — the highest level since the early 2000s. On April 25, the regulator again left it unchanged at this level.
The extremely tight policy has begun to yield results. High rates strengthened the ruble, making imported goods cheaper. Inflation expectations among Russians for the coming year began to fall from 14% to around 13%. Operational data also indicate a slowdown in inflation. However, this comes at a cost: consumption is falling, citizens prefer to save money in deposits rather than spend it. High rates also stifle investment activity.
If this were the only issue, the authorities might have tolerated a slow decline, considering it an acceptable price for fighting inflation.
3. Worsening External Conditions
However, the situation has been exacerbated by a third factor — the deterioration of external economic conditions. As The Economist notes, this has recently become the dominant factor. The escalation of the U.S. trade war, declining global growth forecasts, and falling oil prices have hit Russia’s economy hard.
Particularly alarming is China — Russia’s largest oil buyer. The International Monetary Fund (IMF) revised China’s GDP growth forecast for 2025 down from 4.6% to 4%.
Falling oil prices trigger a chain reaction: from the decline in oil company stock prices (which account for a quarter of Russia’s market capitalization) to a direct hit on export revenues. The MOEX index, which tracks the value of major Russian companies, has dropped by about 10% from its recent peak.
The national budget is also feeling the pressure. In March, revenues from oil and gas taxes fell by 17% compared to the previous year. On April 22, Reuters, citing official documents, reported that the government expects a sharp decline in oil and gas revenues in 2025.
Although Donald Trump is seen as favorable to Putin, the escalation of the trade war has effectively dealt a significant blow to the Russian economy.
This article was prepared based on materials published by The Economist. The author does not claim authorship of the original text but presents their interpretation of the content for informational purposes.
The original article can be found at the following link: The Economist.
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