Menacing sanctions, meaningless forecasts, and a murky future Meduza’s top five takeaways on the Russian economy heading into 2025
The end of 2024 brought an unpleasant surprise for the Russian government. Inflation suddenly started to accelerate, outpacing forecasts significantly. The ruble hit 110 to the U.S. dollar, according to the Russian Central Bank’s official exchange rate, forcing the regulator to raise the key rate to a historic high, which triggered discontent among businesses. And all the while, Vladimir Putin continued to insist that “Western countries’ attempts to inflict a strategic economic defeat on Russia haven’t succeeded.” Meduza shares five key takeaways on what actually happened to the Russian economy in 2024 and what to expect in 2025.
The Kremlin and the government could have improved the situation — but they didn’t
Since Russia launched its full-scale invasion of Ukraine in 2022, the official line on the economy can be summarized as follows: Western countries “destroyed trade relations with the Russian Federation,” creating new “economic challenges.” But by 2024, both economists and the Central Bank began warning of internal threats increasingly often.
Take inflation, for example. At the start of the year, the forecasts were optimistic: the Central Bank kept repeating that price growth wouldn’t exceed four percent, and Vladimir Putin said things had started trending in the right direction. But by mid-summer, everything had gone wrong: year-on-year inflation reached nine percent, and the Central Bank raised the key rate for the first time since the start of the year.
At the time, Central Bank Head Elvira Nabiullina gave three reasons for the rise in prices, all of which were the result of official decision-making:
- “Consumer activity remains high against the backdrop of a significant growth in household incomes.” Russians who enlisted in the military and received sign-on bonuses north of five million rubles ($49,000) are just one piece of the puzzle here. Even according to official data, this segment of the population numbers no more than one million people, which isn’t that many in the context of the Russian economy. But the defense industry as a whole has had a greater impact, employing nearly four million people whose salaries increased by 20 to 60 percent depending on their specialty, the Industry and Trade Ministry says. However, there’s also a wider trend.
- “The labor shortage continues to grow.” Unemployment in Russia has reached a record low of 2.3 percent, forcing businesses to raise salaries. According to Rosstat, average real incomes grew by another 10 percent in 2024, after growing by eight percent last year. The demographic decline of the 1990s partially explains the labor shortage, but there are other factors stemming from official decision-making: the increased number of military personnel (1.5 million people), the influx of workers from civilian industries into the military-industrial complex (600,000 people), and emigration driven by the war and mobilization (according to The Bell’s estimates, some 700,000 people left Russia and didn’t return). The Higher School of Economics estimates that the Russian economy is short of nearly three million workers.
- “Significant investment demand supported by both fiscal stimulus and high corporate profits.” High corporate profits can be attributed to the fact that Russian businesses have occupied niches previously filled by foreign companies. Fiscal stimulus, meanwhile, refers to a variety of concessions on bank loans. For example, until July 2024, Russians could take out a mortgage at an eight percent interest rate (and these preferential mortgages accounted for more than 90 percent of transactions in the housing market). Subsidized loans were also available to IT companies (with interest rates as low as one percent), small- and medium-sized enterprises, defense manufacturers, and many other businesses. To quote Nabiullina, this resulted in a “vicious cycle,” with the Central Bank raising the key rate in an attempt to cool the economy, and the government rendering this totally ineffective by compensating businesses for their costs.
The Central Bank tightened its monetary policy in the second half of 2024. But despite the record-high key rate, the government still found ways to speed up inflation. For example, the authorities approved an increase in the “recycling fee” for imported cars, leading to a sharp rise in prices. What’s more, federal budget spending was 1.5 trillion rubles ($14.8 billion) more than expected in the fourth quarter, creating another source of increased demand.
Russia’s economic outlook hasn’t become any clearer
The main paradox of 2022 was the difference between analysts’ expectations and reality. Apocalyptic predictions about the collapse of the Russian economy didn’t come true, international experts agreed that things would stabilize, and the so-called “structural restructuring” began.
The forecasts for 2024 were rather optimistic, albeit incorrect: the reality turned out to be much worse than what the authorities imagined in their crisis scenarios. Take the Central Bank’s forecasts, for example.
- March: The key rate may go down in the second half of the year. Instead, it started going up, and now the Central Bank basically refuses to comment on its trajectory.
- August: In the event of a global financial crisis comparable to 2007–2008, the largest economies going into recession, and additional sanctions on Russian exports, the key rate could be increased to 20–22 percent. This crisis scenario didn’t come to pass, but Russia’s benchmark interest rate still ended up in this range (on December 20, the Central Bank announced that it would hold the key rate at a record 21 percent). The Central Bank has been quick to correct itself, however. Its website now says that in the event of a global crisis in 2025, the key rate will average 22–25 percent.
- October 25: The Central Bank changes its 2024 inflation forecast for the third time, stating that price growth won’t exceed 8.5 percent. Inflation reached this threshold on December 13.
The Central Bank wasn’t alone in its struggle to make accurate forecasts about the Russian economy. Market analysts were off the mark, too, revising their assessments nearly every month. The Economic Development Ministry was also wrong when it said the U.S. dollar would stabilize at 90 rubles.
Sanctions could still hurt the Russian economy
In 2022, Russia became the most sanctioned country in the world. But in all of his speeches devoted to the economy, Vladimir Putin insists that Western sanctions haven’t achieved the desired results.
Nevertheless, 2024 showed that external restrictions do affect the work of Russian enterprises involved in international trade. Take the ruble exchange rate, for example.
- Sanctions caused Russian imports to fall. To be more precise, this happened due to the threat of secondary sanctions. In December 2023, President Joe Biden signed an executive order that expanded U.S. authority to sanction third-country banks and financial institutions that help Russia’s defense industry evade sanctions. Though this mechanism was never widely applied, financial institutions in China stopped processing monetary transfers from Russia. In turn, businesses had to find alternative ways to transfer money, and consider the costs associated with payment agents and transitioning to barter. As a result, by May, imports had fallen by nine percent. Central Bank analysts said this would bolster Russia’s currency — and they were right: the U.S. dollar fell from 92 to 88 rubles by the end of the month.
- Sanctions stopped Russia from trading in the U.S. dollar and the euro. On June 12, the United States imposed the strictest possible sanctions on the Moscow Exchange (MOEX), leading Russia’s largest stock exchange to suspend U.S. dollar and euro trading. The Central Bank then began using the interbank (or over-the-counter) market to determine the dollar exchange rate. However, interbank trading is based on negotiated deals, meaning the exchange rate fluctuates based on the buyer’s needs. Moreover, trade volumes are kept secret and trust in them has fallen; some market players have even concluded that the ruble exchange rate is now more affected by external than internal factors.
- Sanctions forced the ruble to fall to lows not seen since 2022. In late November, the U.S. Treasury imposed sanctions on 50 Russian banks, including Gazprombank — an important source of foreign currency for the Russian market. As a result, exporters weren’t able to return revenues to Russia, leading to a supply shortage. According to the Central Bank’s official exchange rate, the dollar rose to 114 rubles and the euro to 120, forcing the regulator to intervene to stabilize the rate. However, the trend spooked business owners, who began adjusting prices for goods, and inflation went up by 0.5 percent in just one week (when it was forecast to go up by four percent over the course of the entire year).
This is hardly a comprehensive list of the effects of sanctions on Russia in 2024. For example, the ban on purchasing Russian diamonds reduced Alrosa’s profits three-fold. Sovcomflot, which allegedly operates the shadow fleet of tankers that Russia uses to circumvent sanctions on oil, is in a similar situation. Russia’s flagship liquified natural gas project Arctic LNG 2 loses contractors regularly, and its future is uncertain.
According to Bloomberg, the Biden administration is also considering imposing tougher sanctions on Russian oil before Donald Trump takes office, though the details of the plan haven’t been made public.
The Kremlin has become more willing to shift costs onto others
Since the start of the full-scale war against Ukraine, the Russian budget has been running a deficit, meaning spending exceeds revenues. The Finance Ministry has either issued bonds to borrow the difference from the market or drawn from the National Wealth Fund. Apparently, the ministry was expecting a short war: in 2022, the draft budget for 2025 suggested reducing total spending to 29.2 trillion rubles (about $288 billion). In 2023, the Finance Ministry also planned to decrease spending by 2025.
Instead, the desire to finance the war and the military-industrial complex has grown, and the authorities are planning to spend a record 41.5 trillion rubles ($410 billion) next year. That said, the planned deficit is rather modest — 0.5 percent of GDP, or 1.2 trillion rubles ($11.9 billion). And all because the authorities have already calculated how much they’ll make after amending the tax code. Take these three changes, for example.
- Corporate income tax will increase from 20 to 25 percent. This key element of the tax reform will add 1.6 trillion rubles ($15.8 billion) to the budget. What’s more, Russia will have a progressive income tax scale, so tax increases will affect those who make more than 2.4 million rubles (about $23,700) a year. The Finance Ministry maintains that only three million people fall into this category, but SberCIB analysts believe that due to the rapid growth of salaries in Russia, this number could double by next year.
- Raw materials companies will pay even more. In addition to paying more in income tax, the tax on mineral extraction will increase for them, too. This includes companies producing iron ore, gold, diamonds, and mineral fertilizers.
- Increased excise taxes will also affect consumers. Starting next year, there will be an increase in the taxes levied on gasoline, as well as a variety of alcoholic drinks, carbonated beverages, and tobacco products. Manufacturers will likely pass these costs on to their customers, while the proceeds from the excise tax will go towards fighting diabetes and cardiovascular diseases (or so the government says).
The scope of the changes to the tax code is actually even broader. For example, the authorities decided that while profit tax is set to go up to 25 percent, the state-controlled oil pipeline monopoly Transneft will have to pay 40 percent. The vehicle recycling fee is set to increase yet again. And there will also be changes to the simplified tax system (STS) for small- and medium-sized businesses, most of which will no longer be exempt from VAT. Last fall, mind you, the Finance Ministry stated that it didn’t plan to raise taxes at all, while presidential aide Maxim Oreshkin and Economic Development Minister Maxim Reshetnikov called raising taxes on businesses “counterproductive.”
Things are unlikely to get better in 2025
Economists have already stopped trusting official forecasts. While they once aligned their projections with the Central Bank’s assessment and maintained that inflation would return to the four percent target in the coming year, the latest macroeconomic survey predicts six percent inflation in 2025. This reaction is understandable: the last time the Central Bank managed to meet its target inflation rate was in 2019.
The ruble will continue to weaken next year. Of course, the Economic Development Ministry claims the dollar trading rate will be 96 rubles on average, but no one else is quite so optimistic. Sber CEO German Gref believes that by the end of 2025, the exchange rate will hit 115 rubles to the dollar. The Central Bank’s macroeconomic survey also forecasts that the average exchange rate will be around 102 rubles to the dollar. But there are even bigger risks.
- Donald Trump plans to increase oil production, as do the governments of Brazil and Canada. Other things being equal, this will increase the supply surplus, causing a gradual fall in oil prices. Whereas Brent oil is trading around $75 per barrel, J.P. Morgan expects it to average at $73 a barrel in 2025 and close the year well below $70. Other analysts believe oil could plunge as low as $40 per barrel.
- Economists have begun talking about stagflation increasingly often. “Stagflation” occurs when high inflation is accompanied by a recession (i.e., an economic downturn). Sber’s Gref, analysts from the governmental think-tank TsMAKP, and several other economists are already discussing this risk. A textbook example occurred in the United States in the early 1970s, and the U.S. government was even forced to freeze prices. According to the Central Bank, however, there is zero risk of stagflation in Russia.
- The authorities have few resources for force majeure. During the first two years of the war, Russia used up half of the National Wealth Fund’s liquid reserves. And despite the high price of oil, it hasn’t actually been replenished. The draft budget for 2025 says the National Wealth Fund should increase by 1.8 trillion rubles ($17.8 billion), but Finance Minister Anton Siluanov has already said that its funds could be used to finance infrastructure projects.
Vladimir Putin, meanwhile, remains focused on the personnel problem. In his words, the country “needs to create conditions for a change in the demographic situation” in 2025. Putin previously tried to solve this issue by declaring 2024 the “Year of the Family” in Russia and allocating half a billion rubles ($4.9 million) to the occasion. According to the statistics for the first half of the year, however, the number of registered births hit new record lows every single month.
Explainer by Meduza
Key rate
The interest rate at which banks can borrow when they fall short of their required reserves, which determines the cost of credit for borrowers and influences the supply of money and credit in the economy.