ECONOMICS
The Russian economy is currently coping with rising military expenditures, but its resilience is limited. The main risks it faces in 2025 come from the threat of falling oil prices and stricter sanctions. Even if neither of these developments occurs, the economy will remain in a difficult state, with inflation eroding all the benefits of wage growth. Even if a ceasefire in Ukraine is reached, the Russian economy, which has spent the past three years adjusting to a wartime footing, is unlikely to recover unless the cessation of hostilities is paired with the lifting of sanctions. Ironically, a lull in the fighting could even create new challenges.
Russia enters 2025 grappling with so many economic challenges that even government-affiliated experts predict stagflation, a banking crisis, and rising bankruptcies. Despite these projections, the Ministry of Economic Development is sticking to its GDP growth forecast of 2.5%. Forecasting GDP a year ahead is notoriously difficult, with even the most respected analytical centers rarely more accurate than fortune-telling. The task becomes even harder when the official figures are dubious, such as the 4% GDP growth reported for 2024 — a number that is facing increasing skepticism from economists. However, there is little debate about the two main factors that could dramatically alter Russia's economic landscape: one is an end to the war in Ukraine (whether temporary or permanent), and the other is a sharp drop in oil prices.
A fall in oil prices
The Russian economy, and particularly its budget, is heavily dependent on oil and gas, which account for a quarter of all budgeted revenues for 2025. The budget assumes an average oil price of around $70 per barrel, but actual prices could fall due to declining global demand. The World Bank, for example, predicts that oil prices will drop from the current $80 per barrel of Brent crude to an average of $73 in 2025 (implying about $60 for Russian oil). The Organization of the Petroleum Exporting Countries (OPEC) is more optimistic, forecasting a slight increase in demand. That being said, the group has lowered its projections five times over the past six months.
There are more extreme scenarios as well. Analysts at the Oil Price Information Service have warned that oil prices could drop to $30-40 per barrel if OPEC+ countries abandon production cuts in a bid to maintain market share. This would “effectively amount to a price war over market share that could send oil to lows not seen since Covid,” according to MST Marquee senior energy analyst Saul Kavonic.
Saudi Arabia has already opted to prioritize market share over price stability. According to the Financial Times, the kingdom was ready to abandon its unofficial target of $100 per barrel and increase production in December to maintain its market share.
For Russia, a decline in oil prices would result in significant budget losses and a growing deficit, which is currently projected at a relatively modest 1.1 trillion rubles, or 0.5% of GDP. But a mere $10 drop in oil prices reduces oil and gas revenues by about 2 trillion rubles. Thus, if prices fall from the planned $69.7 down to the entirely possible price of $58 per barrel (the World Bank's forecast of $73 for Brent minus the Urals discount), the deficit could rise to 3 trillion rubles, or 1% of GDP. If global prices drop to $40, the deficit could reach nearly 10 trillion rubles (over 3% of GDP). Such a sharp decline would push Russian oil companies to the brink of profitability.
“This is a fundamental shock that will affect the entire structure of the economy. Export revenues support the ruble exchange rate and the budget. It's a mistake to think that this won't impact non-export budget revenues. Most budget revenues are indirectly tied to export revenues,” explains Oleg Itskhoki, an economics professor at the University of California. “A sharply increased budget deficit would be difficult to finance through domestic borrowing. It's unclear who would voluntarily buy government debt under such conditions — likely no one except banks under pressure from the [Russian] Central Bank or Finance Ministry.”
Banks, however, will have fewer resources to invest in government debt due to reduced lending caused by the Central Bank's record-high interest rates. Experts at the government-aligned Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) have been warning since this past fall about the possibility of a banking crisis. “Preliminary November data indicate a sharp contraction in the credit market, which could trigger such a crisis,” reads the think tank’s December overview.
A GDP contraction exceeding 3% has not occurred in Russia since the global financial crisis of 2008, when the country tapped into its substantial financial reserves to cushion the blow. While Russia’s official reserves are now larger, liquid assets would last only a few months in the event of a dramatic oil price collapse. Without reserves or access to external and domestic borrowing, a sharp decline in living standards would be unavoidable.
A ceasefire or the end of the war
Russia's economic woes are primarily caused by the invasion of Ukraine and the resulting international sanctions. The longer the war continues, the deeper the crisis will become. However, if peace talks after Donald Trump's inauguration lead to a long-term ceasefire, Russia’s economy will not immediately benefit. On the contrary, it could experience severe stress in the short term due to the sudden end of military spending, which the economy has grown dependent on over the past three years.
“If active combat operations cease, defense and security spending will likely be cut, causing the economy to lose trillions of rubles in budget funds — defense contracts will dry up, payments to contractors will grind to a halt, and military compensations will end. This removal of a 'wartime Keynesian stimulus' could trigger an economic downturn unless another positive stimulus, such as sanctions relief or reintegration into global trade, emerges — which I find unlikely,» notes Tatyana Mikhailova, a visiting professor at the University of Pennsylvania. “Even if sanctions are lifted (a remote possibility), rebuilding trust with counterparties and investors will take time. I foresee capital flight if Russian money becomes acceptable in the West again.”
Dmitry Nekrasov, director of the Center for Analysis and Strategies in Europe (CASE), lays out a similar scenario: «In the event of a war's end, I would expect a sharp easing of monetary policy and an immediate devaluation of 20–35%. The freed-up labor force from the military sector would need to be reallocated. Inflation will remain high for another 1–2 years, even with a quick end to the war.”
The illusion of stability and a wave of defaults
Economists interviewed by The Insider agree that if external conditions remain unchanged (meaning that oil prices do not collapse and the war in Ukraine continues), 2025 will likely resemble 2024: military spending will grow as planned, oil revenues will flow in, inflation will remain high, and public dissatisfaction with it will rise as price increases erode wage gains (which are already slowing).
“The situation will be similar to 2024 but worse regarding inflation, a shortage of cheap labor in civilian sectors, investment in civilian industries, public-sector wages, pensions, and healthcare,» predicts Tatyana Mikhailova.
Economic stagnation will compound these issues, especially dangerous amidst persistent inflation. “Much will depend on government policy. If they continue flooding the economy with money during stagnation, inflation will remain high without significant growth. If they avoid this, growth will be low, but inflation might also decrease,» says Ruben Enikolopov, an economics professor at Pompeu Fabra University.
The first scenario — stagflation — would mean ongoing price rises combined with minimal or no economic growth, leading to declining real incomes. The second, more optimistic scenario, would see reduced inflation alongside modest economic growth, stabilizing or slightly increasing real incomes. Certain sectors, like construction, already face challenges. Declining mortgage lending due to high interest rates and the end of subsidized programs slowed construction in 2024, with growth of just 0.2% in the third quarter compared to 3-4% in the first two quarters, according to CMASF.
The current situation in Russia appears stable, primarily due to the macroeconomic consistency maintained over the past two decades with budget and trade surpluses, notes Oleg Itskhoki. But the situation is changing:
“The budget surplus is gone, and if trade surpluses disappear as well, that will amount to two major problems compounded by a third — inflation and exchange rate instability, which the Central Bank can no longer manage. As a result, various crisis points emerge, and predicting the trajectory of the unfolding crisis becomes impossible. For instance, there could be a coordinated action by depositors withdrawing their funds simultaneously or a wave of defaults, where one triggers another. This raises the question of whether the state has sufficient resources to stop such a wave. There is a whole range of events that could occur, and we truly do not know if the resources behind the facade of apparent stability are enough to address different crisis scenarios. A series of events could act as triggers for a crisis that neither the Central Bank nor the Ministry of Finance would be able to contain.”
Ruben Enikolopov concurs:
“We currently have two parallel economies — the military and the civilian. The military sector is performing well; it is the engine of growth. The civilian sector, however, is not growing, and it’s fortunate if it isn’t shrinking. Costs in the civilian sector — capital and labor — are rising sharply. The cost of money is high because the Central Bank is fighting inflation, and, most importantly, labor costs are increasing due to a catastrophic shortage of workers. As a result, the civilian sector will be the first to falter. Once companies stop seeing profit growth, they won’t be able to cover rising costs, forcing them to shut down significant parts of their businesses, potentially triggering a wave of defaults.
In such a scenario, banks would also start losing money and would no longer be able to support the budget as easily. If the government needs to finance a deficit at the same time, banks simply won’t be able to purchase government bonds. For now, banks have some 'reserves' to rely on, which should last for a while, but the question remains how severe the problems will be and how long they will persist.”