Russia’s economy expected to cool down in 2025

MOSCOW

Russia’s economy is expected to cool down in 2025 after leaving a year fighting inflation behind.

The Russian economy is estimated to have wrapped up 2024 with a 3.9% growth, according to data from the country’s Economic Development Ministry, Central Bank, and various institutions, compiled by Anadolu.

Russia’s economy is expected to have grown above the world average of 3.2% for two consecutive years.

Meanwhile, the country’s unemployment rate still hovers at the lowest level of 2.3% as of November 2024.

The record unemployment rate is led by the 9% year-on-year increase in the inflation-adjusted real salaries in the first nine months of 2024, as wages have been on the rise due to labor shortages.

Russian officials say that the economy overheated due to the war in Ukraine, while some agree that the main reason for the overheat is related to the lack of industrial capacity to keep up with domestic demand and import sanctions.

Russia’s Central Bank raised its policy rate by 200 basis points to 21% in October 2024, as the soaring demand led by wage increases pushed inflation above the target. The annual inflation was at 9.5% as of late December last year, and the bank aims to reach 4% inflation by the end of 2026.

Experts warn that a hard landing may be on the horizon with recession or near-zero economic growth in Russia’s fight against inflation.

Russia was subjected to the most comprehensive sanctions in recent history, and yet, the country displays a strong economic performance, driven by the government’s budget incentives and significantly raised defense spending, while working toward accelerating import substitution processes against the restrictions on its banking sector.

Russia’s Central Bank Governor Elvira Nabiullina said labor reserves and production capacities were almost exhausted last year, and the lack of these resources may lead to a slowdown in the country’s economy despite the stimulation attempts.

The bank tightened its monetary policy due to overheating while investments in fixed assets slowed, rising only by 14.5% in the first quarter of 2024 and 5.1% in the third quarter.

The Russian Ministry of Economic Development estimates that the country’s economy will grow by 2.5% this year, while the Central Bank expects a growth of 0.5% to 1.5%.

Andrey Kostin, the CEO of Russia-based VTB Bank, told Anadolu that the bank estimates the Russian economy will grow by 2%.

As for the labor shortages, Russian President Vladimir Putin and several officials said it is one of the main risks for economic growth.

The problem of labor shortages was further deepened due to structural and demographical issues, the war in Ukraine, and the shift of available labor resources to the defense industry. Labor shortages may become more severe with the hardening of immigration policies.

Over 90% of companies operating in the country experienced labor shortages, according to a report by the Russian Institute for Entrepreneurship and Economic Development in April 2024.

- Changes in energy sector

The uncertainties over the future of oil prices and the potential expansion of sanctions put the energy sector on the agenda, as a possible economic slowdown in China, Russia’s largest trading partner with an annual bilateral trade volume of around $250 billion, came to the fore.

Russia’s access to the international markets and key technological products is blocked via sanctions, hampering its economic developments and the fluctuations in oil prices cause further uncertainties.

Due to sharp declines in oil, one of Russia’s main exports, the uncertainties in its budget balance are on the rise.

Russian energy firm Gazprom announced on Jan. 1 to suspend natural gas deliveries to Europe through Ukraine, while the country’s main pipelines to Europe have also become inactive after the war in Ukraine.

Russia recovered some of its losses in oil shipments with China and India increasing imports to the country, and it aims to reduce its losses in Europe by increasing its liquefied natural gas capacity.

Meanwhile, US President-elect Donald Trump’s promises to end the war in Ukraine were met with cautious optimism in Russian markets, though officials are certain that the sanction pressures will continue, at least in 2025.

*Writing by Emir Yildirim in Istanbul