Russian economy falters: From boom to near stagnation
After years of unexpected resilience, the Russian economy is showing clear signs of slowing down. Indicators suggest that the annual growth rate has dropped from 5% to nearly 0. High inflation has prompted the central bank to keep rates at 21%, and global trade tensions are further weakening Russian markets, which rely heavily on the export of raw materials.
Sergey Lavrov, Russia's Foreign Minister, recently told the American network CBS that Russia has become immune to Western sanctions because it has "restructured the economy to be self-sufficient." These assurances contradict the analysis conducted by "The Economist."
The weekly suggests that the first symptoms of economic slowdown are visible nationwide, from Kaliningrad to Vladivostok. Evidence for this includes data from Goldman Sachs, which suggests that since the end of last year, Russia’s annual economic growth rate has fallen from about 5% to nearly zero. Similar trends are shown by the monthly growth estimates prepared by the Russian Development Bank VEB. Sberbank, Russia's largest lender, also reports a downward trend in high-frequency business turnover.
Although the Russian government is more reserved in its comments, it admits that the situation has changed. At the beginning of April, the Russian central bank reported that declines in production had been registered in many sectors recently, driven by rapidly falling demand.
The end of the economic miracle
Over the past three years, signals from beyond Poland’s eastern border have been far more troubling. Despite sanctions and wartime expenditures, Russia’s economy exceeded almost all forecasts. This was due to a combination of fiscal expansion, high commodity prices, and the militarisation of the economy. After the full-scale invasion of Ukraine in 2022, economists predicted a drop in Russia's annual GDP of up to 15%. In reality, the rate fell by only 1.4%, then increased by 4.1% in 2023 and 4.3% in 2024. Consumer confidence approached record-high levels.
As it seemed that Donald Trump, the President of the United States, might give Vladimir Putin what he wants to end the war in Ukraine, some analysts predicted Russia’s economy would accelerate even more in 2025. Current data points to a completely different scenario.
What is behind the sudden slowdown? Three reasons seem most likely. The first is what Russia's central bank euphemistically calls the "structural transformation" of the economy. Previously oriented towards the West and accepting private enterprise (with some restrictions), Russia has since 2022 shifted to a wartime economy oriented towards the East.
This transformation required massive investments, not only in arms and ammunition factories but also in new supply chains to increase trade with China and India, as well as to boost domestic production. By mid-2024, real capital expenditure was 23% higher than at the end of 2021.
According to the central bank, this adaptation is now complete. Military spending follows a similar pattern. Julian Cooper from the Stockholm International Peace Research Institute (SIPRI) estimates that this year military expenditures will rise by only 3.4% in real terms, a drastic slowdown compared to the 53% increase last year. Weaker spending on "structural transformation" means slower growth.
Inflation and interest rates slow the economy
The second factor is monetary policy. Inflation in Russia has been above the central bank’s target of 4% annually for months, even exceeding 10% in February and March. This is due not only to the growing pace of military spending but also to a labour shortage caused by conscription and the emigration of skilled workers. Last year, nominal wages in Russia rose by 18%, forcing companies to raise prices. In response, the central bank tightened control.
On 25th April, the Russian central bank decided to keep the benchmark interest rate at 21%—the highest in the 21st century. Its super-hawkish stance may finally be yielding results. High rates encourage capital inflow into the rouble, making imports cheaper. Russians' inflation expectations over the next 12 months are falling from a recent peak of about 14% to around 13%. High-frequency data suggests that inflation is gradually decreasing.
Instead of spending money, Russians are placing it in savings accounts. High rates further discourage capital investments. If that were the whole story, perhaps Putin would remain satisfied. For the Russian government, a small, gradual slowdown might be a price worth paying if it means taming inflation.
The problem is that the slowdown is neither gradual nor small. This is occurring because, in recent weeks, a third factor has started to dominate all others—the external conditions have deteriorated. As the US trade war escalates, global growth forecasts have fallen, and oil prices along with them.
Falling oil prices a disaster for Russia
Economists are particularly concerned about the situation in China—Russia's largest oil buyer. The International Monetary Fund has lowered its expectations for China’s GDP growth in 2025 from 4.6% to 4%. Falling oil prices are causing numerous problems in Russia. They have hit the stock market, where oil companies account for a quarter of the capitalisation. The Micex Index, which tracks the stock prices of over 50 major listed companies, has fallen by one-tenth from the last peak.
As export revenues decline, falling oil prices directly affect the real economy. The Russian budget is already feeling the effects—in March, tax revenues from oil and gas fell by 17% compared to the previous year. On 22nd April, Reuters reported, citing official documents, that the government expects a sharp drop in oil and gas sales this year.
Germany also suffers. They lost hundreds of billions of euros due to crises
Losses are also visible on the other side of the political barricade. According to the German Economic Institute (IW) in Cologne, over the past three years, the German economy has not managed to return to the 2019 level after an initial post-pandemic recovery. Without pandemic-related losses and subsequent crises, German GDP would be about 735 billion euros higher.
The most serious crisis since German reunification
Michael Grömling, Chief Economist at IW, expressed deep concern over Germany’s economic state, describing it as the most severe downturn since the country’s reunification. He pointed to the COVID-19 pandemic and the war in Ukraine as key factors behind the sharp decline in business investment, warning that it would have long-lasting effects on Germany’s production capabilities.
The total economic losses due to reduced private consumption over the past five years are estimated at over 470 billion euros. This translates to about £5,200 per German resident.
Grömling also highlights a notable change in the pattern of economic losses. He explains that during the pandemic's peak, the decline in consumer spending was the primary driver of economic damage. However, in more recent years, the growing impact has come from a significant shortfall in investment, which has become the dominant source of financial strain.
