More frightening than recession, what could the Russian economy face?

Economists told Business Insider that Russia's economy is not collapsing, but the country will face a difficult situation by 2025 if it continues to maintain a special military campaign in Ukraine.

In 2024, the Russian economy will remain stable with GDP growth at the end of the year at 3.9-4%. (Source: The Moscow Times)

Since launching a special military operation in Ukraine in February 2022, the Kremlin has restructured the economy, prioritizing military spending, imposing export bans, tapping the sovereign wealth fund and increasing trade with "friendly" countries.

In 2024, the Russian economy remains stable with the growth rate of Gross Domestic Product (GDP) at the end of 3.9-4%, the unemployment rate in the country is at a record low of 2.3%, and the real income of the population has increased by 9%.

However, inflation is a major concern in the country. In addition, the ruble has weakened by 15% since the beginning of the year while the price of bread has increased by 10-15% in many regions.

Vedomosti newspaper has recorded a record increase in prices of essential goods in more than 20 years.

In addition, unprecedented defense spending, labor shortages and Western sanctions have put Russia in a difficult position.

Persistent inflation

Associate Professor Roman Sheremeta at the Weatherhead School of Management at Case Western Reserve University (USA) commented that the continued special military campaign will put significant pressure on the already tight budget of the country of white birch.

Russia has increased defense spending from $59 billion in 2022 to $109 billion in 2023 and $126.8 billion for 2025. Next year, defense will account for 32.5% of Russia's federal budget, up from 28.3% in 2024.

Soaring defense spending has boosted the Russian economy in recent years, but it has also contributed to rising inflation. Russian President Vladimir Putin recently confirmed that inflation in the country could reach 9.5% by 2025.

To control this situation, the Central Bank of Russia has raised its key interest rate from 19% to 21% in October 2024, a record high. This interest rate will affect the profit margins of businesses in the country of birch trees.

“The key question is how high will inflation go?” said Alexander Kolyandr, a financial analyst and non-resident senior fellow at the Center for European Policy Analysis.

Speaking at an investment forum in Moscow earlier this month, Mr Putin acknowledged that inflation was at a “relatively high level” and urged the government and the Central Bank to rein it in.

TsMAKP, a Russian research group, warns that Russia's failure to tackle inflation could push the country into stagflation (a scenario in which growth is low and inflation is high). This situation would be harder to escape than a recession.

The European Union (EU) has launched a new package of sanctions targeting the "dark fleet" and that could cause a sharp decline in Russia's oil revenue. (Source: tbsnews)

Economic growth slows down

President Putin's country is expected to see lower-than-expected economic growth in 2025.

In its October 2024 World Economic Outlook report, the International Monetary Fund (IMF) lowered its estimate of Russia's GDP growth from 1.5% to 1.3%.

“Overall growth will be quite slow. Many sectors are likely to contract,” predicted Iikka Korhonen, head of research at the Bank of Finland’s Institute for Emerging Economies.

"The continued special military campaign will put significant pressure on the country's already tight budget," said Associate Professor Roman Sheremeta at the Weatherhead School of Management at Case Western Reserve University (USA).

According to The Wall Street Journal , US sanctions against Gazprombank and other financial institutions in November 2024 caused the ruble to fall sharply.

Companies in Russia are also cutting back on expansion plans. About 200 shopping malls in Russia are at risk of bankruptcy due to rising debt burdens, and nearly a third of the country’s freight companies fear bankruptcy by 2025.

Russia's largest mobile operator MTS blamed interest-related costs for a nearly 90% drop in third-quarter 2024 net profit.

“The elite are fighting for survival,” Alexandra Prokopenko, a former Russian Central Bank official and now a fellow at the Carnegie Russia Eurasia Center in Berlin, told The Wall Street Journal.

Indeed, in recent months, Russian CEOs and business leaders have increased their criticism of rising interest rates and Western sanctions.

"Sky-high interest rates are making it difficult for companies," Sergei Chemezov, CEO of defense conglomerate Roste, said in October 2024.

Another "blow" to oil

While Russia's share of oil and gas revenues will decline in 2023, the country hopes that the revenue source will account for about 27% of the country's total budget revenues by 2025.

“As long as Russia can sell as much crude oil as it can at current prices, it will have enough revenue to sustain its special operations campaign until 2025,” Korhonen said.

Earlier this month, Russian state oil company Rosneft agreed to sign a 10-year, $13 billion deal to supply crude oil to India.

However, analyst Kolyandr believes that Russia's oil revenue outlook is "too optimistic" as global oil prices could be lower next year.

Traders expect global oil prices to fall from an expected $80 a barrel in 2024 to between $65 and $71 a barrel in 2025 due to slowing demand and a shift to cleaner energy.

Meanwhile, the Group of Seven (G7) countries have set a price ceiling of $60 per barrel for Russian oil from December 2022.

President Putin's country has been able to circumvent the price cap by using a "shadow fleet" to divert oil exports to countries like China and India. However, the European Union (EU) has recently launched a new package of sanctions targeting the "shadow fleet" that could cause Russia's oil revenue to plummet.

Russia’s economic performance in 2025 will depend on the availability of resources, Korhonen said. And as of October 2024, the Russian Central Bank has about $614.4 billion in international reserves.

Meanwhile, Mr. Kolyandr said, whether Moscow faces any crisis in 2025 will depend on everything that happens during the year, including world oil prices, sanctions, President-elect Donald Trump's trade policy and the labor market.

Source: https://baoquocte.vn/dang-so-hon-ca-suy-thoai-kinh-te-nga-co-the-doi-mat-voi-dieu-gi-298799.html