Economy
Oil Prices and Dollar Inflation Seen as Biggest Risks for Russian Economy
April 25, 2025
- Alexander KolyandrNonresident senior fellow with the Democratic Resilience Program at the Center for European Policy Analysis (CEPA)
- Mikhail TeginJournalist
In an interview, economist Alexander Kolyandr talks about the implications of Trump’s policies for the Russian economy, how sanctions have impacted incomes, inflation and the daily lives of Russians, and why the defense sector is now the main driver of growth and the ruble is unexpectedly strong.
The original interview in Russian was published in Republic and is being republished here with their permission.
Oil price from January 6, 2020 to mid-April 2025, $ per barrel. Source: Statista
How do you assess the actions of Donald Trump and their impact on Russia – not so much the impact on the state, but on the lives of ordinary Russians?
To speak objectively about the impact, you need to look at the numbers. The White House says tariffs have not been introduced, but this makes no sense. In 2024, Russia exported $3.27 billion of goods to the US, ranking below Jordan and above Sri Lanka. The former was slapped with additional tariffs of 20%, and the latter 44%.
So it is not a question of volumes. Since 2022, Russia has been under [Biden’s June proclamation on] tariffs. It set a 35% duty on Russian imports (see here and here, and this, coupled with sanctions, has practically destroyed trade between the countries.
Applying Trump’s formula to the current situation ($3.0 billion one way and about $0.5 billion the other) tells us that a tariff of around 40% should be levied on Russian imports. But since a 35% tariff is already in effect, the issue has not even been raised.
If we take the figures from before 2022, when trade flows were approximately equal, the US tariff would be around 10%... not 35%, as it is now.
So the current sanctions in some sense have protected Russia from Trump’s “tariff chaos?”
No, rather the opposite. Without sanctions, Russia could import more from the US. For example, spare parts for Boeing aircraft, various equipment, agricultural inputs, antibiotics, additives, special machinery – in general, Russia would be happy to buy all of this.
To speak objectively about the impact, you need to look at the numbers. The White House says tariffs have not been introduced, but this makes no sense. In 2024, Russia exported $3.27 billion of goods to the US, ranking below Jordan and above Sri Lanka. The former was slapped with additional tariffs of 20%, and the latter 44%.
So it is not a question of volumes. Since 2022, Russia has been under [Biden’s June proclamation on] tariffs. It set a 35% duty on Russian imports (see here and here, and this, coupled with sanctions, has practically destroyed trade between the countries.
Applying Trump’s formula to the current situation ($3.0 billion one way and about $0.5 billion the other) tells us that a tariff of around 40% should be levied on Russian imports. But since a 35% tariff is already in effect, the issue has not even been raised.
If we take the figures from before 2022, when trade flows were approximately equal, the US tariff would be around 10%... not 35%, as it is now.
So the current sanctions in some sense have protected Russia from Trump’s “tariff chaos?”
No, rather the opposite. Without sanctions, Russia could import more from the US. For example, spare parts for Boeing aircraft, various equipment, agricultural inputs, antibiotics, additives, special machinery – in general, Russia would be happy to buy all of this.
“It is US sanctions, not US tariffs, obstructing trade. They are doing more harm.”
Sanctions have to some extent isolated the Russian financial market. Has this protected it?
In a limited sense, yes. The financial market was less exposed to the global shock than it would have been otherwise. With a fully open capital account, the losses would have been much bigger. In the current structure, Russia found itself in relative isolation, and this limited the fallout. There were, of course, losses, but they were driven by other factors.
What were they?
First of all, broad sentiment and a lack of prospects for agreements on Ukraine, not global trade directly.
MT: What risks do you see for the Russian budget currently?
There are several. The first is the price of oil. What’s important here is not the current price, but the average for the year. If it falls $10 per barrel, oil and gas fiscal revenues will decrease about $25 billion. This is significant, but it can be compensated for by the National Wealth Fund (NWF). Meanwhile, the decrease can be compensated for by a weaker ruble – the budget gets rubles from trade, and the weaker the ruble, the more rubles the budget gets. But as soon as you weaken the exchange rate, inflationary pressure appears.
And this is the second risk: dollar inflation and general uncertainty. The Central Bank (CBR) will be less willing to start lowering its key interest rate. Amid sanctions, inflation and uncertainty, especially with falling oil prices, the key rate will most likely remain high. And this will slow down the economy, especially its nonsubsidized parts – primarily those not connected to the defense industry.
How might this affect taxes?
As for taxes, the Russian economy already de facto operates at “two speeds”: the military side is growing, and the civilian side stagnating. This will be reflected in growth rates and thus in tax revenues. The VAT, corporate income tax and personal income tax are all directly linked to economic activity. Accordingly, the slower the economy grows, the less money the budget will get in non-oil and gas taxes.
Is there anything left in the NWF? Can it compensate for lower tax receipts?
Yes, it can. There is money in the NWF, plus more money for 2024 will come in. The problem lies elsewhere, though. The budget for 2025 is calculated based on an economic growth forecast of 2.5%. If growth is only 1%, non-oil and gas taxes will be considerably lower.
In a limited sense, yes. The financial market was less exposed to the global shock than it would have been otherwise. With a fully open capital account, the losses would have been much bigger. In the current structure, Russia found itself in relative isolation, and this limited the fallout. There were, of course, losses, but they were driven by other factors.
What were they?
First of all, broad sentiment and a lack of prospects for agreements on Ukraine, not global trade directly.
MT: What risks do you see for the Russian budget currently?
There are several. The first is the price of oil. What’s important here is not the current price, but the average for the year. If it falls $10 per barrel, oil and gas fiscal revenues will decrease about $25 billion. This is significant, but it can be compensated for by the National Wealth Fund (NWF). Meanwhile, the decrease can be compensated for by a weaker ruble – the budget gets rubles from trade, and the weaker the ruble, the more rubles the budget gets. But as soon as you weaken the exchange rate, inflationary pressure appears.
And this is the second risk: dollar inflation and general uncertainty. The Central Bank (CBR) will be less willing to start lowering its key interest rate. Amid sanctions, inflation and uncertainty, especially with falling oil prices, the key rate will most likely remain high. And this will slow down the economy, especially its nonsubsidized parts – primarily those not connected to the defense industry.
How might this affect taxes?
As for taxes, the Russian economy already de facto operates at “two speeds”: the military side is growing, and the civilian side stagnating. This will be reflected in growth rates and thus in tax revenues. The VAT, corporate income tax and personal income tax are all directly linked to economic activity. Accordingly, the slower the economy grows, the less money the budget will get in non-oil and gas taxes.
Is there anything left in the NWF? Can it compensate for lower tax receipts?
Yes, it can. There is money in the NWF, plus more money for 2024 will come in. The problem lies elsewhere, though. The budget for 2025 is calculated based on an economic growth forecast of 2.5%. If growth is only 1%, non-oil and gas taxes will be considerably lower.
“Then, the government, as has happened before, will say ‘we have no money’ and will start postponing expenditures or implicitly refusing to fund things.”
Part of the Druzhba pipeline, which carries oil from the eastern part of European Russia to Europe. Source: Wiki Commons
But obviously, no one is going to cut military spending, not only because the war continues and no one wants it to end – and it will take much time and money to reequip the army – but also because the government views the military-industrial complex as the main engine of economic growth.
What makes you think that the government views the military-industrial complex like this?
It’s the old Soviet model, where you have the military-industrial complex that pulls everything else along with it. The government has spent the last 30 years looking for something to do that. They tried consumption, they tried energy, they tried foreign investment. Before the war, they tried to subsidize construction, which continued in the first two years of the war. Now, it’s the military-industrial complex, because they need something that will move the economy forward and support all the other sectors through a multiplier effect.
Generally speaking, no one is going to cut military spending. In principle, even if there is a budget deficit of 2%, you can always borrow money. At the same time, if you have high rates, then borrowing is more expensive and thus the interest expenses will grow for the budget.
Plus, since the budget is usually planned for three years, there is always the possibility, on paper at least, to shift some expenditures from one year to another. Overall, I foresee no fiscal disaster, unless something worse happens than we are seeing now.
But the economic situation may sour if the crisis scenario outlined by the CBR materializes. This scenario is based on a hypothetical major deterioration in global financial markets.
This, the CBR reckons, could lead to a global financial crisis. In this scenario, a 3-4% economic contraction is possible [for Russia] in 2025, with a rebound possible only in 2027. Inflation could accelerate to 13-15%, and the key rate could be hiked to 25% (from the current 21%).
It may even lead to a decline in real incomes, as the economic downturn would take place against the backdrop of continuing inflation. This is a bad scenario, which in many respects is in line with, and in some respects even worse than, what happened in 2008-09. But it is based on a global crisis and a significant drop in oil prices. We do not see any signs at this point that this is forthcoming.
There is, by the way, an important long-term effect of Trump’s “tariff wars.” Now, all countries will try to maintain a trade [deficit] with the US, because if you have a trade [surplus], you will get whacked in the form of tariffs.
For Europe, for example, it is easiest to buy US weapons, but the EU wants to rely more on its own kit. In that case, it is easiest to boost purchases of US oil and liquefied gas. Accordingly, foreign countries’ demand for Russian LNG, not to mention Russian oil and pipeline gas, looks set to decline.
Russia’s future return to the European energy market is being pushed further and further back, and current buyers will be able to insist on even greater discounts. This will put pressure on the budget in the long term.
Currently, the economy and the budget generally are still oriented toward the civilian sphere, despite the growth in spending on the military sphere. But can the economy switch to a war footing where the entire budget and all production are subordinated to the needs of the special operation – especially considering that, as you say, no one wants it to end?
Technically, yes, this is not a “wartime budget” in the full sense of the term. Russia is large, and there is no total mobilization.
What makes you think that the government views the military-industrial complex like this?
It’s the old Soviet model, where you have the military-industrial complex that pulls everything else along with it. The government has spent the last 30 years looking for something to do that. They tried consumption, they tried energy, they tried foreign investment. Before the war, they tried to subsidize construction, which continued in the first two years of the war. Now, it’s the military-industrial complex, because they need something that will move the economy forward and support all the other sectors through a multiplier effect.
Generally speaking, no one is going to cut military spending. In principle, even if there is a budget deficit of 2%, you can always borrow money. At the same time, if you have high rates, then borrowing is more expensive and thus the interest expenses will grow for the budget.
Plus, since the budget is usually planned for three years, there is always the possibility, on paper at least, to shift some expenditures from one year to another. Overall, I foresee no fiscal disaster, unless something worse happens than we are seeing now.
But the economic situation may sour if the crisis scenario outlined by the CBR materializes. This scenario is based on a hypothetical major deterioration in global financial markets.
This, the CBR reckons, could lead to a global financial crisis. In this scenario, a 3-4% economic contraction is possible [for Russia] in 2025, with a rebound possible only in 2027. Inflation could accelerate to 13-15%, and the key rate could be hiked to 25% (from the current 21%).
It may even lead to a decline in real incomes, as the economic downturn would take place against the backdrop of continuing inflation. This is a bad scenario, which in many respects is in line with, and in some respects even worse than, what happened in 2008-09. But it is based on a global crisis and a significant drop in oil prices. We do not see any signs at this point that this is forthcoming.
There is, by the way, an important long-term effect of Trump’s “tariff wars.” Now, all countries will try to maintain a trade [deficit] with the US, because if you have a trade [surplus], you will get whacked in the form of tariffs.
For Europe, for example, it is easiest to buy US weapons, but the EU wants to rely more on its own kit. In that case, it is easiest to boost purchases of US oil and liquefied gas. Accordingly, foreign countries’ demand for Russian LNG, not to mention Russian oil and pipeline gas, looks set to decline.
Russia’s future return to the European energy market is being pushed further and further back, and current buyers will be able to insist on even greater discounts. This will put pressure on the budget in the long term.
Currently, the economy and the budget generally are still oriented toward the civilian sphere, despite the growth in spending on the military sphere. But can the economy switch to a war footing where the entire budget and all production are subordinated to the needs of the special operation – especially considering that, as you say, no one wants it to end?
Technically, yes, this is not a “wartime budget” in the full sense of the term. Russia is large, and there is no total mobilization.
“The government is trying not to shock society, and it has waged the war ‘in the background’. But military-industrial complex expenditures are growing, and the government sees the military-industrial complex as the main driver of the economy.”
So these expenditures will only grow. Still, a multifold increase is unlikely – it would kill the rest of the economy. Russia is not waging a total war, as in 1941. The main goal of the government domestically is for ordinary Russians to feel as few changes as possible.
But people feel inflation – prices are rising. And the observed rate is about 14-15%.
Yes. Official inflation is slightly above 10%, but it will begin to decline slightly against the backdrop of slowing growth and a ruble strengthened by geopolitical hopes.
So income growth is keeping up with inflation?
The average wage has grown and now amounts to more than RUB 89,000 a month. But averages can be misleading. The income growth is uneven both by region and by field of work. At one point, incomes of low-income groups of the population grew faster, but then that flipped.
How have the rich kept getting richer in these conditions?
Because they have assets. If you live paycheck to paycheck, inflation eats away your money. But if you have savings, you get 20% interest on your money, like now, and you benefit.
Plus, the economy is still working, with all the elements of a market economy intact. Some people make money in defense, some in trade, some open restaurants.
But people feel inflation – prices are rising. And the observed rate is about 14-15%.
Yes. Official inflation is slightly above 10%, but it will begin to decline slightly against the backdrop of slowing growth and a ruble strengthened by geopolitical hopes.
So income growth is keeping up with inflation?
The average wage has grown and now amounts to more than RUB 89,000 a month. But averages can be misleading. The income growth is uneven both by region and by field of work. At one point, incomes of low-income groups of the population grew faster, but then that flipped.
How have the rich kept getting richer in these conditions?
Because they have assets. If you live paycheck to paycheck, inflation eats away your money. But if you have savings, you get 20% interest on your money, like now, and you benefit.
Plus, the economy is still working, with all the elements of a market economy intact. Some people make money in defense, some in trade, some open restaurants.
Fed Chair Jerome Powell. Source: Wiki Commons
Why is the ruble strengthening against the dollar and the euro, even though there are no obvious successes in talks and public comments already basically indicate their failure?
This is not so much about Russia. The world has begun to ask itself whether the US is still a safe haven. Dollar assets are being sold off.
In the US, stocks, bonds and the dollar are all retreating. This is typical for a country with a developing economy, not a developed one. Ordinary people and investors are afraid that Trump will put pressure on the Fed, try to fire Fed Chair Jerome Powell and move to managing monetary policy “manually.” All this creates a sense of uncertainty.
And because Russian investors simply have nowhere to run, the ruble is strengthening?
Yes. They have almost no choice: access to foreign markets is closed or extremely limited, so they flock to the ruble, no matter what happens. Perhaps some buy crypto, but globally they have limited options.
Is there a risk that the CBR with its [measures to rein in lending] will be late to soften policy and, taking into account the structure of the economy, “freeze” it?
That is a good question, and there is no simple answer. Because it concerns primarily the actions of the CBR and not the situation in the economy. The CBR has proven extraordinarily professional and competent and has not made any mistakes. Its measures are slowing down corporate and private lending. But so far, they are not freezing it, meaning firms and individuals with healthy financials can continue to borrow.
The main thing is that an economic slowdown does not take place amid high, unabated inflation. Getting out of such a situation, as the experience of Western countries in the 1970s and 1980s shows, would be very difficult and painful.
This is not so much about Russia. The world has begun to ask itself whether the US is still a safe haven. Dollar assets are being sold off.
In the US, stocks, bonds and the dollar are all retreating. This is typical for a country with a developing economy, not a developed one. Ordinary people and investors are afraid that Trump will put pressure on the Fed, try to fire Fed Chair Jerome Powell and move to managing monetary policy “manually.” All this creates a sense of uncertainty.
And because Russian investors simply have nowhere to run, the ruble is strengthening?
Yes. They have almost no choice: access to foreign markets is closed or extremely limited, so they flock to the ruble, no matter what happens. Perhaps some buy crypto, but globally they have limited options.
Is there a risk that the CBR with its [measures to rein in lending] will be late to soften policy and, taking into account the structure of the economy, “freeze” it?
That is a good question, and there is no simple answer. Because it concerns primarily the actions of the CBR and not the situation in the economy. The CBR has proven extraordinarily professional and competent and has not made any mistakes. Its measures are slowing down corporate and private lending. But so far, they are not freezing it, meaning firms and individuals with healthy financials can continue to borrow.
The main thing is that an economic slowdown does not take place amid high, unabated inflation. Getting out of such a situation, as the experience of Western countries in the 1970s and 1980s shows, would be very difficult and painful.
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