Economy
Peace Hopes Lift Russian Economic Indicators, But Not Broader Outlook
April 2, 2025
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Sergei Shelin
Journalist, independent analyst
Journalist Sergei Shelin explains how, despite rising government spending and falling oil export earnings, hopes for a ceasefire have managed to strengthen the ruble, push inflation lower and buoy the stock market. This has done nothing to fix the economy’s longer-term problems, however.
The original text in Russian was published in the Moscow Times and is being republished here with the author’s permission.
Another Russian economic miracle happened in the last two or three months.
Seasonally adjusted annualized inflation came in at 14.1% in December, 10.6% in January and 7.6% in February before falling to 4.0% in mid-March. Up until the beginning of February, the ruble had been fluctuating around 100 versus the dollar, but in the middle of last month it suddenly strengthened, and by March 20 the USD/RUB rate was around 80-85. The ruble-denominated MOEX Russia Index has rallied as well, jumping from 2,500 points in December to 3,100-3,200 points in March.
Another Russian economic miracle happened in the last two or three months.
Seasonally adjusted annualized inflation came in at 14.1% in December, 10.6% in January and 7.6% in February before falling to 4.0% in mid-March. Up until the beginning of February, the ruble had been fluctuating around 100 versus the dollar, but in the middle of last month it suddenly strengthened, and by March 20 the USD/RUB rate was around 80-85. The ruble-denominated MOEX Russia Index has rallied as well, jumping from 2,500 points in December to 3,100-3,200 points in March.
Do you or do you not personally support the proposal for a ceasefire between Russia and Ukraine? Levada Center, March 2025
Dark blue: Definitely support
Light blue: Probably support
Yellow: Probably do not support
Red: Definitely do not support
Gray: Hard to say
Dark blue: Definitely support
Light blue: Probably support
Yellow: Probably do not support
Red: Definitely do not support
Gray: Hard to say
In the grip of paradoxes
The reason for this unexpected turnaround was hopes for an end to the war, even though the objective challenges facing the Russian economy are only growing.
Oil is falling in price. The average-weighted price of Russian crude fell to $61.10 per barrel in February and then to $58.10 per barrel in March. Meanwhile, the price penciled into the 2025 budget is $69.70 per barrel. Under pressure from OPEC, Russian oil production has fallen (from, according to the IEA, 9.20 million barrels per day in January to 9.12 million barrels per day in February), as have physical exports.
A fall in earnings from a country’s main export usually portends a weakening of the national currency. But the Russian economy, as always, defies logic: as mentioned, the ruble has firmed significantly. It is now much stronger than the average annual USD/RUB rate of 96.5 penciled into the budget.
Due to the strength of the ruble and the weakness of oil prices, according to Reuters, the price of a barrel of Russian crude is now 24% lower than the planned RUB 6,726.
Already in the first two months of 2025, nominal oil and gas budget revenues were slightly down versus a year earlier, while the real figure – accounting for inflation – was much lower. Non-oil and gas revenues were up about 10% in nominal terms, meaning they remained at best flat year over year in real terms.
Overall, January-February revenues were up just RUB 0.3 trillion versus the previous-year period at RUB 5.3 trillion. At the same time, expenditures soared RUB 1.9 trillion to over RUB 8.0 trillion.
This was driven by higher military expenditures, which are being front-loaded. The two-month deficit reached an unprecedented RUB 2.7 trillion – more than double its size a year ago.
Such a gigantic deficit, combined with a corresponding increase in the money supply, should have accelerated inflation. Yet price growth died down by March. This paradox was a result of the previous paradox – the strengthening of the ruble, which stopped the growth of ruble prices for nonfood imported consumer goods.
But food, which is less dependent on imports, has become more expensive, with food inflation running at basically the same pace as before. “Import substitution is, of course, good, but not for the consumer,” the MMI Telegram channel muses, “and there are absolutely no signs of a slowdown in most services – everyday services, health care, tourism, hotels, theaters…”
An ambiguous blessing
The dark side of this sudden turnaround has yet to be noticed by either economic players or the general public.
Central Bank sentiment surveys indicate a broad surge in economic confidence. Borrowing conditions are seen by firms as improving. Inflation expectations both among business leaders and among households are falling.
The reason for this unexpected turnaround was hopes for an end to the war, even though the objective challenges facing the Russian economy are only growing.
Oil is falling in price. The average-weighted price of Russian crude fell to $61.10 per barrel in February and then to $58.10 per barrel in March. Meanwhile, the price penciled into the 2025 budget is $69.70 per barrel. Under pressure from OPEC, Russian oil production has fallen (from, according to the IEA, 9.20 million barrels per day in January to 9.12 million barrels per day in February), as have physical exports.
A fall in earnings from a country’s main export usually portends a weakening of the national currency. But the Russian economy, as always, defies logic: as mentioned, the ruble has firmed significantly. It is now much stronger than the average annual USD/RUB rate of 96.5 penciled into the budget.
Due to the strength of the ruble and the weakness of oil prices, according to Reuters, the price of a barrel of Russian crude is now 24% lower than the planned RUB 6,726.
Already in the first two months of 2025, nominal oil and gas budget revenues were slightly down versus a year earlier, while the real figure – accounting for inflation – was much lower. Non-oil and gas revenues were up about 10% in nominal terms, meaning they remained at best flat year over year in real terms.
Overall, January-February revenues were up just RUB 0.3 trillion versus the previous-year period at RUB 5.3 trillion. At the same time, expenditures soared RUB 1.9 trillion to over RUB 8.0 trillion.
This was driven by higher military expenditures, which are being front-loaded. The two-month deficit reached an unprecedented RUB 2.7 trillion – more than double its size a year ago.
Such a gigantic deficit, combined with a corresponding increase in the money supply, should have accelerated inflation. Yet price growth died down by March. This paradox was a result of the previous paradox – the strengthening of the ruble, which stopped the growth of ruble prices for nonfood imported consumer goods.
But food, which is less dependent on imports, has become more expensive, with food inflation running at basically the same pace as before. “Import substitution is, of course, good, but not for the consumer,” the MMI Telegram channel muses, “and there are absolutely no signs of a slowdown in most services – everyday services, health care, tourism, hotels, theaters…”
An ambiguous blessing
The dark side of this sudden turnaround has yet to be noticed by either economic players or the general public.
Central Bank sentiment surveys indicate a broad surge in economic confidence. Borrowing conditions are seen by firms as improving. Inflation expectations both among business leaders and among households are falling.
“Such is the uniqueness of the moment. The defense segment is satisfied with the growing and uninterrupted flow of money, while everyone else is happy with the talk of a possible end to the war.”
But this “ambiguous blessing” cannot last forever. This is obvious, even to experts who work in Russia and try not to upset the authorities.
The wisest among them resort to doublespeak: “if sanctions pressure is eased, Sovcombank chief analyst Mikhail Vasiliev forecasts the national currency will strengthen to 70-80 versus the dollar. If there is no progress in talks, the ruble exchange rate may retrace to a range of 90-100 versus the dollar, 94-104 versus the euro and 12.3-13.7 versus the yuan.”
The more hazardous experts, whom I will not name (just in case), are less ambiguous: “spring export inflows will be lower than in winter, and demand for imports will grow, meaning the ruble will gradually begin to retrace to 90 versus the dollar in the near future.”
Hopes do not fix economic imbalances
There is no arguing with this. But to understand the whole picture, recall the economic backdrop against which the notorious Putin-Trump calls have been taking place.
The situation in the Russian economy had been gradually deteriorating. The economy was spinning out of balance. The rapid growth of war spending was not compensated by a sufficient reduction in spending and crediting on the civilian side of the economy. Because of these imbalances, inflation accelerated. Constant hikes to the Central Bank’s key rate did not help things.
Whether or not the hopes for an end to the war are well founded, they have not fixed these underlying imbalances. They have only shown the absurdity of the regime’s rhetoric about the supposed economic benefits of Western sanctions. The same goes for official assurances that the Russian economy is now bigger than it was before the war.
The Russian economy has indeed adapted to sanctions, but outside of the defense segment it is deteriorating and would very much like the sanctions pressure to end.
The recent improvement across several economic indicators is driven almost entirely by the Russian public’s enthusiasm about ceasefire talks and has no objective basis. The increased foreign interest in Russian assets is also playing a role, but it is hardly a major one.
If Russia’s military spending does not decrease and crediting, including in the civilian segment, does not slow down, inflation will begin to rise again. In addition, the ruble will weaken, as at the current strong exchange rate and low oil prices, exports and imports cannot be balanced.
Even the most optimistic case for Russia entails economic stagnation. For example, the March forecast of the OECD, predicated on “a peaceful resolution of the conflict,” has Russian GDP growing just 1.3% this year and 0.9% next year.
If the war keeps going, things will go back to how they were just a few months ago – with unabated inflation in the economy and permanent disagreements in the Kremlin over the best way to impose sacrifices on the country.
The wisest among them resort to doublespeak: “if sanctions pressure is eased, Sovcombank chief analyst Mikhail Vasiliev forecasts the national currency will strengthen to 70-80 versus the dollar. If there is no progress in talks, the ruble exchange rate may retrace to a range of 90-100 versus the dollar, 94-104 versus the euro and 12.3-13.7 versus the yuan.”
The more hazardous experts, whom I will not name (just in case), are less ambiguous: “spring export inflows will be lower than in winter, and demand for imports will grow, meaning the ruble will gradually begin to retrace to 90 versus the dollar in the near future.”
Hopes do not fix economic imbalances
There is no arguing with this. But to understand the whole picture, recall the economic backdrop against which the notorious Putin-Trump calls have been taking place.
The situation in the Russian economy had been gradually deteriorating. The economy was spinning out of balance. The rapid growth of war spending was not compensated by a sufficient reduction in spending and crediting on the civilian side of the economy. Because of these imbalances, inflation accelerated. Constant hikes to the Central Bank’s key rate did not help things.
Whether or not the hopes for an end to the war are well founded, they have not fixed these underlying imbalances. They have only shown the absurdity of the regime’s rhetoric about the supposed economic benefits of Western sanctions. The same goes for official assurances that the Russian economy is now bigger than it was before the war.
The Russian economy has indeed adapted to sanctions, but outside of the defense segment it is deteriorating and would very much like the sanctions pressure to end.
The recent improvement across several economic indicators is driven almost entirely by the Russian public’s enthusiasm about ceasefire talks and has no objective basis. The increased foreign interest in Russian assets is also playing a role, but it is hardly a major one.
If Russia’s military spending does not decrease and crediting, including in the civilian segment, does not slow down, inflation will begin to rise again. In addition, the ruble will weaken, as at the current strong exchange rate and low oil prices, exports and imports cannot be balanced.
Even the most optimistic case for Russia entails economic stagnation. For example, the March forecast of the OECD, predicated on “a peaceful resolution of the conflict,” has Russian GDP growing just 1.3% this year and 0.9% next year.
If the war keeps going, things will go back to how they were just a few months ago – with unabated inflation in the economy and permanent disagreements in the Kremlin over the best way to impose sacrifices on the country.
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