ECONOMY
Despite Slowing Growth, Russian Economic Stability Not at Serious Risk in 2025-26
November 25, 2024
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Vladislav Inozemtsev
Cofounder and expert at the Center for Analysis and Strategies in (CASE) in Nicosia, Cyprus
Economist Vladislav Inozemtsev says the Russian economy is slowing but remains skeptical of alarmist forecasts about Russia’s economic situation, which are multiplying following the latest Central Bank rate hikes.
The original text in Russian was published in the Moscow Times and is being republished here with the author’s permission.
The main conclusion of the new report, “Dictator’s reliable rear: Russian economy at the time of war,” by Sergei Aleksashenko, Dmitri Nekrasov and your author, was that a serious economic crisis in Russia is not forthcoming.
The Russian economy looks poised to stand the test of war next year and beyond. Growth rates will slow, but the trend of a moderate improvement in living standards (for all groups except pensioners) is set to continue. Respected colleagues have noted that our findings generally overlap with their own and stand out from the growing alarmism in reports about the economic situation in Russia.
It is this contrast that should be the focus of those who seek an objective idea of what is going on in the Russian economy.
Economic slowdown is impossible to deny
Of course, there are growing problems in the Russian economy.
Though budget revenues are being administered with increasing efficiency (there is a high likelihood that the budget will come close to balancing in 2025), military spending is broadly crowding out the private sector and at the same time boosting incomes, thus pushing up demand and inflation.
Elsewhere, the Central Bank’s key rate looks very high, and consolidated financial results of Russian firms and organizations since the middle of the year are down versus the year before. The ruble is weakening, and the availability of foreign currency to pay for imports is an issue, even though imports have been growing since the second quarter.
Bottom line: the evidence of a slowdown is clear – as I pointed out in the Moscow Times just a few weeks ago.
Who are the alarmists?
There are two main categories of doomsayers. The first includes those who are clearly opposed to the Kremlin and have long predicted a decline and crisis for the Russian economy. While correctly noting the inherent flaws of the economic system, they have nevertheless underestimated its robustness more than once or twice, along with its ability to adapt to sanctions and other new conditions.
I have also been “burned” several times when forecasting economic dynamics, and I have become much more cautious lately. Therefore, with all due respect to my colleagues from this first category, I would treat their forecasts with some skepticism.
The Russian economy looks poised to stand the test of war next year and beyond. Growth rates will slow, but the trend of a moderate improvement in living standards (for all groups except pensioners) is set to continue. Respected colleagues have noted that our findings generally overlap with their own and stand out from the growing alarmism in reports about the economic situation in Russia.
It is this contrast that should be the focus of those who seek an objective idea of what is going on in the Russian economy.
Economic slowdown is impossible to deny
Of course, there are growing problems in the Russian economy.
Though budget revenues are being administered with increasing efficiency (there is a high likelihood that the budget will come close to balancing in 2025), military spending is broadly crowding out the private sector and at the same time boosting incomes, thus pushing up demand and inflation.
Elsewhere, the Central Bank’s key rate looks very high, and consolidated financial results of Russian firms and organizations since the middle of the year are down versus the year before. The ruble is weakening, and the availability of foreign currency to pay for imports is an issue, even though imports have been growing since the second quarter.
Bottom line: the evidence of a slowdown is clear – as I pointed out in the Moscow Times just a few weeks ago.
Who are the alarmists?
There are two main categories of doomsayers. The first includes those who are clearly opposed to the Kremlin and have long predicted a decline and crisis for the Russian economy. While correctly noting the inherent flaws of the economic system, they have nevertheless underestimated its robustness more than once or twice, along with its ability to adapt to sanctions and other new conditions.
I have also been “burned” several times when forecasting economic dynamics, and I have become much more cautious lately. Therefore, with all due respect to my colleagues from this first category, I would treat their forecasts with some skepticism.
Sergei Chemezov, Rostec CEO. Source: Wiki Commons
Interestingly, the second category – and I want to drill down on them – is entirely “systemic” figures who have only recently become alarmists. They include Rostec head Sergei Chemezov, who in the Federation Council warned of mass bankruptcies among factories because of high interest rates. Almost the same arguments were made by the Russian Union of Industrialists and Entrepreneurs, and most recently experts from the ultra-loyal Center for Macroeconomic Analysis and Short-term Forecasting also raised the specter of stagflation and “a shift of GDP growth into negative territory.”
It would seem that these warnings should be taken very seriously – were it not for one circumstance: they all come from people who for years have made a living out of criticizing the Central Bank for carrying out a monetary policy that has supposedly hindered industrial growth.
It would seem that these warnings should be taken very seriously – were it not for one circumstance: they all come from people who for years have made a living out of criticizing the Central Bank for carrying out a monetary policy that has supposedly hindered industrial growth.
“Today, the overwhelming majority of critical assessments of the Russian economy by experts and politicians blame the Central Bank, which has been trying to fight inflation by hiking rates at an accelerated pace.”
Russia's military spending is projected to be a third of all fiscal expenditures in 2025 and 6.2% of GDP. Pictured is an RSD-10 Pioneer, a Soviet intermediate-range ballistic missile with a nuclear warhead. On November 21, a new Russian intermediate-range ballistic missile, Oreshnik, was launched at the Ukrainian city of Dnipro. Source: Wiki Commons
Its efforts are bound to be only partially successful, however, since inflation in Russia is not entirely monetary in nature. I find it hard to agree that the Central Bank is responsible for the growing problems in the Russian economy.
Just the other day, Central Bank analysts put out an extremely important paper indicating that in most sectors, loan servicing adds no more than 3.0-3.5% to the cost of production (the data is until end-2023, so the figure may now be just over 4.0%). In this situation, even high rates cannot kill economic growth – with the possible exception of construction, long fueled by subsidized mortgages.
‘Military Keynesianism’
The Kremlin’s current economic policy – which some call “military Keynesianism” – is unlikely to threaten economic stability in 2025-26. Stagflation is unlikely to materialize: inflation should start a slow decline next year, and economic growth should stay positive.
There is also no reason to expect a fiscal crisis, with the softening ruble actually working in the government’s favor.
I also consider it dubious that household deposits will be frozen (such rumors spread in mid-November and were immediately refuted by Central Bank Governor Elvira Nabiullina – RP): such a measure would achieve nothing, since the highest price growth is observed for everyday goods, which are consumed mainly by those who have no savings at all, and 70% of recent growth in deposits is attributable to those of RUB 3 million and above.
My colleagues and I have made our forecasts. Let’s see how they turn out a year from now and whether we are right to downplay the much-hyped fears of an economic collapse.
Just the other day, Central Bank analysts put out an extremely important paper indicating that in most sectors, loan servicing adds no more than 3.0-3.5% to the cost of production (the data is until end-2023, so the figure may now be just over 4.0%). In this situation, even high rates cannot kill economic growth – with the possible exception of construction, long fueled by subsidized mortgages.
‘Military Keynesianism’
The Kremlin’s current economic policy – which some call “military Keynesianism” – is unlikely to threaten economic stability in 2025-26. Stagflation is unlikely to materialize: inflation should start a slow decline next year, and economic growth should stay positive.
There is also no reason to expect a fiscal crisis, with the softening ruble actually working in the government’s favor.
I also consider it dubious that household deposits will be frozen (such rumors spread in mid-November and were immediately refuted by Central Bank Governor Elvira Nabiullina – RP): such a measure would achieve nothing, since the highest price growth is observed for everyday goods, which are consumed mainly by those who have no savings at all, and 70% of recent growth in deposits is attributable to those of RUB 3 million and above.
My colleagues and I have made our forecasts. Let’s see how they turn out a year from now and whether we are right to downplay the much-hyped fears of an economic collapse.
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