The prospects for Russian economic growth have become worse than before the large-scale invasion. Russian economic growth peaked, after overheating, in the first half of 2024. And the long-term prospects for its growth have become gloomier than before the full-scale invasion. Bloomberg reports this with reference to analysts.
Economists note that the peak of growth is likely to have passed somewhere in the middle of this year. The further trajectory of economic growth next year remains an open question – whether it will be a “soft” or “hard” landing for the economy. Military production, which has driven rapid growth in recent quarters, continues to expand, but this is not enough to offset the decline in other sectors of the economy.
The International Monetary Fund has already lowered its forecast for Russia’s economy – now in 2025, it is expected to grow at 1.3% instead of the previous 1.5%. In September, Russian manufacturing declined for the first time since April 2022, according to the S&P Global Purchasing Managers’ Index.
The slowdown in growth outside the military-industrial complex emphasizes that Russia is sinking deeper into a state of “war economy.” In 2023, the country recovered rapidly from the invasion-induced recession, posting 3.6% annual economic growth, fueled by defense spending. Now, there are growing concerns that further military production could harm civilian sectors of the economy.
Russians are already facing extremely high interest rates, and this Friday the Central Bank may raise the prime rate to 20%, the level it was at after the invasion began, in order to curb inflation.
Any downturn in the economy could result in ordinary Russians experiencing hardships from which they have been protected until now. Even despite the sanctions imposed by the United States and its allies. After all, countries such as Turkey, China, India, Kazakhstan, Georgia, and Armenia are partly helping to circumvent the sanctions. However, the US systematic work in this area is making it increasingly difficult to circumvent sanctions. This week, the U.S. Treasury Department is imposing additional sanctions on third countries that help supply Russia with banned goods and technologies.
In its latest report, the Central Bank of Russia acknowledged that economic growth in the third quarter was less than in the first half of the year. The Russian economy has almost reached its full production potential, the bank said.
However, the Central Bank forecasts growth this year at 3.5%-4%, a level that would be the envy of many countries. This year, Russia has struggled to slow the overheating economy as the resources needed to increase production are nearly exhausted.
Indicators suggest that Russia’s fiscally driven growth has passed its peak. Construction and transportation services have declined since the beginning of 2024 as mortgage rates began to rise sharply, while transportation has faced capacity constraints. Military-related production continues to expand, but has been unable to compensate for the decline in civilian sectors since May. As a result, overall industrial production remained unchanged.
The Bloomberg Economics Composite Economic Activity Indicator, which contains about 60 key indicators of the Russian economy, shows that activity has been steadily declining since the end of 2023. This means that after two years of 3.5% growth, the economy is likely to slow to 1-2% next year.
“Even before the full-scale invasion, Russia’s long-term growth prospects were bleak,” says Anders Olofsgaard, associate professor at the Stockholm Institute of Transition Economics.
