Resilience and risk

Russia’s economic patterns in 2024 were shaped by persistent sanctions, the Ukraine conflict and an emphasis on fiscal and industrial policy to sustain growth. Sizable government spending, particularly on military-related production, has bolstered the economy but also driven inflation and strained labor markets. Growth in 2024 exceeded expectations, with labor shortages and wage growth supporting domestic consumption. Yet, inflation remained high at around 6% as of the end of the year. The Central Bank of Russia (CBR) pursued a stringent monetary policy, raising key rates above 20% to stabilize inflation, reduce currency volatility and prevent overheating.
Short-term growth continues to rely on fiscal stimulus, import substitution and the exploration of alternative export markets. Our forecast for 2025 is for subdued growth (+1.8%) at levels similar to the pre-pandemic average due to international oil prices remaining close to 2024 levels and sanctions. However, pressures from slowing construction and weaker export performance in sectors like metals and energy are evident. The housing sector, previously supported by subsidies, has decelerated significantly, while export volumes have declined by -20% since 2021. The construction sector is expected to shrink further, with a -10% decrease in housing commissioning projected for 2025.

Inflation management remains a key challenge for the CBR, given tight labor markets and strong nominal wage growth, and is projected to rise by +12% in 2025. While high interest rates will temper capital outflows and stabilize the ruble at RUB105/USD, further monetary tightening may be necessary if inflationary pressures persist.

Russia’s business environment remains heavily influenced by government intervention and geopolitical uncertainties. The authoritarian regime under President Vladimir Putin continues to suppress dissent effectively, but the risk of political instability remains elevated. Succession uncertainties beyond 2030 and mistrust of Russian governance abroad weigh heavily on investor confidence.

Tight state control over key sectors and economic levers, while ensuring stability, reduces market dynamism and flexibility. Sanctions and technological isolation further erode the country’s competitive edge, discouraging foreign direct investment. The construction and export industries, in particular, are constrained by limited access to advanced technologies and materials.

Inflationary pressures evoke memories of past economic crises, raising concerns among the population and elites alike. While suppression of dissent ensures political continuity in the short term, latent discontent poses risks to long-term stability. The brittle nature of the regime, masked by economic resilience and strict governance, underscores these vulnerabilities.

Externally, declining Western support for Ukraine and potential shifts in the conflict’s dynamics could influence Russia’s geopolitical standing. An agreement favoring Russia remains a likely scenario, though continued isolation from Western markets will constrain long-term growth potential. Demographic challenges, particularly labor market shortages, further exacerbate these difficulties, dimming the country’s economic prospects beyond 2026.