Russian Economy Faces Sharp Slowdown as War Rages On, Bank Warns

Russia's gross domestic product is expected to slump in 2025 and next year as the country's sanctions-hit wartime economy faces continued turbulence.

The Bank of Russia, also known as Russia's Central Bank, issued the forecast on Friday as it announced it had left its key interest rate unchanged at 21 percent—an all-time high imposed in October to cool an overheating economy.

Newsweek has contacted the CBR for comment.

Why It Matters

Western-led sanctions imposed because of Vladimir Putin's full-scale invasion of Ukraine have partially isolated Russia from the global economy but the country has managed to enjoy higher GDP growth than expected.

But Russia's GDP has been fueled by military spending, albeit amid concerns over inflation and worker shortages. A slowdown in its growth will raise questions about the sustainability of Putin's military spending plans.

What to Know

The Central Bank held the key interest rate at which it lends money to other institutions to 21 percent on Friday. This historically high rate is aimed at curbing inflation which at 9.9 percent, is more than twice its goal of 4 percent.

The central bank's forecast noted that Russia's growth for 2024 was 4.1 percent—higher than predicted in October, mostly due to a bigger-than-expected growth in domestic demand. The U.S.'s GDP grew by 2.8 percent in 2024.

However, the bank's forecast that Russia's GDP would drop to between 1 and 2 percent and could reach as low as 0.5 percent in 2026 before going up slightly to between 1.5 and 2.5 percent in 2027.

Inflationary pressures remained high and domestic demand growth was still outstripping the capabilities to expand the supply of goods and services. Russia faces a worker shortage exacerbated by casualties in Ukraine, an exodus of those fleeing the draft and a growing demographic crisis.

Inflation in Russia is predicted to decrease this year to between 7 and 8 percent, still well above its 4 percent goal, which the bank said would be reached in 2027.

The Central Bank's governor, Elvira Nabiullina, said separately that monetary tightening will cool the economy and that growth over the next three years would be in line with its forecast in October.

In reporting the central bank's decision, independent Russian outlet The Bell said rising prices and declining lending increase the likelihood Russia could face "a dangerous combination of low growth and high inflation."

It said that the underlying reason for high inflation remains high government spending, in particular on the military.

Because GDP measures the cost of all goods and services produced in an economy at current prices, inflation pushing up prices means the overall GDP figure goes up, even if actual volume output is unchanged, The Bell said.

What People Are Saying

Russia's Central Bank said : "The Russian economy grew by 4.1% in 2024, which was slightly higher than the Bank of Russia forecast in October. This is mainly due to higher growth in domestic demand than expected."

Central Bank Governor Elvira Nabiullina said: "Price pressures remain significant. The underlying inflation indicators exceeded 10 percent by the end of 2024, which is certainly an intolerably high level in our view."

What Happens Next

Vladimir Putin extols high growth but Russia's economy faces further obstacles ahead with lower oil prices, budget constraints and a rise in bad corporate debt, according to Reuters, citing internal government documents.