In Moscow on January 23 (Reuters) - Despite enduring three years of conflict in Ukraine and Western sanctions, the Russian economy has displayed resilience. Yet, as the conflict nears its fourth year, the economy grapples with significant challenges as key decision-makers disagree on how to tackle them.
Economists paint a grim picture for 2025, describing it as an "ideal storm" with various adverse factors simultaneously in play.
Dmitry Polevoy from Astra Asset Managers cautioned, "After several years of robust growth, the economy may underperform in 2025."
These economic challenges bolster Russian President Vladimir Putin's argument for negotiations with U.S. President Donald Trump to end the conflict in Ukraine. Trump's recent statement on January 21 accusing Putin of "destroying Russia" and highlighting high inflation underscores the urgency.
Former central bank deputy governor Oleg Vyugin emphasized, "Russia aims to resolve the Ukrainian conflict diplomatically, factoring in economic considerations."
The five primary challenges for the Russian economy in 2025 are outlined below:
1. Inflation spiked to 9.5% in 2024 due to hefty military and national security expenses, set to comprise 41% of the total state budget outlay in 2025, alongside state-subsidized loans and soaring wages amid labor shortages.
2. Inflation, a top concern in public opinion surveys, saw double-digit increases in staple food prices like butter, eggs, and vegetables last year.
3. Vulnerable groups experienced a 0.7% drop in real pensions from January to November 2024 due to inflation's effects.
4. To combat inflation, the central bank has raised interest rates.
5. Russia's industrial sectors beyond defense have stagnated since 2023, forecasting stagflation – high inflation coupled with economic stasis – with manpower shortages exacerbating the situation.
Moreover, the economy faces additional challenges due to the military manpower drain and the financial strain resulting from continued high defense-related spending, potentially leading to recession and insolvencies.
The rouble's recent drastic depreciation, influenced by Western sanctions and trade disruptions, poses further economic pressure, although it is assisting in narrowing the budget deficit. However, it is expected to fuel future inflation by increasing imported goods' costs.
The forex market has been affected by sanctions, with the Chinese yuan predominating, while dollar and euro transactions have shifted to less transparent markets due to restrictions.