Author: Giorgi Bilanishvili
Notwithstanding the comprehensive international sanctions, Russia’s economic condition remained comparatively stable in 2023 and 2024, significantly supporting its continued military aggression towards Ukraine. Recent developments in the global oil market, particularly the decline in crude oil prices driven by US President Donald Trump’s tariff policies and OPEC+’s decision to augment oil production, have posed new challenges for the Russian government. This has drawn attention to the condition of Russia’s economy, which has already faced a decline in growth and various challenges since the beginning of 2025.
This blog is founded on a recent report released by the Stockholm Institute of Transitional Economics at the Stockholm School of Economics in April 2025, augmented by data sourced from various international outlets that offer a comprehensive analysis of Russia’s present economic situation.
Analysis of the principal trends in the Russian economy
Although the economic conditions in Russia are presently stable, indicators suggest rising volatility. The macroeconomic projection for 2025 anticipates diminished growth relative to 2023 and 2024, alongside heightened susceptibility in long-term outlooks.
Petroleum Export
The export of petroleum remains a significant contributor to Russia’s budget, although its proportion has diminished. The recent decline in oil prices has intensified fiscal pressures, as oil and gas export tax revenues decreased by 12% in April 2025 relative to the same period in the prior year. This decline has persisted for the past three months. Global oil corporations are reportedly preparing for an extended duration of diminished crude prices, with forecasts suggesting stabilization at approximately $65 per barrel by 2025. Despite Russian crude generally being priced at a slight discount to global benchmarks, the Kremlin deems this price acceptable, although it complicates fiscal management due to ongoing military expenditures related to the invasion of Ukraine.
Maritime exports have experienced a decline in revenue due to heightened sanctions aimed at Russia’s “shadow fleet,” which carries a significant volume of its maritime oil. The EU’s most recent sanctions package, effective May 2025, explicitly targets this fleet, thereby intensifying operational pressures. Simultaneously, the prices of pipeline-transported Urals and East Siberia-Pacific Ocean (ESPO) crude oil have declined at the onset of 2025, while pipeline gas exports to China have increased. China remains a strategic ally of Russia; however, it has been influenced by several factors, including trade disputes with the United States and a recent decline in imports of Russian coal and steel.
Exports of liquefied natural gas (LNG) to the European Union (EU) have increased, with France and Belgium acting as principal importers and re-exporters to other EU member nations. In 2025, the EU imported around six million tons of Russian LNG valued at over €2.5 billion. The EU’s current plan to implement a total ban on Russian gas imports by 2027 presents a substantial challenge to Moscow.
Growth of Gross Domestic Product (GDP) and inflation
The official forecast indicates that Russia’s GDP will increase by 1-2% in 2025, although growth momentum has diminished since autumn 2024. Official inflation rates of 9-10% are extensively disputed by independent evaluations, which approximate the inflation rate at approximately 20%. To mitigate inflation, Russia’s Central Bank has enacted stringent monetary policies, increasing interest rates from 7.5% in mid-2023 to 21% by October 2024. However, elevated inflation, increasing housing prices, expanding credit, and high deposit rates have heightened the likelihood of a crisis in the banking sector.
Financial challenges and shortfalls
Subsequent to the invasion of Ukraine, Russia’s fiscal equilibrium has worsened, resulting in a budget deficit of $33 billion in 2022, $32 billion in 2023, and $34 billion (1.7% of GDP) in 2024. Despite the deficit being manageable, the government has increasingly depended on sovereign wealth funds, reserves, and domestic borrowing to finance escalating expenditures. The recent decline in oil prices has intensified fiscal pressure, with Bloomberg projecting a budget deficit of 3.2 trillion rubles (approximately $40 billion) in the first four months of 2025, three times larger than the corresponding period of the previous year.
The Ministry of Finance has raised the budget deficit target from 0.5% to 1.7% of GDP and reduced the projected Urals crude oil price from $70 to $56 per barrel. Significantly, each $1 decline in oil prices diminishes revenue by approximately $2.3 billion (calculation based on the current USD-RUB exchange rate), thereby intensifying fiscal limitations.
Military-Industrial Complex
Military expenditures have surged significantly, rising from $65.9 billion in 2021 to approximately $149 billion in 2024, and are anticipated to remain elevated in 2025, constituting 32.5% of the federal budget—substantially exceeding other public spending categories. The National Wealth Fund (NWF) has emerged as the principal source of financing for military expenditures, resulting in a significant reduction of its liquid assets (yuan and gold). Gold reserves decreased from over 500 tons in 2023 to 164 tons by early 2025, while the liquid component of the National Wealth Fund constitutes less than 3% of GDP.
The military-industrial complex has expanded swiftly, establishing itself as the foundation of Russia’s economy. Notwithstanding the sanctions, prominent state-owned enterprises such as Rostec and Almaz-Antey have augmented production. Nevertheless, this sector is financially and technologically susceptible due to its dependence on non-transparent budget allocations and preferential financing from state banks. The sector’s vulnerability is heightened by a significant decline in arms exports, susceptibility to oil price volatility, the escalation of sanctions, and the potential for an economic recession.
Elevated interest rates and the diversion of resources to the military sector have adversely affected the majority of other economic sectors. Increased pressures arise from elevated taxes, diminishing demand, and alterations in government policy concerning mortgage subsidies. The Center for Macroeconomic Analysis and Short-term Forecasting, a Russian government’s government-affiliated think tank, asserts that the economy is essentially in recession, excluding defense-related sectors.
Prominent corporations, including Gazprom, Gazprom Neft, Rosneft, and Lukoil have experienced substantial reductions in net profits attributable to production cuts, sanctions-induced price discounts, and alterations in tax policy. Extended declines in oil prices would threaten the financial stability of these companies.
Final Assessment
Notwithstanding its ostensible stability, Russia’s economy confronts considerable challenges stemming from international sanctions. The government has demonstrated effective management capabilities in alleviating these pressures; however, the recent decline in oil prices poses a new and potentially destabilizing element if it persists. Sanctions continue to serve as a significant source of pressure on Russia, rendering their elimination a paramount objective for Moscow in discussions with Washington regarding the conflict in Ukraine.
The position of the US administration under President Trump remains ambiguous, with uncertainty apparent domestically and among European allies. The recent congressional hearings featuring Secretary of State Rubio underscore the intricate political dynamics of sanctions policy. Although unconditional sanction relief seems improbable, a certain degree of leniency may be feasible. Nevertheless, the total abrogation of sanctions would likely require a peace accord entailing Russian concessions in Ukraine, an endeavor in which Russia has thus far exhibited minimal interest.