Russia's Economic Growth Forecast Sharply Lowered Due to Inflation and High Interest Rates

Amid the ongoing Ukraine conflict, Russia's economy has been experiencing a significant slowdown. Despite achieving strong growth rates of 4.1% and 4.3% in 2023 and 2024, respectively, the economic growth forecast for 2025 has been sharply lowered from 2.5% to 1.5% due to high interest rates implemented to curb inflation, suppressing credit demand. The Russian government and central bank have been facing challenges in balancing fiscal policy and monetary policy, with high financing costs and labor shortages constraining economic growth.

Key Takeaways:

• The Russian economy's growth forecast for 2025 has been sharply lowered from 2.5% to 1.5% due to high interest rates implemented to curb inflation.
• Russia's economic growth achieved strong growth rates of 4.1% and 4.3% in 2023 and 2024, respectively, but has slowed significantly this year.
• Russian Economic Development Minister Maxim Reshetnikov warned in June that the Russian economy was on the brink of recession and that monetary policy was key to reversing the trend.
• Military spending has reached its highest level since the Cold War, causing inflationary pressures and forcing the Russian Central Bank to raise its key interest rate to 21% in October last year.
• High financing costs and labor shortages continue to constrain economic growth, with total deposits in Russian banks reaching a record high of 61.1 trillion rubles.
• Resident deposits continue to soar, increasing by 8% in the first seven months of this year, with local currency deposits reaching 43.6 trillion rubles (about US$542 billion).
• Interest income from deposits now covers about 10% of Russian households' annual expenditure.
• Interest income from residents' deposits is expected to reach 4 trillion rubles in the first half of 2025, a year-on-year increase of 150%.
• Russia's nominal GDP is now only $2.2 trillion, essentially the same as in 2013, despite the economy soaring from less than $200 billion in 1999 to $1.7 trillion during Putin's presidency from 2000 to 2008.
• Manufacturing is expected to grow by about 3% this year, lower than the previous forecast of 4.3%, and industrial production growth is expected to be about 2%, also lower than the previous forecast of 2.6%.
• Russia's GDP grew by 1.1% year-on-year in the second quarter of 2025, compared with 4.0% in the same period last year, and the International Monetary Fund (IMF) forecasts Russia's economy will grow by 0.9% this year, lower than the previous forecast of 1.5%.

Statistics:

• Russian economic growth forecast for 2025: 1.5% (down from 2.5%)
• Interest rate in Russia: 18% (lowered from 21% in October last year)
• Resident deposits in Russian banks: 61.1 trillion rubles (a record high)
• Local currency deposits: 43.6 trillion rubles (about US$542 billion)
• Interest income from deposits: 4 trillion rubles (expected in the first half of 2025, a year-on-year increase of 150%)
• Russia's nominal GDP: $2.2 trillion (essentially the same as in 2013)
• GDP growth rate in Q2 2025: 1.1% year-on-year
• Manufacturing growth rate in 2025: 3% (lower than the previous forecast of 4.3%)
• Industrial production growth rate in 2025: 2% (lower than the previous forecast of 2.6%)

Sources:

• Russian Finance Minister Siluanov, quoted in the statement by the Russian government
• Russian Central Bank, data released this week
• Russian Federal Statistics Service, data released earlier this month
• International Monetary Fund (IMF), latest forecast
• Russian Economic Development Minister Maxim Reshetnikov, quoted in reports
• Dmitry Breitenbicher, member of the board of directors of VTB, Russia's second-largest state-owned bank, quoted in reports