Russia's 4.3% Growth at Risk as Inflation Hits 9.9% and Interest Rates Soar to 20%

Russia's economic expansion, which saw a growth of 4.3% in 2024, is now at risk due to escalating inflation and interest rates. The economy, bolstered by increased military spending and oil exports, has managed to grow despite global sanctions. However, the inflation rate surged to 9.9% by April 2025, driven by rising import prices and labor shortages. The latter is exacerbated by an estimated 2.6 million workers either enlisting in the military or fleeing to avoid conscription. In response, the central bank has raised interest rates to around 20%, making borrowing more expensive and discouraging business investments.

Russia’s economy outlook is growing more uncertain and complicated. The central bank has been raising interest rates to around 20% to fight inflation. This rise costs money to borrow and discourages business investment. Economists offer mixed views on Russia’s economic future under these pressures. Yevgeny Nadorshin, a Moscow economist, said the country faces a “pretty uncomfortable situation until late 2026.” However, he rejected claims of a complete economic collapse. Russia’s unemployment rate stands at a historic low of 2.3%. Nadorshin expects a modest rise to 3.5% next year. He said, “Without any single doubt, the Russian economy has experienced recessions deeper than this.” Nonetheless, he predicts more defaults and bankruptcies as growth slows and the rising interest rates worsen.

Russia’s public finances are facing increasing strain from shrinking energy revenues. Official figures had oil and gas revenues dropping 35% year-on-year in May 2025. This has driven the budget deficit wider. The government is prioritizing military spending over infrastructure expenditure. Political analyst András Tóth-Czifra said, “They have this large pot of expenditure for the military that can’t be touched.” This hurts the quality of public services and infrastructure maintenance.

Sanctions also restrict Russia’s economy’s access to foreign markets and technologies, damaging key industries. The European Union banned coal imports and plans to end Russian gas imports by 2027. Tóth-Czifra said such measures may not have a direct effect on military expenditure. However, they hinder long-term economic diversification and growth. These challenges make Russia’s future beyond the war more difficult financially. The sanctions are restructuring the country’s industrial base and energy sector.

Despite difficulties, the Kremlin stresses that Russia’s economic strength and stability remain intact. Spokesperson Dmitry Peskov stated in June 2025 that “macroeconomic stability” and “underlying strength” continue. Yet experts like Dr. Katja Yafimava from Oxford highlight ongoing challenges. She said, “It’s next to impossible to see a big return to Europe buying Russian oil and gas.” The war is likely to cause long-lasting economic damage to Russia. The government faces limited options to counteract these mounting pressures.