Putin's wartime economy braces for a soft, bumpy landing – Bloomberg

Putin's invasion of Ukraine has triggered an economic boom in Russia, fuelled by government stimulus. Nearly three years later, signs are emerging that the time to settle the bill is approaching.

Source: Bloomberg

Details: While the mood in Moscow and other cities remains upbeat – restaurants are packed, and luxury shops are bustling – a combination of record-high interest rates and persistent inflation increasingly jeopardises forecasts of another year of war-driven but slower growth.

"A relatively good period for the Russian economy, which was based on previously accumulated resources, is over," said Oleg Vyugin, economist and former senior official at Russia’s Central Bank.

Additionally, Russia faces sanctions, a recently weakened currency, uncertain oil price prospects and the possibility that its largest trading partner, China, may struggle to overcome its significant economic challenges.

The Central Bank predicts a sharp slowdown in growth in 2025 to 0.5%, compared to 3.5%-4% last year and expects inflation to return to its 4% target only in 2026.

So far, the economy has managed to grow despite external pressures and coupled with high wages, this has helped suppress public opposition to the war.

The impact of rising prices has been uneven across Russian society, partly due to labour shortages driving up wages.

Even the largest companies are revising their strategies. State-owned pipeline operator PJSC Transneft and Russian Railways sharply reduced investment programmes, partly due to borrowing costs.

Private companies, including steelmaker Severstal and mining company Norilsk Nickel, are also cutting expenses, while United Co. Rusal International, a leading aluminium producer, is considering reducing production by over 10%, citing the economic situation as one reason.

The drop in oil prices is one of the biggest risks for the economy in 2025. If prices fall further, the state may have to make sacrifices.

Meanwhile, Ukraine has halted natural gas transit through its territory. Although the economic impact is likely to be muted, analysts estimate this could still cost Russia between 0.2% and 0.3% of its GDP.

Read also: More trouble ahead: as Russia enters 2025, how is the economy doing?

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