By AFP and Kontur | 2024-12-23

WARSAW -- Stubborn inflation, exorbitant borrowing costs, bankruptcy risks and a growth slowdown: the Russian economy is facing a slew of negative headlines, as the costs of the Ukraine war and Western sanctions mount.

Since ordering an invasion in February 2022, Russian President Vladimir Putin has repeatedly touted the "failure" of sanctions and hailed strong growth in the face of unprecedented uncertainty.

But going into 2025, that three-year run of mostly good economic news looks in serious doubt.

Annual inflation is estimated to have increased to 9.5% as of December 16, more than twice the government's 4% target, AFP reported December 20.

Prices have been rising despite the central bank having hiked interest rates to a two-decade high of 21%.

Russian media, usually reluctant to report on any sign of social discontent, are increasing their coverage of hard-pressed families.

The price of butter, up a third since the start of the year, has become emblematic, with a slew of reports on rising thefts from supermarkets.

'Root cause'

The invasion is to blame, say most independent analysts.

"The root cause of the economy's problems is labor starvation and sanctions ... the symptom is an inflationary surge," said Anton Tabakh, chief economist at the Russian ratings agency Expert RA.

Both those factors are directly related to the war.

Labor shortages, already pressing because of Russia's demographic problems, have been exacerbated by hundreds of thousands of men joining the army, being employed by arms manufacturers or fleeing the country, as well as a tightening of migration rules.

"This is holding back GDP growth," said economist Yevgeny Nadorshin, a former advisor to the Economic Development Ministry.

Russia lacks about one million workers, he estimated.

That shortage has contributed to rising wages, pushing up prices set by businesses.

So too has the Kremlin's massive increase in military spending.

State expenditure is set to be 67.5% higher in 2025 than in 2021, before Russia's military offensive.

Up against those huge sums, interest rate rises have so far had only a limited effect.

High rates have triggered outcry from bosses, including at state-run companies, with market borrowing costs running at 25-30% interest per year.

"The economy can't exist like this for long," German Gref, CEO of state-run Sberbank said this month.

Russian Railways said it will cut investment by 40% next year.

Even Putin's closest allies have complained.

Sergei Chemezov, CEO of the Rostec military-industrial conglomerate and a close friend of Putin, described interest rates of more than 20% as "madness" in November.

Many firms, unable to refinance, will go under, analysts expect.

"The number of bankruptcies is about to rise sharply, especially among small and medium businesses. But there will be some among large businesses as well," said Nadorshin.

Growth slowdown

Faced with such an onslaught, the Central Bank predicts a sharp slowdown in growth next year -- to below 1.5%, from over 3.5% this year.

It has ruled out the prospect of stagflation -- low growth and high inflation -- yet the word is being used more and more frequently in Moscow.

Adding to those worries has been fresh volatility for the Russian currency, which slid to its weakest against the dollar since March 2022.

The ruble tumbled after the United States introduced sanctions on key financial institution Gazprombank, which had been handling all payments for Russian gas exports.

Putin December 19 acknowledged concerns over high inflation but insisted the economy was "stable" in the face of external threats.

"With the economy as a whole, the situation in Russia is normal and sustainable ... despite external threats," Putin said at a televised end-of-year news conference.

Russia has grown faster than the eurozone over the last two years, he claimed.

However, "inflation is a worrying signal," he said.

"The rise in prices is a bad thing. But I hope that if macroeconomic indicators are maintained, we will be able to cope with it."