10 01 2025

Is Russia’s economy finally collapsing?

New Year decorations in Moscow, 11 December 2024. Waiting for Russia’s collapse? Yo may be deceived. New Year decorations in Moscow, 11 December 2024. Waiting for Russia’s collapse? Yo may be deceived. https://novayagazeta.eu/articles/2024/12/26/quagmire-or-catastrophe-en

After a period of relative calm, mainstream media have lately, once again, been flooded with articles predicting the imminent collapse of Russia’s economy. The sanctions, together with the financial burden of the war in Ukraine, should finally be working, so Russia is now under severe strain, and we will in 2025 see the collapse. Is there any truth in this?

Russia's soaring inflation, capital flight, and exodus of oligarchs—may cause a painful recession in 2025(Newsweek), How Russia’s economy reached breaking point’, (The Telegraph), ‘Russian Economy is on the Brink of Collapse(ModernDiplomacy), ‘Russian economy in meltdown’ (Express). And so on. Try searching for ‘Russia Economy’ on the internet and there is no end to these stories (even if you skip the Ukrainian websites).

When a country is in economic trouble, there are some key indicators you would normally look at. If the government is spending above its capacity, it should show up in a large public sector deficit. If the country as a whole is spending above its capacity, it should show up in a negative balance of payments and increasing foreign debt. If the economy is stagnating, it should show up in low or negative economic growth. If the economy is not up to its potential, it should show up as low capacity utilisation, unemployment and a low level of investments.

There are actually clear troubling signs in the Russian economy, but what they indicate is overheating: capacity utilisation in the production sector is unusually high, unemployment is historically low (2.3% in November 2024), companies are complaining about difficulties in finding enough manpower, and inflation is high (8-9%). All these are normal signs of an overheated economy.

Household incomes are increasing and there is no lack of products. Photo: a supermarket in Tyumen. Wikimedia.

What often breaks an overheated economy is a trade deficit with other countries, which it becomes difficult to finance, and/or difficulties in financing the public sector deficit and the increasing public debt. None of these are presently signalling serious problems for Russia.

Russia had January-November 2024 a surplus on the Balance of Payment of USD 57.4 billion (against 49.4 billion for the same period in 2023). It is surprising to note that despite a high economic growth of almost 4%, imports were actually falling in 2024. When an economy is overheating and national production cannot satisfy domestic demand, this is normally covered by imports. But it seems not to be the case. There are no red lights flashing for Russia here.

The budget deficit January-September 2024 was 0.1% of GDP, but even so the Ministry of Finance expects a deficit for the whole year of 1.7% of GDP. The projected deficit for 2025 is 0.5% of GDP. For a comparison, it is expected that the US budget deficit will be 7% of GDP in the present fiscal year, and in the EU 3%. Russian public debt at around 15% of GDP in 2023 is very low in international comparison (81.5% in the EU, close to 100% in the UK and over 100% in the US and France). So there are no red lights flashing for Russia here either.

What worries the population and the planners in Russia is the high inflation and the extremely high interests rate set by the Central Bank.

Despite the high inflation real wages are increasing, as nominal wages have been increasing much more. According to a Central Bank survey from December 2024, real wages increased 8.4% in 2024 and are now 17.6% higher than in 2021 (before the war). This is obviously the result of the tight labour market where firms are competing for the workers. As a result, real household incomes are increasing and so is private consumption. So while it is true that an important part of Russia’s economic growth is driven by military expenditure, consumption is actually also an important factor. So up to now it has not been a choice between guns or butter, but rather guns and butter.

This doesn’t mean that there are no immediate risks for the Russian economy. There are several.

The first one is related to the high interest rate. The Russian Central Bank has been trying to cool down the economy increasing the key interest rate, which has now reached an astonishing 21%. With an inflation of 9% that means that the real interest rate is a whopping 12%. No wonder the productive sector is protesting as few investments will be able to generate a sufficient return to pay back loans at that rate. The Ministry of Economy apparently agrees with this critique and I think they are right. The high interest rate risks inflicting serious harm to the economy, and may even risk creating a financial crisis. A policy shift is needed, which we shall look at in a subsequent article.

As Russia is reorienting its trade from West to East and South, huge investments are necessary to expand the capacity of the East and South transport corridors. The Baikal-Amur railway (BAM), constructed by the Soviet Union, is now undergoing an ambitious and costly expansion. Photo from railfreight.com

Another risk is a possible dramatic fall in the price of oil and gas, as incomes from oil and gas provide more than a quarter of the revenues for the federal budget (but much less if we look at the overall Government budget, including the regions and municipalities), and the Ministry of Finance claims that this dependency is falling. A fall in prices could be caused by falling demand from China due to the rapid transition to electric vehicles, sluggish economic growth in the EU, and increased production in the US and elsewhere. Or a new international economic crisis for example as a consequence of Trump’s tariff wars.

Furthermore, there is a risk related to what looks like a bubble in the Russian property market, particularly in Moscow and Saint Petersburg, The bursting of this bubble may affect the banking system (even if it presently looks quite robust). Signs at end 2024 is that the property market is already cooling, so perhaps there will be a ‘soft landing’ instead of a burst.

A longer term problem may be related to access to appropriate technology, as the tightening of US secondary sanctions against foreign companies, including Chinese, have led some of them to stop cooperating with Russia. The Russians are trying to solve this by creating their own technology, but it is costly, takes time and may not always be successful. This will be a major challenge in the future.

The conclusion is that Russia faces serious challenges in its economy, among these a stubbornly high inflation. But here are no immediate signs of stress that will break the economy. So those hoping for an economic collapse in 2025 are likely to be deceived.

In a forthcoming article we shall look at how (not) to control inflation in Russia.

 

 

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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