By Nicholas Larsen, International Banker
On October 22, the International Monetary Fund (IMF) released the latest edition of its “World Economic Outlook”. Published twice a year, the report’s October issue confirmed that the organisation expects the Russian economy to grow by 3.6 percent this year, up from the 3.2-percent expansion stated in the preceding edition published in April and also comfortably ahead of the United States (2.8 percent), Germany (0.0 percent), France (1.1 percent) and the United Kingdom (1.1 percent). With Moscow still facing an onslaught of economic sanctions levied against it by Western nations, speculation continues to mount over whether Russia’s economy can continue to withstand this raft of punitive measures and maintain the same growth trajectory over the next few years.
The world’s largest country by area has thus far defied widespread expectations that US- and European Union (EU)-led sanctions would expose key vulnerabilities in the Russian economy. A 3.6-percent growth rate in gross domestic product (GDP) in 2023, for instance, positioned Russia as one of the world’s fastest-growing major economies outside of India and China, while the first six months of this year saw it extend those gains with growth for the first and second quarters recorded at 5.4 percent and 4.1 percent, respectively.
By April, the IMF had upgraded its 2024 GDP forecast for Russia by 0.6 percent to 3.2 percent, putting it well ahead of its estimates for the US (2.7 percent), the UK (0.5 percent), Germany (0.2 percent) and France (0.7 percent). By June, the World Bank had confirmed that, as per its most recent data release from the International Comparison Program (ICP), Russia had overtaken Germany and Japan to become the fourth-largest economy in the world (using the purchasing power parity [PPP] method of GDP calculation). Soon after, the World Bank also upgraded Russia from “upper-middle-income country” to “high-income country” status, with gross national income (GNI) per capita having reached $14,250 in 2023.
Given the painful economic headwinds Russia has faced since the outbreak of war in Ukraine in late February 2022, how is this possible? According to Petya Koeva-Brooks, deputy director of the IMF’s Research Department, four key factors explain the resilience of the Russian economy in the face of sanctions. “First, oil export volumes have held steady. The second part is that we have seen a lot of strength in corporate investment, including by state‑owned enterprises,” Koeva-Brooks noted during a press briefing for the April edition of the “World Economic Outlook”. “The third is that we have also seen a lot of robustness in private consumption that has underpinned growth. And last, but not least, we have also had the impact from government spending; though there, we have seen much larger increases in security‑related spending than overall spending.”
Indeed, government spending has played a pivotal role in buoying the economy, not least with Moscow seeking to sustain its war effort with additional funds for national defence. According to draft budget documents published on September 30, defence spending will rise to 13.5 trillion roubles (US$145 billion) next year, which would be a whopping 25 percent higher than in its 2024 budget.
At 6.3 percent, moreover, national-defence spending’s share of GDP in 2025 will be comparable to the figures recorded during the Soviet period of the late 1980s. Defence spending will also represent a mighty 32 percent of the 2025 budget’s total planned expenditure of 41.5 trillion roubles ($446 billion). “Resources will be allocated and have already been allocated for equipping the armed forces with the necessary weapons and military equipment, paying military salaries, and supporting defence industry enterprises,” the Ministry of Finance of the Russian Federation stated regarding the 2025 defence budget.
And while headline GDP figures do indeed impress, that’s not to say Russia does not face distinct downside risks to its economic outlook. On the contrary, while much of the world is now finally enjoying bearable inflation again after nearly three years of spiralling prices, the Central Bank of the Russian Federation (Bank of Russia, or BoR) recently confirmed the country’s seasonally adjusted annual inflation rate for September at 9.8 percent, up from 7.5 percent in August. The central bank also noted that it expects inflation to remain within the elevated 8.0–8.5 percent range at the end of 2024.
“Over the medium-term horizon, the balance of inflation risks is still significantly tilted to the upside,” the BoR observed in an October 25 statement. “The key risks are associated with persistently high inflation expectations and the upward deviation of the Russian economy from a balanced growth path, as well as with a deterioration in foreign trade conditions.” The central bank also acknowledged that household and business expectations for inflation had reached their highs for 2024 on the back of the currently heightened price environment.
Such expectations do much to explain why the BoR hiked its key interest rate by a hefty 200 basis points to 21 percent in late October. “Growth in domestic demand is significantly outstripping the capabilities to expand the supply of goods and services. Additional fiscal spending and the related expansion of the federal budget deficit in 2024 have pro-inflationary effects,” the bank’s press release accompanying the rate hike stated.
Inflation is also being supported by the ongoing tightness of the Russian labour market, with unemployment at record lows of 2.4 percent since June and a growing labour shortage in many industries forcing wages upwards at a rate that is outpacing labour-productivity growth. “Real wages are skyrocketing,” Janis Kluge, an expert on Russia’s economy with the German Institute for International and Security Affairs, told the Financial Times (FT) in late July. “You have people who hardly earned any money before the full-scale invasion…who suddenly have huge amounts of money.”
Indeed, the Russian Federal State Statistics Service (Rosstat) found that the real disposable incomes of Russians during the second quarter surged by 9.6 percent, which is reportedly the highest annual growth for a quarter in more than 10 years. Real disposable income also grew by 8.7 percent from the first quarter, as well as by 8.1 percent for the first half of the year. With extra money in their pockets, therefore, Russia is also experiencing a healthy consumer boom. “People are getting these higher salaries,” Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, also told the FT. “So, what are Russian people doing? They’re consuming like crazy, and this consumption creates domestic demand.”
With both soaring wages and a consumer-spending boom sending prices skyrocketing, then, the BoR may continue to hike rates this year to ensure inflation returns to its official 4-percent target—a task the central bank currently aims to achieve during the first half of 2026. The IMF’s latest “World Economic Outlook” report acknowledges that such monetary tightening will weigh on economic growth before then, however, forecasting a decline in GDP growth from 3.6 percent this year to 1.3 percent in 2025 “as private consumption and investment slow amid reduced tightness in the labour market and slower wage growth”.
“What we are seeing right now in the Russian economy, that it is pushing against capacity constraint. So, we have a positive output gap, or you could put it differently—the Russian economy is overheating. What we are expecting for next year is simply also the impact that going over your supply capacity, you cannot maintain for very long. So, we see an impact on moving into more normal territory there,” Alfred Kammer, director of the European Department of the IMF, explained during the press briefing for October’s “World Economic Outlook” edition. “And, of course, that is supported by a tight monetary policy by the Central Bank of Russia. A tight monetary policy, in order to bring down inflation, slows down aggregate demand, and in 2025 will have these effects on GDP. That’s why we are seeing the slowdown in 2025.”
While the BoR has forecasted Russia’s GDP to grow this year at 3.5-4.0 percent, therefore, it is very much a case of a year of two halves, with the strong January-June period giving way to a sharp slowdown during the latter six months. “This deceleration is mainly caused by increasing supply-side constraints, including a decrease in the availability of spare production capacity and labour resources,” the bank’s October 25 press release added. “Domestic demand is supported by growth in lending and incomes of households and businesses, as well as by increased fiscal spending. The upward deviation of the Russian economy from a balanced growth path is still significant. This is also evidenced by high current inflationary pressures.”
This slowdown will continue beyond this year, with the BoR expecting Russia’s GDP to register 0.5-1.5-percent growth in 2025, 1.0-2.0-percent growth in 2026 and 1.5-2.5-percent growth in 2027.
A more upbeat outlook from the Ministry of Economic Development of the Russian Federation, meanwhile, puts the GDP-growth forecast for 2024 at 3.9 percent, much higher than its previous April estimate of 2.8 percent. The Ministry also hiked its GDP-growth outlook for 2025-2027: 2.5 percent for 2025 from the earlier 2.3 percent forecasted in April, 2.6 percent for 2026 from 2.3 percent and 2.8 percent for 2027, compared with its April projection of 2.4 percent.
“We are assessing the rate of economic growth this year more optimistically than we assessed it in April. Now we believe that real GDP growth will amount to about 3.9 percent, which is fairly high and higher than last year,” a Ministry spokesman confirmed. “For the subsequent years, we forecast some slowdown in real economic growth. This is foremost because the tightening of monetary conditions on the part of the Bank of Russia will kick in one way or the other. But, nonetheless, GDP growth rates will remain positive and amount to a quite respectable 2.5 percent [in 2025].”