Russia’s GDP is set to fall by at least 50% in 2025, as the economic crisis in the country continues to gather pace. Businesses and consumers have been hit hard in recent months by the double whammy of spiralling inflation and high interest rates.
Consumers, in particular, have seen food prices explode, as inflation soars and shows no sign of coming sown. Russia‘s Central Bank was forced to hike interest rates to 21% in October – the highest level in over 20 years – in a bid to contain inflation. As a result of the increase in the key interest rate, many firms are struggling to pay back bank loans and are fighting for their survival.
President Putin urged the Central Bank governor, Elvira Nabiullina, not to “cryogenically freeze” the economy and to loosen its monetary policy.
Putin’s plea was echoed by Kirill Dmitriev, CEO of Russia‘s sovereign wealth fund and the Kremlin’s envoy on international economic cooperation.
He argued that a decrease in interest rates was “critical” for investment and overall economic growth.
Despite the warnings, the Central Bank decided to freeze its key interest rate at 21%, in a big blow for Russia‘s business community.
The decision is expected to have a major negative impact on Russia‘s economic growth this year.
Kyrylo Shevchenko – a former head of Ukraine‘s National Bank – said in a post to his X social media account: “Governor Nabiullina insists inflation must fall steadily before any cuts.
“But inflation is still over 10%, and GDP growth is expected to crash from 4.1% in 2024 to just 1–2% in 2025.
“Meanwhile, credit growth is tanking, investment is flat, and Nabiullina’s advice?
“Companies should stop relying on loans and ‘go to the capital markets’ — in a country under heavy sanctions and cut off from foreign investment.”
He added that the governor was clinging to outdated policy tools and that Russia‘s economy was stagnating.
The Kremlin has sought to drive economic growth through massive military spending, which over the next three years will rise to 6.1% of GDP.
Analysts for the website intellinews.com described the move as “a wild piece of economic management”.
They added: “Instead of tweaking the economy with carefully selected 25bp tweaks to the prime interest rates every now and again, Nabiullina is letting the currency crash and cutting off access to big swaths of credit, while Russian Finance Minister Anton Siluanov is using a sledge hammer of credit-funded massive spending increases to boost growth in other parts of economy.
“The war machine must be kept going at all costs, but cuts will be made elsewhere to bring about a soft landing.”