Russia's Economic Prospects In 2025 And Beyond

Around a month ago, the Russian government submitted its 2025 federal budget to the State Duma.[1] Observers commented on its figures, with the greatest attention paid to a 25-percent increase in military spending compared to 2024 that will bring the defense allocations to a level exceeding that of peaceful year of 2021 by four times.[2] This trend appears, of course, to be quite important – mostly because it ends the former plans for limiting, if not cutting, the military expenses that were announced every year since the start of the war, as in Russia the parliament adopts three-year budget projections, one might see that every time the "military funds" were expected to be cut from the budget's second year onwards – but this time, for 2026-2027, they are not decreasing).[3] But, to my mind, one should not only look on the budget as such, but assess the larger picture of Russia's economic condition for 2025 and beyond.

(Source: NN.RU)

The Kremlin Believes That Economic Vulnerability Is In Decline

The most important point here is that the Kremlin now sincerely believes that the economic vulnerability has, if not completely ended, declined to a level at which it can be simply ignored. For the second year in a row, the federal revenues exceed expectations,[4] and for the first time the Finance Ministry ventured to propose a deficit-free budget. In the past it had featured a 0.5 percent GDP shortage,[5] but the people in the government call it "structurally deficit free," whatever that means.[6] This shift, I would argue, reflects the fact that the Russian economy is now thought to be able to produce almost any amount of government revenue that might be needed for Russian President Vladimir Putin's war efforts – and this is per se a huge difference compared to the first phase of the "special military operation." All extraordinary measures like mobilization, forced borrowing, personal deposit freezes, etc., are no longer on the table. The war, formally an "emergency," has been rethought as a "new normal" that can be waged indefinitely.[7] Even though many experts are still talking about the aggravating slowdown in Russia, the Kremlin is mostly right: These days, the economy is the Russian dictator's reliable rear.

Another important message reads that the government considers both Russian business and Russian employees prosperous enough to be able to pay higher taxes. In 2021, the first shift, from a flat 13-percent income tax to a 15-percent tax for incomes exceeding five million rubles per year, was introduced.[8] Previously, in 2019, when the value-added tax was elevated,[9] the changes were either too small – the additional income tax contributed a mere 150-160 billion rubles in revenue annually in 2022-2023 – or were levied on everyone as a consumer of everyday goods.[10]

However, these days, the Kremlin targets the elites and the upper strata of the middle class as well as all Russian businesses since it believes they are earning too much. Such an approach has its logic; in 2023, the combined profits of Russian businesses adjusted by subtracting their combined losses, hit an all-time high of 33.4 trillion rubles, or roughly 20 percent of GDP.[11]

The real wages, on their part, are expected to rise in 2024 by 9.2 percent,[12] a pace unseen since the early 2000s. Putin, as one may see, now believes that the wealthy should share their wealth with the state – and so, I would say, sends a clear signal that the Russian economy is working not so much for the benefit of the people but for that of the state.

To my mind, the 2025 "tax adjustment" will not be the last, and in the coming years the Kremlin will make many more attempts to squeeze the economy to fund its inflating war ambitions and infrastructure programs. As the fundamental principle of overall tax stability is broken – many duties and fees have been increasing constantly over the past 20 years while the major tax breaks remained intact – one should expect much more of the same kinds of measures to follow suit.[13]

What should also be mentioned is that the Russian leadership now considers it normal to cut some "non-essential" funding. In this category it includes transfers and subsidies to regional governments, healthcare, educational programs, and much more. For some ("general welfare spending" and regional subsidies), the government allocates less money than before, while for others (education and healthcare), it increases the nominal spending by a margin that does not keep up with even the official inflation rate.[14] The only section where incomes should match the rate of inflation is the pension system (the so-called "social pensions" that most retirees get, are expected to grow by 14.75 percent by April 2025) – so it seems that Putin will do his best by increasing the retirement benefits even faster than official inflation bites into people's incomes.[15]

Putin Avoids Disappointing His "Electoral Base" Of Retirees

On the other side of the equation, there is no tax increases for the self-employed or for individual entrepreneurs – the Kremlin does want to distract this numerous and active group that has been growing in size in recent years – now there are more than 10 million Russians that claim they are self-employed and may enjoy preferential tax regime.[16] I would summarize these trends by saying that Putin believes in the private market economy so much that he easily cuts both the revenues of entrepreneurs and employees and the social benefits they may enjoy – but he avoids disappointing his "electoral base" of retirees and state pensioners. Moreover, he prefers to increase the nominal payments and lets the inflation "adjust" them to the changing conditions, thus masterfully forcing the people to believe that the powerful and generous state gives them a lot of money, but as it happens, the selfish and greedy businesses take it back through raising prices.

Of course, one of the most important questions is whether the Russian economy could continue to enjoy the growth it has achieved in 2023 and in the first half of 2024. To my mind, it seems quite probable – but of course the growth rates will go down in 2025 to around 2-2.5 percent before recovering a bit in 2026 and later.[17]

The economy, I would argue, is now undergoing another wave of adaptation to the changing conditions, similar to that of 2022, but much less dramatic (I used to call it "the second adjustment"). Many experts question the very possibility of a new period of expansion, citing the extra high interest rates and increasing inflation, but I want to focus on a quite important issue: In Russia, high rates will for sure demotivate individual borrowers from getting mortgages or consumer loans, but they might affect business much less. In recent years, the government has adopted dozens of subsidized loan programs for small businesses, agricultural companies, hi-tech enterprises, and, of course, for armaments producers and state-controlled corporations. Until the beginning of 2022, the Russian banks issued around five trillion rubles in such subsidized loans,[18] not to mention more than six trillion rubles disbursed through subsidized mortgage plans since 2020.[19] Moreover, the Russian mid-sized and small business has been relying for years on "organic" growth, as its profits were the most important source for new investment.

In all these cases, business is not hurt too much by the growing interest rates, but may benefit from the increasing prices for its products. What we see these days is, I would repeat, an adjustment to new foreign trade practices, to new price dynamics, to changing cost of credit, etc. – but at the same time the aggregate domestic demand shows no signs of declining. Moreover, the bank deposits of both Russian citizens and Russian corporate entities are growing, with the former advancing at record pace, increasing by an incredible 54 percent from early 2022 to more than 57 trillion rubles.[20]

The "War Economy" Has Replaced The Anemic Economic Condition Of The 2010s

There is also another important issue that increases Russia's economic stability and makes the war less disturbing for most of the population: The people realize that the "war economy" has substituted the anemic economic condition of the 2010s. I would remind the reader that this decade was marked by very slow economic growth averaging 1.8 percent per year for 2011-2020,[21] and also by deteriorating quality of life as even official figures for real disposable incomes decreased by more than nine percent between 2013 and 2020.[22]

What should be emphasized here is reversal of a long-time trend that had led to a decrease of labor's share in the Russian GDP. While in the early 2000s it averaged around 48-50 percent, it has been declining steadily since then, hitting an all-time low of 38.8 percent in 2021.[23] Now, with fierce competition for employees, the workers may dictate their conditions to the businesspeople, and the trend of growing labor compensation looks quite serious.

By the end of this year, the labor share in GDP may exceed 42 percent, and, probably, it may be back to 48 percent in 2027-2028. This change may have a fundamental impact on the Russian economy since together with the growing autarky it would significantly increase the domestic demand for consumer goods and services and keep the Russian economy growing even if the war stops and some kind of armistice, if not a peace treaty, is brokered. The growth in ordinary workers' income looks like a trend unseen since the 2000s and it has a tremendous influence on the popular acceptance of Putin's "war economy."

Conclusion – The West Should Prepare For A Long-Term Struggle With Putin's Reich, Which Looks More Resilient Than The Soviet Union

To conclude, I would argue that Russia seems to have become a long-term threat to the Western world whose chance of economic collapse is extremely small. Some experts have been arguing for a long time that the current showdown might be called "a new Cold War," but it seems the comparison is not perfect.

During the Cold War, the Western nations competed with an entirely different system based on a planned economy that was generally much less effective than their own. The Soviet Union's defense spending was three times higher as a share of GDP, as are Russia's recent military expenditures.

Soviet commodity trade was mostly Western-oriented, and the Soviet Union never coordinated its price and production policies with anyone else. But now the Russian economy is a market economy. The Russians own vast personal and private assets for which they will fight, making their businesses more effective. Russia possesses powerful allies with significant technological capabilities, like China.

All this makes the situation resemble not so much the Western-Soviet story of the 1950s to the 1980s but rather the story of 1930s, when the Axis powers rose to their mastery in continental Europe by combining ultra-nationalistic ideologies with dictatorial political systems and highly effective market economies led and managed by highly capable administrators and businesspeople.

In the 1930s, the great powers descended quickly into a World War, and one did not have a chance to trace their long economic competition. However, the industrial developments in Germany at that time were quite impressive as it took the entire world several years to defeat it. I have for a long time insisted that Putin's Russia strongly resembles the fascist regimes of interwar Europe, and these similarities appear in the economic realm as well.

Russia's war with Ukraine will soon extend into its fourth year, and one of the main lessons of this hard and sorrowful time is that the market economy created in Russia in the 1990s and 2000s, following the advice and copying the standards provided by the Western nations, has turned into a powerful weapon now directed against the West itself. China's story looks quite similar with the only difference being that Beijing has refrained from engaging in a military confrontation with any Western ally. This fact should be taken seriously since it already seems that many economic sanctions imposed on Russia are backfiring and inflicting more costs on the West than on Russia, while their overall efficiency is far from obvious.

The West, it seems, should rethink the risks posed by the results of its own policies (as, in some sense, the rise of Nazi Germany was caused by the special treatment of the Weimar Republic) and prepare for a long-term struggle with Putin's Reich, which these days looks even more resilient than the Soviet Union once was...

*Dr. Vladislav Inozemtsev is the MEMRI Russian Media Studies Project Special Advisor, and Founder and Director of the Moscow-based Center for Post-Industrial Studies.