In 2024, Russia’s economy has surprised on the upside, growing even faster than any of the G7 despite its growing isolation. Despite all these sanctions, official figures indicate that the Russian economy grew by 4.3% this year. By comparison, the U.K. grew only 1.1% and the U.S. grew by 2.8%. This surprising boom, though, is occurring as officials have repeatedly warned of a looming recession and serious workforce shortages.
Just last week, Russia’s Economy Minister delivered a stark warning. He recently said that the country is “teetering” on the brink of a recession after a time of “overheating.” This exceptional period of growth hasn’t been matched by a strong labor market. By the end of 2024, Russia was anticipating a deficit of nearly 2.6 million employees. This drop largely came due to men getting conscripted into military service or leaving the country to avoid the war. This kind of shortage makes an already difficult economic climate even more challenging and threatens long-term growth potential.
Barring all these (and other) obstacles, the Russian economy appears to be holding on surprisingly well in pockets. We hear you—the unemployment rate has fallen to an unprecedented 2.3%. Experts predicted it would climb to just 3.5% next year. This low unemployment rate is a strange picture considering the economic conditions on all other fronts. With inflation continuing to be a major concern, the deck is already stacked against us.
As of April, Russia’s monthly inflation rate was 9.9%. Western sanctions have only exacerbated that inflationary pressure by making goods prohibitively expensive. On top of that, the current labor shortages are straining every sector and making matters worse. In response, the central bank has bumped interest rates up to unprecedented heights. They are doing so to help bring down prices and fight inflation.
Russia has adeptly rerouted its oil exports away from Europe to other market. When it comes to its gas exports, it is failing to follow its own advice. Analysts believe that this shift isn’t sustainable over the long-term. Even so, “This would create a pretty grim economic picture for Moscow,” one analyst pointed out.
The new realities of the geopolitical landscape have ushered in a boom in military spending, financed almost exclusively by oil sales abroad. Building on the military production for the continued operations in Ukraine, production has increased dramatically. This change indicates a stark prioritization of resources towards defense over a commitment to economic diversification.
A rising “shadow fleet” of tankers has become the norm as Russia works to avoid sanctions on its oil shipments. This strategy has reinforced the country’s ability to keep its oil revenues coming in, even in spite of international sanctions. Experts warn that while these measures allow immediate operational capacity additions, they do so at the expense of longer term availability to expand economic growth more substantially.
“None of this is likely to seriously impede Russia’s ability to wage war in the short-term,” – Mr Tóth-Czifra
In spite of these rosy military forecasts, economic analysts are cautioning concerning the longer-term repercussions. “It could affect the economy’s ability to grow or diversify in years to come,” Mr Tóth-Czifra added.
The Russian rouble has very clearly rebounded, and it is one of the best-performing currencies in the world this year with over 40% gains. This economic recovery does little to calm fears about an economic downturn just around the corner. Many observers expect the fallout to cause vast and continuing pain across the economy until late 2026, with predictions of widespread defaults and bankruptcies on the rise.
“Overall, it will be a pretty uncomfortable situation until late 2026, and definitely there will be defaults and bankruptcies,” – Yevgeny Nadorshin
The new economic reality foreseen by the combination of sanctions, labor shortages, and fluctuating oil revenues depicts a paradoxical future for Russia’s economy. Military expenditures are the true sacred cow in the budget, and continue to be untouchable. In doing so, they allow our public services and infrastructure to fall further into disrepair.