Hit by falling oil revenues and Western sanctions, growth in the country has slowed while the budget deficit has exploded.

By Marie Jégo and Benjamin Quénelle via Le Monde https://www.lemonde.fr/en/economy/article/2025/08/11/why-russia-s-economy-is-beginning-to-falter_6744266_19.html

The war in Ukraine is beginning to take its toll on the Russian economy, which is facing a sharp slowdown due to declining oil revenues and Western sanctions. The country is “on the verge of recession,” said Maxim Rechetnikov, the economy minister, during the St. Petersburg Forum – the so-called “Russian Davos” – in June.

President Vladimir Putin immediately rejected that assessment, eager to praise Russia’s resilience in the face of sanctions. But the numbers do not lie. In July, the International Monetary Fund lowered its growth forecast for the country from 1.5% to 0.9% for 2025. This is a far cry from the spectacular rates of 4% seen in 2023 and 2024, when the state devoted all its financial resources to the war.

Another troubling sign: The budget deficit has exploded, reaching, according to the Finance Ministry, 4.9 trillion rubles (about €56 billion) at the end of July – a surge of 30% compared to the annual target set by the government. The economic slowdown, the drop in oil and gas revenues, as well as the depletion of reserve funds – practically exhausted after three years of war – make up a new reality: Cuts are coming. The Finance Ministry will find it difficult to slash spending on defense and security, which account for just over 40% of expenditures. The government will therefore have to reduce social contributions as well as support for civilian industries.

Exports at rock-bottom prices

While overall budget spending has increased (20.8% in one year), revenues have dwindled. Oil and gas sales, which make up about one third of federal revenues, fell by 18.5% during the first seven months of the year. The main reason is the falling price of oil on the global market ($66.40 per barrel at the start of August, or about €51.80), with Russian crude falling even further due to its price cap at $47.60, imposed as part of the 18th package of sanctions recently adopted by the European Union. With the West refusing to buy its oil, Russia has redirected sales to China, India and Turkey, but it is exporting at rock-bottom prices. Circumventing sanctions is also costly for producers, who are forced to use multiple intermediaries.

For now, life in Moscow and other medium-sized cities in the Russian Federation still appears vibrant, with crowded restaurants, theaters and luxury shops. But the combination of several factors – declining revenues, high interest rates, persistent inflation – suggests the economy is in a tailspin. While the defense industry, well-fed by state orders, “runs like clockwork,” according to Sergei Aleksashenko, a former vice president of the Central Bank of Russia (1995-1998), the civilian sector is struggling.

During the first seven months of 2025, entire segments of the civilian economy – metallurgy, mining, construction and the automotive industry – saw production decline. In the steel sector, MMK, the plant of Magnitogorsk, one of the world’s largest steel producers and a leader in Russian ferrous metallurgy, reduced its output by 18% in the second quarter. For the period from January to June, its net profit plummeted by 88.8% compared to the same period in 2024.

The coal industry has been hit especially hard: Production is falling, export revenues are down and debts are rising. Even the largest companies are in the red. The sector’s net loss in 2025 could reach between 300 and 350 billion rubles (over €3 billion), warned Dmitri Lopatkine, deputy director of the coal industry department at the Energy Ministry. Directly impacted by the war and sanctions, this sector is struggling to compensate for the loss of European markets, where it was once a leading supplier. Shifting toward the Asian market, where competition is tougher – especially with Australia, Indonesia and South Africa – is no easy task.

Resorting to ‘cannibalization’

Moreover, China, Moscow’s main trade partner, increased its imports by 14% in 2024 but reduced its purchases from Russia by 7%. Finally, sanctions have made it difficult for Russian companies to access equipment and components from Europe, the United States and Japan, which they traditionally relied on. Having failed to overcome their dependence on Western equipment, companies have had to resort to “cannibalization” – dismantling several units in order to assemble a single working one.

The automotive industry has also been particularly hard-hit. In the first half of the year, car production fell by 28%, truck production by 40% and several factories will switch to a four-day work week. This is the case for the truck manufacturer KamAZ, the Avtovaz and GAZ car factories and the tractor factories in Chelyabinsk and Saint Petersburg. These reduced hours will lead to a 20% loss of income for workers and employees at the factories concerned, contributing to a further decline in consumption.

For months, industrialists and bankers have been demanding a cut in the key interest rate set by the Central Bank of Russia, which has been kept high to combat inflation, estimated at 10%. Both companies and households want to be able to borrow again and take out consumer loans. On July 25, the Central Bank lowered its key rate from 20% to 18%, which is insufficient to revive lending. With rates this high, it is difficult for businesses to borrow for investment. In July, Alexei Krapivin, CEO of construction giant Natsproektstroy, said that many companies could neither sustain their ongoing projects nor honor their debts. More than 55% of loans granted to companies carry variable rates, and since interest rates remain high, many companies find themselves on the verge of default.

Toxic mix

Banks have also grown concerned about the rapid rise in unpaid loans. Between the beginning of 2022 and May 2025, corporate debt to banks nearly doubled. At the end of June, Bloomberg, citing sources in the banking sector, warned of the growing risks of a systemic banking crisis. Banks granted loans at reduced rates to support the Kremlin’s war effort and are now threatened by “bad debts.” Nearly half – 48 out of the 100 largest Russian banks – saw their financial results worsen in the first half of the year compared to 2024. Fifteen of them posted losses.

“With full access to the data of the banking system, I can confidently state that fears of a banking crisis are unfounded,” said Elvira Nabioullina, governor of the Russian Central Bank, on July 3. But other officials are more worried. For example, Sberbank CEO German Gref sounded the alarm in June, warning that the toxic mix of soaring interest rates and an overvalued ruble was creating a “perfect storm” likely to stifle investment and drag the Russian economy into long-term decline.

A return to growth will not happen anytime soon. “Any future growth is only possible if labor productivity increases. But over the past 10 years, it has grown by just over 1% per year on average. Investment is needed, and that is difficult in wartime and with a key interest rate of 18%,” said Dmitri Nekrasov, an expert at the Center for Analysis and Strategies in Europe.