The Russian economy: another dismal update, June 2025

As of June 2025, the Russian economy and its governing institutions present a picture of resilience under duress, yet one increasingly defined by internal contradictions and mounting long-term challenges. While the initial predictions of an outright collapse due to Western sanctions have not materialised, the economy is showing clear signs of strain, reorienting itself profoundly towards a war footing. Simultaneously, Russia's institutions, while maintaining a façade of stability, are undergoing a quiet transformation, becoming more centralised, militarized and less transparent, all while suppressing any genuine dissent or independent analysis.

Economically, Russia has managed to adapt to a significant degree, largely through a pivot towards non-Western markets and a massive reallocation of resources towards her military-industrial complex. However recent reports paint a more challenging picture for mid-2025. There are growing concerns within Russia itself about the economy sliding towards "stagflation" – a dangerous combination of slowing growth and high inflation. GDP growth in Q1 2025 slowed significantly to 1.4% year-on-year, a stark drop from previous quarters. This slowdown is attributed to falling consumer demand, declining investment in key non-military sectors like construction, and a persistent labour shortage. Inflation remains stubbornly high, with some forecasts suggesting it could reach 15-21% annually, severely impacting the real incomes and purchasing power of ordinary Russians.

The reliance on oil and gas revenues, while providing a crucial lifeline, is also proving volatile. Despite efforts to reroute exports, the Russian oil sector reported a significant loss in Q1 2025, with major companies like Surgutneftegas and Gazpromneft experiencing substantial profit declines. This is attributed to sanctions, fluctuating global demand and increased production costs. The federal budget is under immense pressure, with a substantial deficit for the first four months of 2025, largely due to dwindling oil and gas revenues and soaring military expenditures, which now constitute a staggering 40% of government spending. Russia's inability to borrow from international markets due to sanctions further exacerbates her fiscal strain.

The "sanctions are not working" narrative frequently espoused by the Kremlin is increasingly being challenged by internal and external analyses. While Russia has found workarounds and developed some resilience, these circumventing measures are often costly and inefficient. The country's technological dependence on foreign components, particularly for her military-industrial complex, remains a significant vulnerability, despite efforts to boost indigenous production.

As to institutions, the Russian government maintains a tight grip on power, with decision-making increasingly concentrated within the Kremlin. The war in Ukraine has further accelerated the trend towards authoritarianism, with any form of independent media, civil society or political opposition being systematically stifled. The institutional landscape is being reshaped to serve the needs of the war effort. For instance there are reports of the Kremlin conducting purges of officials and businessmen who do not align with its pro-war objectives, replacing them with veterans or those seen as more loyal. Law enforcement and security agencies play a central role in maintaining domestic stability and enforcing the official narrative.

The Central Bank of Russia, led by Elvira Nabiullina, faces immense pressure to balance economic stability with the government's fiscal demands, often leading to conflicting signals. While the Central Bank recently cut its key interest rate, some analysts warn that this move may be more politically motivated than economically sound, with a potential for future ruble devaluation and renewed inflationary pressures. The lack of transparent economic data and the manipulation of official statistics make it challenging to ascertain the true depth of Russia's economic woes, but independent assessments generally paint a more pessimistic picture than the official line.

In essence, Russia's economy in June 2025 is a war economy, heavily distorted by military spending and reliant on uncertain external revenues. While not on the verge of collapse, it is experiencing a significant slowdown, rising inflation, and mounting fiscal pressures. Russia's institutions, far from being robust and transparent, are increasingly centralised, militarised and geared towards sustaining the war effort, at the expense of civilian welfare and long-term economic development. The façade of stability masks significant structural weaknesses and a growing internal debate about the true costs and sustainability of Russia's current trajectory.