The Economist: Trump Kicked Putin In The Teeth
- 30.04.2025, 11:50
Russian economic growth has fallen to zero.
Mr Trump may be well disposed towards Mr Putin, but with his trade war he has kicked him in the teeth, The Economist reports.
Russia's economy is slowing sharply
A high-frequency index produced by Goldman Sachs, a bank, suggests that, since the end of last year, Russia’s annualised economic growth has fallen from around 5% to around zero (see chart). VEB, the Russian development bank, finds similar trends in its estimate of monthly growth. A high-frequency measure of business turnover compiled by Sberbank, Russia’s largest lender, has dipped.
Although more circumspect, the government acknowledges that something is up. In early April the central bank noted that recently “a number of sectors recorded lower output because of plummeting…demand”.
After growth - a sharp slowdown
Russia’s worries come after three years in which its economy outperformed almost all forecasts regardless of the war, owing to the combination of a fiscal splurge, high commodity prices and the militarisation of the economy.
Following the full-scale invasion of Ukraine in 2022, economists predicted a contraction in annual GDP of up to 15%. In the event, GDP fell by 1.4% that year, before expanding by 4.1% in 2023 and 4.3% in 2024. Consumer confidence neared record highs.
As it started to seem that Donald Trump, America’s president, might give Vladimir Putin what he wants to end his war on Ukraine, some expected Russia’s economy to accelerate even further in 2025, the Economist writes.
Factor one: completion of the “structural transformation”
The first relates to what Russia’s central bank euphemistically calls the “structural transformation” of the economy.
Having previously faced towards the West and accepted private enterprise (within limits), it has since 2022 become a war economy that faces the East. This transformation has required vast investment, not only in weapon and ammunition factories but also in new supply chains enabling more trade with China and India (as well as more production at home). By the middle of 2024 real spending on fixed capital was 23% higher than in late 2021. That adjustment, says the central bank, is now complete. Military expenditure is following a similar pattern.
Military expenditure is following a similar pattern. Julian Cooper of the Stockholm International Peace Research Institute, a think-tank, estimates that this year military spending will grow by just 3.4% in real terms, a screeching slowdown from the 53% increase of last year. Weaker spending on “structural transformation” means slower growth.
Factor two: high inflation
The second factor is high inflation and the central bank's reaction. Russian inflation has been above the central bank’s target of 4% year on year for months, even surpassing 10% in February and March. Gung-ho military spending is one cause, but so is a shortage of labour caused by conscription and the emigration of skilled workers. Last year nominal wages rose by 18%, forcing companies to put their prices up. In response the central bank has tightened the screws. On April 25th it opted to keep its benchmark interest rate at a punishing 21%, its highest level since the early 2000s.
Factor three: foreign economic impact
Were that the whole story, perhaps the Kremlin would remain content. For Russia’s government, a small, gradual deceleration may be a price worth paying if that means taming inflation. The problem is that the slowdown is neither gradual nor small. This is because, in recent weeks, a third factor has come to dominate all others—external conditions have soured. As America’s trade war has escalated, global growth forecasts have plunged, and oil prices have followed. Economists are particularly concerned about China, the largest buyer of Russian oil. The IMF has cut its expectations of Chinese GDP growth in 2025 from 4.6% to 4%.
Cheap oil hits budgets and markets
The decline in oil prices has already hit the stock market - the Moscow Exchange index has fallen by 10% from its peak, and export revenues have begun to decline. In March, oil and gas tax revenues fell by 17% compared to last year. On April 22, Reuters reported, citing government documents, that a sharp decline in oil and gas sales is expected in 2024.
Note that the World Bank predicts that weakening global growth, caused in part by trade shocks, will lead to a decline in world commodity prices by 12% in 2025 and by another 5% in 2026 to the lowest level of the 2020s in real terms.
Commodity prices are set to fall to their 2015-2019 average over the next two years, marking the end of the price boom fueled by the post-COVID-19 economic recovery and Russia’s invasion of Ukraine in 2022. Brent crude is forecast to average $64 a barrel in 2025, down $17 from 2024, and just $60 a barrel in 2026, amid ample supply and falling demand. Oil is currently trading at $63.