Russia’s Economy. As the conflict in Ukraine continues, Russia’s economy finds itself in an escalating state of austerity, largely driven by the comprehensive international sanctions imposed in response to the invasion.
This article aims to provide a clear and easily understandable overview of the current economic landscape in Russia, incorporating insightful analysis of the various factors at play.
Russia’s Economy, Credit Rating and Economic Outlook.
A Surprising Turn.
A recent report from the Chinese credit rating agency China Chengxin International (CCXI) has offered a unique perspective on Russia’s economic resilience. For the first time since the war began, CCXI assigned Russia a credit rating of BBB+g.
This rating, surprisingly, is higher than the BBB-g level it held prior to the full-scale invasion of Ukraine. A BBB+g rating indicates “medium-level economic and financial stability and moderate default risks.”
CCXI justifies this assessment by stating that “the Russian economy is adapting to sanctions as geopolitical risks stabilize.”
The agency also highlights Russia’s “state financial and monetary policy, sufficient international reserves, and the National Welfare Fund (NWF)” as key factors ensuring the servicing of Russia’s external debt.
Furthermore, CCXI notes that the “rapid increase in production rates in the Russian military-industrial complex after the full-scale invasion of Ukraine initially reduced Russia’s economic dependence.”
However, this seemingly positive outlook is not without its caveats. The report acknowledges a supply-demand imbalance within the economy due to high government spending, labor shortages, and rising inflation.
For 2025, CCXI anticipates only a slight slowdown in inflation and moderate economic growth, primarily attributed to the Russian Central Bank’s high key rate of 21%.
The agency concludes that any future upgrade to Russia’s rating is contingent solely on a reduction in sanctions pressure and geopolitical risks.
China’s Investment: A Retreat Despite Energy Bargains.
Contrary to President Putin’s pronouncements of an “unprecedented” partnership with China and its “limitless opportunities,” Chinese investments in Russia have sharply declined since the war began.
Even the significant discounts offered on oil and gas prices have failed to reverse this trend.
According to a report from the Bank of Finland Institute for Emerging Economies (BOFIT), Chinese investments plummeted to $400 million per year in 2022-2023, a stark contrast to the average of $1.2 billion annually between 2011 and 2018.
This trend aligns with the broader actions of other foreign investors. Data from the Russian Central Bank reveals that non-resident investments in the real sector of the Russian economy have fallen by 57% over more than three years of the war.
From $497.7 billion in direct foreign investments at the start of 2022, only $216 billion remained by 2025, marking the lowest level since 2009.
This suggests that the Kremlin’s strategy of replacing Western capital with investments from “friendly” countries has largely been in vain.
Austerity Measures and Industrial Support Cuts.
The Russian federal budget is facing increasing pressure due to declining oil revenues, forcing Putin’s cabinet to implement stringent austerity measures.
This includes a sharp reduction in funding for Russian industrial support programs, which are already struggling under the weight of the Central Bank’s high interest rate.
The Kremlin has initiated budget cuts for 2025, starting with an approximate one-third reduction in funding for major development projects.
This includes a significant cut to the civilian aviation industry development program, through which the Russian regime aimed to replace Western aircraft with domestically produced ones.
Amendments to the Russian budget law confirm that the program’s total budget will be slashed by 22%, from an initial RUR 101.2 billion (approximately $8 billion) to RUR 78.8 billion (approximately $6.2 billion).
Other sectors are also facing substantial cuts:
• “Industrial Development and Increasing its Competitiveness” program: This program, which aimed to boost “consumer goods” production by 40% by 2030, will lose RUR 66.9 billion (approximately $5.4 billion) of its total funding in 2025.
• Automotive industry: RUR 35 billion (approximately $2.8 billion) in cuts.
• “High-tech” sectors: RUR 46 billion (approximately $3.7 billion) in cuts.
• “Innovative transport manufacturing”: RUR 25 billion (approximately $2 billion) in cuts.
• Shipbuilding: RUR 12.6 billion (approximately $1 billion) in cuts.
• Research and design in civilian sectors: RUR 9 billion (approximately $0.7 billion) in cuts.
• Industrial robotics project: This project, which aimed to bring Russian robotization to the level of the world’s 25 most developed countries, will lose nearly one-third of its funding, or RUR 1.7 billion (approximately $0.14 billion) out of RUR 5.6 billion (approximately $0.5 billion).
These significant cuts highlight the immense pressure on the Russian budget and the difficult choices the government is making to manage its finances under sanctions.
Rising Bankruptcy Risks and Corporate Debt.
The Russian Central Bank has reported a sharp increase in bankruptcy risks among major Russian companies.
An assessment of the financial health of 78 companies with the highest market capitalization revealed that their total debts (not just to banks) amount to RUR 43 trillion (approximately $537 billion), representing almost half of all debts owed by manufacturing and service companies operating outside the financial sector.
The proportion of companies that took out loans at increased interest rates reached 32% of the total loan portfolio of market participants in 2024, compared to only 7% a year prior.
The regulator warns that debtor bankruptcy procedures could begin in the near future. While the corporate sector is generally deemed “more or less stable and a large-scale crisis is not yet imminent,” the crucial phrase here is “not yet.”
The fate of these companies largely rests on the Russian Central Bank’s continued adherence to a high key interest rate.
Corporate Challenges: Cash Flow and Dividend Woes.
The Russian Central Bank’s May monitoring report reveals that the high key rate is increasingly negatively impacting the operations of approximately 12,000 large Russian companies.
Their activities are being hampered by rising costs (confirmed by 30% of those surveyed), as well as shortages of personnel and working capital.
This implies that roughly one in six Russian companies is facing cash flow problems essential for maintaining their production or trade cycles.
The structure of net working capital is a critical factor for banks when evaluating loan applications, and the monitoring showed that securing loans is becoming increasingly difficult.
While the overall profitability of companies remains relatively high, it has been declining since 2024, with a growing proportion of unprofitable enterprises.
Consequently, a number of major Russian companies, including Gazprom, Nornickel, NLMK, Severstal, EN+ Group, Rusal, and Rosseti, decided not to pay dividends at the beginning of 2025 due to losses incurred in 2024.
The US Strategy- Strengthening the Ruble to Undermine the Economy!
The Russian ruble has officially strengthened, hovering around RUR 80 to the US dollar. While this might appear to be a victory for the Russian Central Bank and government officials, economists offer a different perspective.
They believe that when the US imposed sanctions on the Moscow Exchange and Russia’s National Clearing Centre in early summer 2024, it was with the deliberate intention of strengthening the Russian ruble to cause adverse long-term consequences for the Russian economy.
Since 2023, American strategists have understood that a ruble exchange rate of RUR 50 to the dollar, not RUR 200, would be more devastating for the Russian economy.
They realized that sanctions on the Moscow Exchange would strengthen, rather than weaken, the ruble. The ultimate goal is to reduce Russia’s federal budget revenues by harming exporters’ interests and diminishing their earnings.
The US has been attempting to achieve this since 2022.
Russia’s foreign trade balance data for April 2025, compared to 2024, shows exports of $33.2 billion (-2.6%), imports of $24.2 billion (+8.5%), and a positive trade balance of $9 billion.
The noticeable increase in imports suggests a greater demand for foreign currency. In April, currency demand reached its lowest level since July 2024.
By the end of April, the value of the US dollar against the ruble fell by 2.5% monthly, and the Chinese yuan by 2.2%. This indicates that import settlements were primarily conducted in rubles, indirectly confirming that a ruble depreciation is unlikely.
A year has passed, and this “second attempt” by the US appears to be successfully implemented. On one hand, sanctions are in place; on the other, the Russian Central Bank’s high key rate and devaluation policy significantly reduce the demand for foreign currency within the Russian economy.
Financial experts even suggest that the ruble will strengthen further, with adjustments, but it will happen. What is surprising in this entire narrative is the Russian government’s passive stance, the reasons for which can only be speculated upon.
Skepticism Towards New EU Sanctions.
Economists remain skeptical about the potential harm of the upcoming EU sanctions package on the Russian economy.
The proposed measures aim to lower the price cap on Russian oil to $45 and disconnect over 20 Russian banks from SWIFT, the international interbank messaging system.
Russian Economists’ Viewpoint.
Kremlin-aligned Russian economists largely dismiss the new EU sanctions as a significant problem. The prevailing sentiment in Russian media is that while the new European sanctions will create inconveniences for Russian banks and the energy sector, the Russian economy is stable enough to withstand the pressure.
They argue that Russia utilizes its national payment system and possesses a vast market for oil in the East, thus downplaying the negative consequences of new sanctions.
It is considered unlikely that a reduction in the Russian oil price cap from $60 per barrel to $50 or even $45 will significantly alter the situation.
Last year and early this year, Russian oil was sold above $60, and companies adapted without relying on Western infrastructure. If global oil prices rise again, the restrictions will not work regardless of the price cap. In the worst-case scenario, lowering the cap to $45 per barrel might lead to a minimal increase in discounts for Russian export oil grades.
The Kremlin is more concerned about the threat of the US Congress approving secondary sanctions, but it remains unclear whether the US is willing to risk confrontation with India and China over Russian oil.
Expert Opinions on Sanctions Effectiveness.
Boris Kopeikin, a researcher at the Stolypin Institute for Economic Growth in Russia: “Additional restrictions on Russian oil may increase logistics costs. Of course, the Russian economy will not benefit from them. But past practice shows that sanctions are not an insurmountable problem.
For Russian oil sellers and buyers, the level of oil prices in the global market is much more important. Mutually beneficial trade will continue, although buyers in China, India, and other countries will try to take advantage of the situation to achieve larger discounts.
New sanctions against the Russian banking sector will increase the share of Russian rubles, Chinese yuan, and other ‘friendly countries” currencies in foreign trade transactions, stimulating Russia and its partner countries to reduce their dependence on Western financial infrastructure in the long term.
The evolution of Russian sanctions and their circumvention mechanisms are being particularly closely watched in China and many other countries.”
Dmitry Yelovsky, General Director of the “Actor” communication agency: “It would be foolish to assume that sanctions will not affect the Russian economy. Of course, Russian oil exporters and banks will face difficulties, which will require resources to overcome, but it will not be critical.
India and China will not stop buying Russian oil and gas- this is confirmed by current practice. Europe will also continue purchases, and hardly at $45; otherwise, it will face a serious energy deficit itself. As a result, the next package of sanctions will only be formally fulfilled.”
Ilya Gambashidze, Director of the “ASP” agency: “With sanctions, the EU is trying very hard to inflict maximum damage on Russia. And if the desires of the European Union leaders matched their capabilities, the damage would certainly be done.
We are witnessing the powerlessness of European sanctions against Russia’s ‘shadow fleet.’ And we will be convinced of this again when the EU tries to lower Russian oil prices.
All Western efforts will result in this oil being sold on the world market at the exchange price. This would even be the most favorable scenario for Europe, if it cannot dictate the prices of raw materials it does not own.
The US, with its raw material resources, also wants to trade oil within a certain price corridor and is not interested in continuing a price war with Russia. In addition, the fight against Russia’s ‘shadow fleet’ will contribute to rising energy prices, primarily for Europe itself.
*And you will get such a picture: it’s not that Russia doesn’t feel the consequences of the economic war at all, but generally, one can laugh at the sanctions.”
Oleg Abelev, Head of the Analytical Department at “Rikom-Trast” investment company: “Russia’s leading banks that are on the sanctions list are already disconnected from SWIFT.
The share of the remaining banks’ loan portfolios is no more than 10-12% of the total volume of the Russian banking system. I do not think that the new restrictions will significantly affect the economy.”
Yuri Lilov, Financial Analyst: “If we talk about disconnecting 20 Russian banks from SWIFT, that’s really unpleasant.
The Russian banking system is not suitable for international transfers.
Yes, it is too fragmented, and due to sanctions, this fragmentation will continue. Before the 2022 sanctions, about 300 Russian banks were connected to the SWIFT system.
Now about 130 financial organizations are disconnected from SWIFT, including Russia’s ten largest banks. The exception is banks that handle payments for energy supplies, the main one being Gazprombank, which is forced to operate with huge restrictions.
For example, it is not allowed to conduct operations with dollars due to sanctions from the US Department of the Treasury’s Office of Foreign Assets Control (OFAC).
Despite US sanctions, Gazprombank continues to make payments in euros. And most likely, it will continue as long as the EU buys energy resources from Russia.
According to Q1 2025 statistics, the share of Russian gas in EU imports was 18.2%, as were, for example, nickel (18.9%) and mineral fertilizers (25.6%).
Data on Russian banks that still have SWIFT access are not publicly available. Disconnecting new banks from SWIFT will increase the burden on the remaining banks in the system, leading to delayed payments and increased commissions.”
Vladimir Klimanov, Director of the Center for Regional Policy at the Russian Academy of National Economy and Public Administration (RANEPA), Doctor of Economics: “Russia has already adapted to sanctions from ‘unfriendly countries,’ although they still affect the economy more negatively than positively.
Therefore, even existing sanctions are undesirable, especially their strengthening???
Secondary sanctions on the Russian energy sector will be less painful than primary ones because oil is already cheap, and the decline in Russian federal budget revenues has already occurred.
It will be more difficult if Russian banks are disconnected from global financial system communication channels. However, new sanctions are also becoming a burden for Western countries themselves, so their introduction is under a big question mark.”
Conclusion: A Complex and Evolving Landscape.
The current economic situation in Russia is a multifaceted challenge, marked by both adaptation and significant strain.
While the country has demonstrated a degree of resilience, particularly in its military-industrial complex and through its financial policies, the long-term impact of sanctions and shifting global alliances remains uncertain.
The austerity measures, coupled with declining foreign investment and a struggling corporate sector, point to a period of continued economic contraction and difficult choices for the Kremlin.
The effectiveness of further sanctions packages, particularly those targeting oil price caps and SWIFT access, will likely be a subject of ongoing debate and observation.
What do you find most surprising about the current state of the Russian economy, and what do you think will be the most impactful factor in its future trajectory?
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I hate Russia, it’s an evil country and I wish them bankruptcy…