BOFIT Forecast for Russia 2025–2027

2/2025, published on 20 October 2025

The pace of Russian GDP growth decelerated much more rapidly in the first half of 2025 than anticipated in our March forecast. We now expect full-year growth to remain at or below 1 %. The needs of war, labour shortages and slower growth in public spending will restrain growth of the Russian economy throughout the forecast period.

Russian GDP growth slows sharply in 2025

Our current forecast expects public spending to support domestic demand, and especially production in sectors linked to the war effort. Growth of the other sectors of the economy will be limited by labour shortages and tightening borrowing constraints. Barring significant changes in Russian domestic policy or major external shocks, we see Russian GDP growing at only about 1 % a year throughout the forecast period.

The downside risks to this forecast increase as the macroeconomic imbalances in Russia worsen. While it is becoming harder to channel economic resources to sectors serving the war effort, it is still not impossible. A longer pause in military activities would provide a welcome respite for the Russian economy, but the significant role of the military-industrial complex is unlikely to diminish any time soon.

Government support for production in strategic sectors

Economic policy remains focused on supporting the war of aggression against Ukraine. This has led to rapid growth in public spending over the past three years, with nominal growth in consolidated budget spending averaging around 17 % a year. A substantial share of spending growth has directed on defence and internal security, which together account for over 40 % of this year’s federal budget. War-related expenditures are also embedded in several other major budget categories, such as social programmes and interest subsidies for corporate borrowers. It is highly unlikely that such spending could be reduced during the 2025–2027 forecast period. However, cuts to other public spending, particularly support programs primarily aimed at private consumption, are possible.

Even with tax hikes, public sector revenues have lagged spending growth, causing the deficit to expand. The deficit has been covered up to this point by draining assets from the National Welfare Fund and issuing domestic government bonds.

The level of Russian government debt, roughly 13 % of GDP, is still quite low by international standards. The bulk of public debt is denominated in rubles, and a significant share of that is held on the balance sheets of domestic banks [1]. Sanctions have effectively banished foreign investors from Russia’s bond markets. This makes borrowing more expensive and constrained for the government. Public sector deficits and government borrowing are expected to remain at this year’s level throughout the forecast period. Under this assumption, financing the deficit is not expected to become impossible, but continued tax increases will be necessary to fund public spending.

Growth in private consumption slows

War, along with its many consequences, has increased labour demand, and led to a rapid rise in average wages. The rise in wages has outstripped growth in consumer prices throughout the country, and unemployment has fallen to record-low levels. Notably, most Russian households feel that they are better off economically than they were before the full-scale invasion of Ukraine in 2022 [2].

Rising wage income and household borrowing have supported retail sales and demand for many domestic services. As travel abroad has become more difficult for most Russians, the domestic hospitality industry (hotels and restaurants) has experienced robust growth, partly with government subsidies. Going forward, growth in private consumption, however, is expected to slow considerably. As growth in aggregate demand slows, pressure to raise wages should ease and real wage growth should decelerate. On the other hand, falling inflation helps real wage growth, and real incomes are not expected to decline.

We expect high costs, labour shortages and increased taxation to further reduce the growth opportunities of private firms, especially those that operate outside the military-industrial complex. As a result, the rise in earned income should slow significantly. Moreover, the sizeable cuts in government-subsidised housing loan programmes in 2024 and extremely high interest rates are already reflected in decelerating household borrowing. Private consumption growth overall should slow significantly to around 1 % p.a.

Investment growth stalled

Fixed investment growth been a major contributor to overall economic growth in recent years. The increase in domestic demand, the significant reduction in import competition and surging corporate profitability all encouraged companies to expand their operations. Companies financed most of this new investment out-of-pocket or through domestic bank loans. Many branches that are key to import substitution or supporting the war effort have benefitted from government subsidies and loan support programmes. In addition, the assets of the National Wealth Fund have been used to finance infrastructure projects deemed strategically important, thereby fuelling high growth in fixed capital investment.

Some rapid investment growth is linked directly to the war effort. The lion’s share of production of weapons systems and other machinery and equipment for military use is recorded as “investment” in accordance with international standards. Further, some construction activities are directly related to military needs. The rapid growth in production of war-related manufacturing industries suggests that various weapons systems have played a significant role in fixed investment growth.

Considerable uncertainty surrounds future investment trends. The investment prospects for private firms have clearly diminished and investment growth has stalled this year. Corporate earnings have shrunk, the tax burden has grown and the price of external financing has increased. Corporate surveys suggest a substantial, broad-based slowdown in corporate investments, with decline in some branches like the construction sector. With the government on track to cut subsidy programmes during the forecast period, we anticipate a weakening of growth prospects and further degradation of the outlook for capital investment. Nevertheless, war-related production and investment should continue to rise over the coming years. It is possible that infrastructure projects set to launch late in the forecast period could modestly increase fixed investment growth.

Goods trade surpluses to continue

Western sanctions continue to restrict Russia’s foreign trade. Even though the Russian economy has grown rapidly in recent years, the value of imports has remained flat. Figures released by the Central Bank of Russia (CBR) show that the value of Russian goods imports in 2024 was less than that of 2021. While comprehensive figures on import price trends are unavailable, a recent study (Korhonen & Simola, 2025) finds that prices of critical sanctioned goods have soared. Due to increased prices for imports, we infer that the volume of Russian imports has declined during the war. As our forecast assumes that the pressure of sanctions remains unchanged, the volume of Russian imports is not expected to increase during the forecast period.

Crude oil and petroleum products continue to dominate Russian goods exports. Oil & gas export volumes are expected to remain at their current levels. Our forecast assumption about Russian crude oil prices is based on the prices of futures contracts for benchmark Brent blend crude in early October 2025. Based on futures prices, we expect world crude oil prices in 2026–2027 to average around $65 a barrel, a level clearly lower than in recent years. If sanctions pressure is maintained at current levels, the export price of Russian crude oil would remain well below the world price. The International Energy Agency (IEA), for example, reports that the average discounted price of Russian crude oil exports in June-August 2025 was roughly $10 below the price for benchmark Brent crude. We assume that a similar discount will prevail throughout the forecast period. Prior to the full-on invasion of Ukraine, the average price of Russian crude was typically only $1–2 dollars a barrel less than Brent.

Based on these assumptions, the net contribution of exports to GDP growth is slightly positive. We expect the current account to remain in surplus.

As the pace of growth slows, risks increase

Following two years of high growth, the resources of the Russian economy are now stretched to full capacity. Increased public spending, therefore, no longer generates growth the same way it did previously. Moreover, because increased public spending raises prices generally, the central bank is compelled to curb inflationary pressures by raising its key rate to very high levels. While monetary policy has only minor impacts on government-supported branches serving the war effort, high interest rates profoundly affect private consumption and private investment. The share of market-based economic activities is therefore shrinking. This is yet another channel how the whole economy and society ultimately shoulder the total costs of war.

Lower growth and Western sanctions slow growth in government tax revenues. Since the budget deficit will not be allowed to grow exponentially, increases in government spending will be more narrowly targeted to specific sectors supporting the war.

Our baseline forecast scenario sees the pace of Russian economic growth slowing gradually to around 1 %, a level at which it is expected remain throughout the forecast period. This means that Russia’s share in the global economy will keep declining.

Uncertainties surrounding Russia’s economic growth trends, however, are expected to increase, including the possibility of distinctly weaker economic performance than under our baseline scenario. Russia’s economic development still depends on price trends in the global oil market. A long-lasting collapse in oil export prices would significantly erode the external balance and budget revenues. A substantial tightening of sanctions would also reduce export prices, raise import prices and complicate foreign trade payments.

From Russia’s perspective, over-dependence on China comes with its own set of risks. Roughly half of Russian goods imports currently come from China, and with regard to critical components in military production, China is the dominant supplier. As a result, Russia cannot afford to offend China’s leadership. On the other hand, it is possible that commodity exports to China increase during the forecast period. This could be feasible if Chinese buyers would start to import Arctic LNG (liquefied natural gas ) or Russia manages to increase its crude oil exports. Construction of the proposed Power of Siberia 2 natural gas pipeline will take years, and could not be completed within this forecast period even under ideal circumstances.

It is not self-evident that the current combination of accommodative fiscal policy and tight monetary policy can be successfully dismantled without triggering violent consequences. Balancing public finances through tax hikes and reducing war spending could drive the economy into recession. On the other hand, incessant growth in public spending as at present also presents a risk, especially to private-sector development.

An increasingly authoritarian and repressive political system makes critical debate rare in Russia. These conditions expose the system to a risk of greater policy errors than earlier.

Table. On-year changes in volume of Russian GDP, %

	2022	2023	2024	2025f	2026f	2027f
GDP	-1.4	4.1	4.3	1	1	1

Sources: Rosstat, CEIC, BOFIT. f = forecast.

Box: "What if a credible ceasefire ended hostilities?"

As part of the forecasting process, we also consider Russia’s longer-term growth outlook and explore a range of possible future scenarios. These scenarios are intended solely as analytical tools and do not represent desired outcomes. In the following, we consider possible issues that could arise if the war ends.

In one such scenario, we examine the potential economic implications for Russia if hostilities were to cease, and credible negotiations between Ukraine and Russia toward a lasting peace agreement were started in the summer of 2026. Battlelines remain roughly largely unchanged. For the sake of simplicity, this scenario assumes that no war reparations are paid and that some of the sanctions imposed on Russia are either lifted or eased.

In this potential future, the recruitment of new contract soldiers in Russia declines considerably and some of the soldiers fighting on the front are demobilised and sent home. This would slightly ease labour shortages and reduce pressure to raise wages for low skilled occupations. The steady rise in defence administration costs and benefit payments would also come to an end.

As a result, the upward pressure on public sector spending eases, potentially creating more space for private sector growth. Even so, government procurement of military matériel and support for the military-industrial complex would remain unaffected. Even without a shooting war, the need to replenish supplies of weapon systems, ammunition and other equipment is substantial. Russia would continue to prepare for a potential future war.

The fate of Western sanctions on Russia is key uncertainty factor in this scenario. If restrictions on capital movements and cross-border payments are lifted, Russia’s high interest rates could bring a sizeable influx of foreign portfolio investment. Even a partial return of foreign investors to Russia would help lower interest rates and ease financing the government budget deficits. On the other hand, the easing of financial market sanctions could spark capital flight from Russia.

If import restrictions on Russia were to be lifted, the easing would likely focus primarily on non-military and non-dual-use goods. This could moderately increase exports of consumer goods to Russia. If sanctions were lifted, the import prices of these products would decrease, which, in turn, would reduce inflationary pressures and allow the CBR to lower its key rate even faster.

Overall, a credible cessation of hostilities would have a small, but positive, impact on Russia’s economic outlook. However, the magnitude of this effect would largely depend on changes in sanctions pressure. A prolonged pause in military operations combined with a loosening of sanctions could provide the Russian economy with a much-needed respite. Nevertheless, in the absence of significant political change, Russia’s military build-up, the redistribution of domestic assets, and the designation of Western actors as unfriendly would likely remain unchanged.

[1] In August, the value of outstanding government OFZ bonds was roughly 25 trillion rubles. About 16 trillion rubles of government bonds were in the banking sector’s aggregate balance sheet in May. Foreign investors held less than 1 trillion rubles in Russian debt. The borrowing plan for the current year was 4.8 trillion rubles, of which 4 trillion rubles has already been raised from the market.

[2] Sinikka Parviainen and William Pyle: Household well-being under sanctions: Insights from the Russian longitudinal monitoring survey. BOFIT Policy Brief 8/2025.