Is the collapse in Russia a myth or reality? Will the Kremlin run out of funds for the war by 2025?

The longer Moscow delays ending the war in Ukraine, the closer the risk of corporate and banking failures looms, which the Russian government will be compelled to finance. These difficulties could lead to a decline in GDP. This opinion was recently expressed by former Bank of America and Morgan Stanley financier Craig Kennedy. Meanwhile, a Bloomberg article states that Vladimir Putin's invasion of Ukraine triggered economic growth in Russia, driven by government stimulus. However, nearly three years later, signs are appearing that it is time to pay the bills, and Russia is edging closer to economic recession.

Is Russia's GDP Growing? What Sustains the Aggressor's Economy

About a third of Russia's federal budget revenues come from oil and gas sources, says financial analyst Ivan Ugliynitsa. Economist Vitaly Shapran, a member of UTFА and former member of the NBU Council, shares this view.

"The Russian budget funds the war through oil revenues, but it’s not just the budget. The war is also financed through unofficial Russian funds and loans to the defense industry from state banks. Overall, stricter sanctions against Russian oil could lead to a decline in budget revenues and liquidity problems in the state financial system. The year 2024 has become the year when Russian exporters could not fully return their earnings, resulting in a trade surplus and some budget revenues existing only on paper," the expert says.

Russia continues to earn foreign currency from oil sales, but these revenues are expected to decrease due to a new round of sanctions from the U.S.

Ivan Ugliynitsa noted that a decline in Russia's GDP growth or recession is anticipated in civilian sectors—especially those sensitive to rates and consumer demand, such as construction, manufacturing, and industry. "Meanwhile, the military sector depends on political decisions, and it is difficult to predict how the situation will develop—whether there will be the political will and resources to continue the military race," the analyst states.

Andrey Shevchishin, a financial analyst and member of the Ukrainian Society of Financial Analysts, indicates that a crisis has already begun in most sectors in Russia.

"There is already a noticeable deterioration in economic conditions across many sectors. First and foremost, this is the extractive industry. It is stagnating in all directions: both oil and gas, as the number of resource buyers decreases while sanctions increase. There is already a negative result for coal because China has stopped accepting it. The metallurgy sector is also experiencing a decline. In the processing industry, things seem to be okay, but it is solely driven by the military-industrial complex. Other sectors such as automotive manufacturing require machinery, and there are no machines because imports are needed," Shevchishin remarked. According to him, the construction sector in Russia is already significantly cooled: the market is not yet stagnating, but the over-indebtedness of developers is evident. Construction, in turn, "affects" other sectors. "Retail trade is still growing because household incomes continue to rise, which fuels consumer demand. However, the service sector for the population is slowing down," the expert explains.

Experts also talk about rising inflation in Russia in 2025. "The year started for Russians with increased fuel excise taxes, tax hikes for citizens, and a rise in the minimum prices for vodka and cigarettes. Domestic gas prices will increase by about 10%, as will transportation and storage services for oil, ticket prices, and tariffs for Russian Railways services. I find it hard to name a sector of the economy that is not affected by rising prices. Additionally, it should be noted that inflation in Russia has a monetary character; in December 2024 alone, the Central Bank of Russia injected an additional 4 trillion rubles into circulation, with another 1 trillion rubles planned for the first quarter of 2025. Food inflation has reached around 25-30%, so if we assume they have created an artificially low inflation rate, which is impossible without manipulating the deflator, I can suggest they have already entered a period of stagflation," Vitaly Shapran reflects.

Inflation in Russia will accelerate, Ivan Ugliynitsa states, but authorities will likely attempt to combat it using typical administrative methods—such as price regulation, bans on increases, and controlling markups—which will lead to product shortages.

The Ruble's Prospects: What Are the Chances of Russian Currency Devaluation?

Ivan Ugliynitsa believes that this year the ruble will continue to weaken significantly. The main factors, the expert notes, include rising demand, increasing inflationary expectations, declining foreign currency revenues, issues with receiving earnings in foreign currency, and dwindling central bank reserves. In reality, the Russian government will have limited options for maintaining exchange rate stability.

According to Vitaly Shapran, the devaluation of the ruble is a lifeline for Russian exporters, including those in oil, steel, coal, and non-ferrous metals. "The devaluation of the ruble is like a 'bone' thrown to Rosneft, Lukoil, and Gazprom (though not much can save them now). Nabiullina tossed this 'bone' to exporters in hopes that part of the effect would help the Finance Ministry close the budget gap. However, if any stressful events occur, like a Prigozhin rebellion, the Central Bank of Russia will not be prepared, and one should expect upheavals in their currency market. Much now depends on China's position, which has started to weaken the yuan against the U.S. dollar in preparation for trade wars with Trump. In this situation, the ruble becomes dependent on China and the policies of the National Bank of China (NBC). Moreover, the NBC did not rush to assist the Central Bank of Russia in 2024 and, I believe, will not do so in 2025," the expert states.

Everything Depends on Oil: Will U.S. Sanctions Affect the Amount of Oil Dollars Received by the Kremlin?

On January 10, the U.S. imposed new sanctions against Russia, affecting key companies vital to the Russian economy, such as Surgutneftegas, Gazprom Neft, Ingosstrakh, and AlfaStrakhovanie. The new package aims to reduce Russia's income from energy exports, increase pressure on the Russian economy, and complicate Russia's ability to finance the war against Ukraine, with the sanctions set to take effect on February 27.

Vladimir Omelchenko, director of energy programs at the Razumkov Center, believes that the U.S. sanctions package will impact the level of oil revenues for the Kremlin—they will decrease.

"The package is significant because it includes two key companies: Surgutneftegas and Gazprom Neft, the third and fourth largest oil producers, respectively, and these companies are closely linked to Putin's family and essentially serve as his wallet. Therefore, these sanctions are indeed very unpleasant for these companies and for the Kremlin," Vladimir Omelchenko notes. He adds: sanctions will impact not only because the extractive companies are on the list but also because secondary sanctions will affect terminals that will accept tankers from the so-called 'shadow fleet' of Russia. This means fewer port terminals in India and China will agree to accept such vessels.

Vitaly Shapran observes: the current sanctions package is very powerful and will likely block the supply of Russian oil to China and India by sea, but it should not be expected to be 100% effective. "There will definitely be a negative effect for Russia, but its depth will depend on how coordinated Ukraine's actions are with its allies," the expert says. He adds that stricter sanctions against Russian oil could lead to both a decrease in the aggressor's budget revenues and liquidity problems in the state financial system.

However, experts also discuss the possibility of Russia circumventing even the new sanctions. Moreover, there is a segment of pipeline oil where no sanctions apply. "Russian oil and gas revenues are decreasing and will continue to decrease. But there is still a risk that they will find ways around this, such as falsifying the origin certificate of the oil, claiming it is Malaysian oil, not Russian. Additionally, some oil sales are not conducted by sea, as there is pipeline export where no sanctions exist," Andrey Shevchishin remarks.

However, in 2025, all experts expect an intensification of sanctions against the Russian economy, which, combined with Russia's internal problems (such as labor shortages, inflation, devaluation, budget deficits, declining development in sectors, and enormous military expenditures), should lead the aggressor towards an economic crisis.

"Massive expenditures on the war and the acceleration of these expenditures, along with the commencement of the Kursk operation and intense shelling of Ukraine, including military-economic targets in Russia, are leading to resource depletion. If Ukraine and its allies find ways to increase Russian losses, as was done with the closure of gas transit or strikes on Russian refineries, the question of economic collapse will likely become a priority for Russia," Vitaly Shapran concluded.