Vladimir Putin has been issued a stark warning about the state of Russia’s economy. It comes after one of his close allies and head of the biggest bank in Russia, German Gref, urged him to enforce immediate measures to avoid a recession.
Gref, the CEO of Sberbank, warned Putin that the country’s wartime economy is stagnating. Military spending in Russia has hit record highs since the invasion of Ukraine, causing inflation and high interest rates. The economy is also suffering from a shortage of workers due to the mobilisation of hundreds of thousands of men into the military. Gref said: “Reviving the economy will be much more difficult than cooling it down…at current inflation levels, the rate at which we can hope for economic recovery is 12 percent or lower.”
Richard Portes, an expert on the Russian economy from the London Business School, said the situation is far worse than Gref proposes. He said: “The Russian economy is not only stagnating, it’s declining.”
Russia’s economy grew by 4.1% in 2023 and 4.3% in 2024 due to high military spending. However, the growth is now stalling, with oil revenues plummeting and the budget deficit widening to the largest in over three decades.
Both inflation and interest rates remain sky high while business leaders grow increasingly frustrated with stifled investment.
Although Gref advises Putin to drop the key interest rate from 18% to 12% by the end of 2025 to help revive the economy, Portes does not believe this will be enough. He added: “Nor do I think that it’s likely.”
Portes added: “I think the Russian economy is in a very bad state, and it’s not going to get better…the problems of the Russian economy are not due to high central bank interest rates.”
The Central Bank will next meet on Friday, September 12. Governor Elvira Nabiullina is expected to consider Gref’s proposal to drop the key interest rate.
Anton Siluanov, Russia’s Finance Minister, told Putin last week that growth was set to drop 1.5% in 2025. According to Portes, this is partly because a war economy has a lack of engines for growth as well as a depleted work force, exacerbated by losses in Ukraine.