Russia's Economy Slows to 1% Growth in 2025 as Inflation Eases

Russia has released its economic results for 2025, revealing a marked slowdown in growth as inflation-control measures weighed on domestic demand.

Russian President Vladimir Putin said on February 3 that Russia's gross domestic product (GDP) grew by 1% in 2025, a deceleration that he described as in line with expectations. Speaking at an economic meeting in Moscow, Putin noted that growth was significantly lower than 4.1% in 2023 and 4.3% in 2024, largely due to targeted policies aimed at curbing inflation.

In December 2025, during his annual end-of-year address, Putin said Russia's economy had expanded by a cumulative 9.7% over the past three years, underscoring that the recent slowdown followed a period of rapid expansion.

Why Growth Slowed

According to figures cited by Putin, Russia's inflation rate fell to 5.6% in 2025, down sharply from 9.5% in 2024. As of January 26, annualized inflation stood at 6.4%, and Putin said inflation could decline further to around 5% this year.

Nikolai Kondrashov, a researcher at the Development Center of the Higher School of Economics (HSE), said that one of Russia's most significant economic achievements in 2025 was halting the acceleration of inflation. By the end of December, inflation had eased to 6.6%, marking nine consecutive months of decline from a peak of 10.34% in March. Although still above the Russian central bank's 4% target, the downward trend has created room for looser monetary policy.

The central bank has relied on frequent adjustments to the benchmark interest rate to restrain price pressures while balancing growth needs. In the first half of 2025, the key rate was raised to 21% to anchor inflation expectations. As inflation cooled, the rate was gradually reduced to 18% in the second half of the year, while maintaining a 'moderately tight' stance to prevent a rebound. This policy helped lower inflation from 9.5% in 2024 to 5.6%, but also compressed consumption and investment, dragging on economic growth.

Wei Jinshen, Associate Professor at the School of Politics and International Relations at Lanzhou University in China, said multiple factors contributed to Russia's economic slowdown. First, as the Russia-Ukraine conflict continued, the short-term stimulus provided by a 'wartime economy' began to fade. A large share of financial resources flowed into the military sector rather than the corporate sector, leaving businesses short of funds for capacity expansion, technological innovation and equipment upgrades, which in turn constrained growth and employment.

Second, Wei said the long-term effects of U.S. and European sanctions have become increasingly evident. Export controls on key technologies have restricted Russia's access to advanced equipment, slowing industrial upgrading and further weakening its industrial base.

Third, Russia's traditional pillar industries are under mounting pressure. Oil and gas exports face restrictions, while strategic adjustments by state-owned energy companies have increased operating costs. At the same time, Russia's financial system has become less integrated with international markets, reducing liquidity and raising financing costs. 'Liquidity in Russia's financial markets has declined, and borrowing costs have risen,' Wei said.

Many Russian economists attribute the slowdown to high borrowing costs, weakening demand, and the rapid expansion of military spending, which has tightened fiscal conditions. Behind the fall in inflation to 5.6% is a combination of tight monetary policy, structural subsidies, and sharp increases in the minimum wage—measures that deliberately restrained demand in exchange for price stability. Low unemployment, at 2.2%, along with social welfare policies, has helped ease social pressure.

The HSE Development Center said the most significant contributors to the downturn were transportation, construction, and parts of the extractive sector, particularly coal, oil and natural gas, which were hit hard by higher interest rates.

Russia's Deputy Prime Minister Alexander Novak previously told the Federation Council that investment growth had stalled, with fixed-asset investment showing zero growth by the end of 2025, signaling the end of several years of rapid expansion driven by state spending and import substitution.

Can Russia Shift From a 'Wartime' to a 'Peacetime' Economy?

For Russia, 2025 was marked by heightened geopolitical uncertainty. The expiration of the Russia-Ukraine gas transit agreement without renewal led Moscow to halt gas supplies to Europe via Ukraine, further constraining energy exports. Falling global oil prices, tighter Western energy sanctions, and additional tariffs imposed by the U.S. administration under President Donald Trump continued to deteriorate conditions for Russia's bulk energy exports.

Putin said Russia's current priorities are to restore growth momentum, improve the business environment, and attract investment by expanding production capacity. These measures have been incorporated into Russia's economic structural adjustment plan through 2030.

Meanwhile, the Russian government has decided to raise the standard value-added tax (VAT) rate from 20% to 22% starting in 2026. Economists predict the tax increase will become a key factor influencing consumer prices and inflation next year.

Natalia Orlova, chief economist at Alfa Bank, said that as the Russia-Ukraine conflict continues to drain resources, the persistent imbalance between military and civilian sectors has made declining investment and economic slowdown—or even recession—a natural outcome. She argued that only an end to the conflict could reverse this trend.

Looking ahead to 2026, Wei Jinshen said Russia's economic outlook remains challenging. On one hand, inertia from slowing growth means that adjusting economic strategy will require substantial institutional costs and financial input. On the other, continued economic weakness could strengthen the resolve of the U.S. and Europe to use sanctions to influence Russia's behavior.

'However, the resilience of Russia's economic system should not be underestimated,' Wei said. 'If meaningful progress is made in Russia-Ukraine negotiations in 2026 and more resources are redirected toward the corporate sector, Russia's economy could gradually transition from a ‘wartime' footing back to normal conditions.'