Russia’s ‘overheating’ economy will face a sharp slowdown next year as labor and sanctions crush momentum, central bank says

Russian President Vladimir Putin.

Russian wartime growth will stagger next year as labor and sanction issues wear down the “overheating” economy, the country’s central bank said in its annual report.

Although GDP is projected to expand as much as 4% this year, state and consumer demand have by now outstripped supply, the Central Bank of Russia said.

The report, cited by the Financial Times, expects growth to reach the 0.5%-to-1.5% zone in 2025, and be 1% to 2% in 2026.

“Available production capacity is depleted,” bank deputy governor Alexei Zabotkin told reporters last week. “The pace of expansion is held back by sanctions barriers and by physical limitations on the output of the means of production. The economy needs additional labor for this as well.”

He added that labor shortages had “significantly worsened.”

This dilemma first cropped up after Russia invaded Ukraine in 2022, committing part of its workforce to the front lines. Last year’s forced mobilization order made the deficit more severe, as up to a million Russians fled the country. By the end of 2023, the country was estimated to lack close to 5 million workers.

That’s put pressure on Russian businesses to increase wages, in a big to source new workers. According to FT, the nominal wage jumped 19.2% in the first quarter of 2024, slowing slightly in the second quarter. Labor shortfalls have hit manufacturing, trade and agriculture the hardest, according to the report.

Rising wages and aggressive government spending are a recipe for higher inflation, which the central bank expects to reach 6.5% to 7% by the end of this year. The bank outlined that interest rates — now standing at 18% — are unlikely to move away from the double digits.

The report said inflation is projected to fall between 4% and 4.5% in 2025, then remain at the 4% level after that.

The West has offered no relief to Russia, as sanctions from the US and its allies have only tightened in recent months. In late August, Washington announced another sweeping sanctions package targeting foreign entities that still support Russia’s war production.

Production capacity and labor supply is “nearly fully used,” the report said.

According to FT, the central bank also listed other economic scenarios in its report, such as an economic “deglobalization” that occurs alongside higher interest rates. In this situation, Russia would contract as much as 3% to 4% next year, and face a crisis as difficult as the 2008 period.

The central bank’s outlook appears in line with Western forecast, as the International Monetary Fund similarly anticipates momentum to fade in 2025.

Meanwhile, individual analysts have warned that a severe recession is looming over Moscow, which could hit as soon as next year.