Russia's economy has undergone significant transformation since Moscow invaded Ukraine in February 2022. After prioritizing militarization over economic development, Russia now is likely headed into a recession.
In the first year of the war, Russia faced sanctions, the withdrawal of foreign companies, and uncertainty. However, these effects were largely offset by a favorable terms-of-trade shock from higher commodity prices and support from China, Turkey, the United Arab Emirates, and countries bordering Russia. The result in 2022 was a moderate 1.4 percent fall in Russia's GDP.
By 2023, the Russian economy had shifted to a war footing. The military-industrial sector benefited the most, as did private consumption driven by war-related payments and high real wage growth due to the tight labor market. Consequently, Russia's GDP rose by 4.1 percent per year in 2023 and 2024.
However, by mid-2023, signs of economic overheating appeared. Unemployment reached historic lows, while wage growth and inflation accelerated. In response, the Bank of Russia raised interest rates from 16 percent in July 2023 to 21 percent in October, which primarily impacted non-war-related sectors.
By the end of 2024 and early 2025, the economy slowed as it butted up against its supply-side constraints and the Bank of Russia focused on reining in inflation. In the first quarter of 2025, GDP dropped 0.6 percent from the previous quarter. The economic contraction was driven by falling activity in mining, trade, real estate, and leisure. Neither monetary nor fiscal policy can deliver the deep structural economic transformation that genuine reforms and investment-driven growth can achieve. If Russia continues on its current model of militarization, the country will face more difficult policy choices in the future.
This PIIE Chart is adapted from Benjamin Hilgenstock and Elina Ribakova's blog, "Why Russia's economic model no longer delivers."
