Macroeconomic fundamentals remain unchanged; budget deficit signals growing challenges

KSE Institute has released its new March Russia Chartbook: “Macroeconomic fundamentals remain unchanged; budget deficit signals growing challenges.” Ukraine’s allies should leverage Russia’s increasing budgetary pressures and limited macroeconomic buffers to intensify economic and strategic pressure, undermining the Kremlin’s ability to sustain the war.

The external environment remains relatively supportive for Russia, although lower global oil prices have driven export revenues to their lowest level in two years – just $13.3 billion in February. While the shadow fleet continues to enable most of Russia’s seaborne crude exports, recent sanctions have begun to limit its effectiveness, with the share of such exports transported without G7+ services falling to 78%.

Russia recorded a 2.7 trillion-ruble federal budget deficit in January–February 2025 – 139% higher than the same period last year and more than twice the amount planned for the full year. The shortfall was driven by a 4% year-over-year drop in oil and gas revenues, while total expenditures increased by 31%. The deficit was fully financed through domestic debt issuance, with no withdrawals from the National Welfare Fund (NWF), which remains untouched in 2025. However, liquid NWF assets have declined by 65% since the full-scale invasion and now consist solely of yuan-denominated assets and gold.

Russia’s macroeconomic buffers remain under pressure. More than $340 billion in international reserves are immobilized due to sanctions, severely limiting the Central Bank’s room for maneuver. Despite having raised the key interest rate by a cumulative 1,350 basis points since mid-2023, inflation continued to rise in February, reaching 10.1% year-over-year – the highest in two years. War-related fiscal stimulus, a tight labor market, and rapid credit expansion continue to fuel domestic demand and inflationary pressures.

GDP growth is expected to slow significantly in 2025. According to KSE Institute, structural labor shortages, lack of foreign investment, and tighter monetary conditions will constrain Russia’s economic potential. Against this backdrop, Ukraine’s partners should strengthen financial pressure and sanctions to further undermine Russia’s ability to fund its war and maintain macroeconomic stability.