Arzubny Metrics
In 2025, Russia's economy is expected to undergo significant structural shifts, driven by both internal and external pressures, with profound implications for various industries.
**Transition to a High-Wage, High-Productivity Economy**
The Russian government is actively pursuing a strategic transformation aimed at boosting economic activity and labour productivity. This transformation seeks to improve job quality and skill acquisition, not merely raise wages due to labour shortages. The focus is on changing employment and consumption patterns to foster a more sustainable, growth-oriented economy with higher wages and more skilled workers.
**Shift Away from Oil and Gas Dependency**
Russia's 2025 budget is being revised downward due to falling oil and gas revenues. The drop in oil and gas income is expected to be substantial, with projections of 10.94 trillion rubles falling to 8.32 trillion rubles (about $104.8 billion). This decline is due to lower global oil prices and a stronger ruble, accompanied by increases in defense spending, exacerbating fiscal pressures. Non-oil and gas revenue is forecasted to rise, indicating efforts to diversify the revenue base, though the tax base remains narrow and enforcement-intensive.
**Economic Slowdown and Contraction in Manufacturing and Services**
Recent data show a contraction in both the manufacturing and service sectors, driven by weakening domestic demand, falling export sales, and rising costs. The manufacturing sector is facing significant challenges, with the manufacturing PMI dropping to 47.5, the lowest since early 2022. The service sector is also experiencing contraction, with the services PMI falling below 50, indicating contraction for the first time in a year.
**Fiscal and Inflationary Pressures**
While nominal budget revenues have increased, the growth is largely inflation-driven rather than real economic growth. Inflation remains elevated, eroding consumer purchasing power and squeezing the economy's real stability. The government has introduced tougher taxation and enforcement for small businesses and windfall profits, which risks further burdening a narrow tax base.
**Impact on Various Industries**
The energy sector, particularly oil and gas, is expected to face revenue volatility due to falling global prices and reduced federal budget support. This could potentially pressure industries to diversify investments away from fossil fuels. The manufacturing sector is facing contraction due to weak domestic demand and export challenges, but there is potential for restructuring and innovation to regain competitiveness. The service sector is experiencing pressure to improve productivity and quality to survive.
The defense and security sector may see increased budget allocations, bolstering defense industries but potentially diverting resources from other sectors. Utilities and consumer staples are viewed as defensive sectors offering resilience amid economic slowdown, making them potentially attractive for investment due to stable demand. Small and extractive businesses are facing increased tax burden and regulatory tightening, but this could also encourage formalization and improved compliance.
**Summary**
Russia's economy in 2025 is at a crossroads, balancing inflation-driven nominal growth against real structural weaknesses. The strategic push towards a high-wage, high-productivity economy, combined with fiscal adjustments and diversification away from oil and gas, will reshape industry dynamics. While defense spending grows, traditional manufacturing and service sectors face contraction, making defensive sectors like utilities more attractive. Tax and regulatory reforms impact businesses unevenly, emphasizing adaptation and productivity gains for long-term stability.
In the context of Russia's economic transformation, the government aims to boost the economy by focusing on finance and business, with an emphasis on improving job quality, labor productivity, and skill acquisition, rather than simply raising wages due to labor shortages.
Additionally, as Russia works to shift away from oil and gas dependency, the decline in oil and gas revenue may impact various industries, potentially pressuring some to diversify investments and encouraging investment in defensive sectors like utilities due to their resilience amid economic slowdown.
