Russia’s long-term inflationary pressures are likely to increase pressure on its ability to maintain high defence spending, Britain’s Ministry of Defence writes, citing its intelligence.
The ministry notes that despite the strengthening of the ruble, inflation continues to rise.
“Inflation rose to 10.1 per cent in February 2025 from 8.5 per cent in October 2024, when the discount rate was introduced at 21 per cent. Labour shortages as well as high government spending almost certainly mean that inflation will remain above the Russian Central Bank’s target of 4 percent through 2025,” the report said.
On 21 March 2025, the Central Bank of Russia (CBR) decided to leave the key interest rate at 21 per cent. UK intelligence notes that interest rates are at their highest level in 20 years, up from the pre-war level of 8.5 per cent in January 2022, and as long as interest rates remain high, the number of corporate bankruptcies in Russia is likely to rise.
In November 2024, the ruble depreciated to its lowest level since Russia’s invasion of Ukraine in 2022 (114 per US dollar), since then the ruble has strengthened to a high of 81 per US dollar in March 2025.
Britain’s intelligence suggests that the ruble’s appreciation is likely to reduce federal oil and gas revenues in ruble terms, adding pressure to the federal deficit.
In January, the Institute for the Study of War (ISW) reported that the Kremlin has launched an information operation to create the false impression that the Russian economy is doing well despite multiple indicators of macroeconomic turmoil.
The Kremlin has recently endorsed policies to increase defence spending, while Russian society faces labour shortages, demographic challenges, declining savings and growing aid dependency as the Russian economy operates with rising interest rates, inflated wages and deteriorating production capacity – these economic realities show that Kremlin claims that the Russian economy is doing well are not true, the Insti added
Last October, the World Bank predicted that Russia’s economy is expected to slow from 3.6% in 2023 to 3.2% in 2024 and 1.6% in 2025 as a result of tighter monetary policy and “increasingly severe capacity and labour constraints”.