Russia’s 2025 Budget Increase Risks Inflation

MOSCOW (Reuters) – Russia’s budget spending for 2025 is projected to rise by 9% to 41.5 trillion roubles ($446.2 billion), potentially leading to higher inflation and prolonged tight monetary policy.

The deficit is expected to be 0.5% of GDP, with a focus on military expenditures in light of the ongoing conflict in Ukraine. Inflation is currently around 9%, outpacing the central bank’s target of 4%, while the benchmark interest rate stands at 19%, the highest since April 2022.

T-Bank analyst Sofya Donets indicated that maintaining spending at 40 trillion roubles would be inflation-neutral. However, the anticipated excess spending of 1.5 trillion roubles could raise GDP growth by 0.5% and inflation by 0.7-0.8% in 2025.

The government predicts inflation will be 4.5% next year, with the central bank committing to a tight monetary policy until inflation declines.

Donets noted that the potential for a rate cut in 2025 has diminished, estimating a decrease of 100-150 basis points from the baseline scenario. Alfa-Bank’s Natalia Orlova stated that increased expenditures would result in a primary budget balance change of 2% of GDP instead of 1%, signaling continued inflationary pressures. Meanwhile, Renaissance Capital economists expressed concern that the budget indications would lead to a 100 basis points increase in the key rate to 20%, predicting that rates would not return to single digits soon.