Russia’s economic outlook deteriorated further on Thursday as Finance Minister Anton Siluanov informed President Vladimir Putin that growth in 2025 is now expected to be 1.5 percent, down from a previous forecast of 2.5 percent. Siluanov singled out elevated interest rates, maintained to squeeze inflation, as a primary drag, saying they have "stifled borrowing" across households and businesses.

The downgrade reflects a growing policy dilemma for Moscow. After initial post-invasion volatility and bouts of inflation, Russian authorities have relied on tight monetary policy to anchor prices. That strategy has helped bring headline inflation down from peak levels, but it has also raised the cost of credit and cooled domestic demand, analysts say. The finance ministry’s recalculation signals how quickly the trade-off between taming inflation and sustaining growth is converging with the broader costs of a prolonged conflict and Western sanctions.

Beyond monetary factors, the economy faces structural headwinds tied to the war in Ukraine. Sanctions have curtailed access to foreign capital, restricted certain imports of advanced technology and deterred many international investors. At the same time, fiscal priorities remain skewed towards defense and reconstruction-related spending, limiting scope for large-scale stimulus without compromising budget targets. While energy exports continue to generate significant revenue, dependence on commodity earnings leaves the budget vulnerable to price swings and market access constraints.

Markets are already weighing the implications. Tighter domestic credit conditions typically dampen fixed investment and real wage growth, which in turn curb household consumption. For corporates, higher borrowing costs and limited external financing increase refinancing risks and may push companies to delay expansion plans. That dynamic could keep unemployment pressures muted in the near term while eroding potential growth over the medium term.

Policy choices now confront Russian authorities with stark options. Easing monetary policy risks reigniting inflationary pressures and further weakening the currency, whereas continued high rates will likely deepen the growth slowdown. Fiscal loosening could support activity but would require either higher non-energy revenues, additional borrowing, or a drawdown of sovereign buffers. Finance Minister Siluanov’s message to the Kremlin illustrates the delicate balancing act: protect price stability or prioritize short-term growth — a choice complicated by the geopolitical context.

Longer-term challenges remain potent. Demographic decline, skilled-labor shortages linked to mobilization and migration, and technological isolation from Western markets could dampen potential output for years. Even if interest-rate normalization and a stabilization of inflation permit a modest growth rebound, many economists warn that structural reforms and reintegration with international finance and trade networks would be necessary to restore pre-war growth trajectories.

For ordinary Russians, the immediate consequence is likely to be slower improvement in real incomes and fewer new jobs, especially in investment-intensive sectors. For investors and policymakers, the subdued forecast underscores that Russia’s economy now operates under a different set of constraints — where monetary policy, fiscal priorities and geopolitics are tightly intertwined, and the margin for error is thin.