The state of the Russian economy in 2025 should be a concern for the Gulf

Reuters/Maxim Shemetov

A friend of a friend in Moscow reports how his previously booming fuel distribution business is getting squeezed between diverse geopolitical pressures.

His fleet of Volvo trucks is dwindling due to lack of parts from sanctions-observing Sweden; drivers – previously from the ‘Stans – find it hard to get Russian work visas after jihadist terror attacks; Russian drivers are being commandeered to work for the army in Ukraine.

Meanwhile, 21 percent interest rates and 8.9 percent inflation are wreaking havoc with his corporate finances, outweighing any benefit he might see from the official GDP growth rate of 3.9 percent this year.

That is a microcosm of the challenges the Russian economy will face in what is likely to be a crucial year for the presidency of Vladimir Putin – and for the countries of the Arabian Gulf that have continued to do business with Russia after the February 2022 invasion of Ukraine.

Since the re-election of Donald Trump, much of the commentariat has focused on the difficult choices Ukraine will face in 2025. But it will also be a make-or-break year for Putin and for his allies in the Middle East.

If the president-elect sticks to his campaign-trail pledge to end the war in Ukraine “in a day”, some of the immediate pressure will be off the Russian economy with reduced requirements for men and materiel, but it is difficult to see how Russia will go about re-establishing a place in the international financial and trade systems.

A senior Russian banker in Dubai recently told me how, even if the conflict was frozen tomorrow, it could be 10 years or more before the West was ready to re-admit Russia to anything approaching normalisation in global finance.

At his annual press conference last week, Putin again shrugged off the effect of Western sanctions, and it is true that they have not had the instant effect policymakers intended in 2022.

“There is no spare industrial capacity; there are no more workers; and exports are being squeezed by Western sanctions,”

Alexandra Prokopenko and Alexander Kolyandr, The Bell

Russian ingenuity in evading them, and the help of “partners” outside the West (including the Gulf region) have mitigated the effect of sanctions for the oil-dependent economy.

But the lesson from the recent collapse of the ruble – down 25 percent on another round of western measures – seems to be that sanctions are working, if taking much longer than originally intended.

While the economy in 2024 behaved “like a marathon runner on steroids”, according to Alexandra Prokopenko and Alexander Kolyandr at the excellent commentary site The Bell, this coming year it is set to hit “the wall”.

“There is no spare industrial capacity; there are no more workers; and exports are being squeezed by Western sanctions,” they say in their most recent analysis.

The Russian economy is overheating at a rapid rate, as soaring defence expenditure sucks resources from normal economic activity. The owner of the Moscow truck business would no doubt agree.

Slowing economic growth – down to 1.5 percent by the end of 2025, say Prokopenko and Kolyandr – high interest rates and rising inflation add up to the prospect of “stagflation” that would seriously impact those Russians, mainly in the wealthy Moscow and St Petersburg regions, who have so far noticed little effect from the war on their living standards.

That is when Putin’s dilemma – whether to call a halt in his anti-Western offensive or double down under a more pliable Trump presidency – gets acute.

But if Russia is headed towards long-term economic malaise, it has big repercussions for the governments and corporates in the Gulf whose “neutrality” stance over Ukraine has been a lifeline for Putin.

Entities in Saudi Arabia and the UAE have made big investments in Russia, accelerating in recent years, in a wide variety of sectors including real estate, technology and, of course, energy. These run the risk of becoming unsustainable in the case of Russian stagflation.

It is in the oil industry that this threat has the biggest consequences for the rest of the world.

The Opec+ alliance, led by Saudi Arabia and Russia, has hitherto been a source of stability in global oil markets because the interests of the two leading producers have more-or-less coincided.

But domestic economic chaos in Russia could mean conflicting and damaging pressures within Opec+ from those producers seeking long-term oil price stability and those seeking to maximise short-term revenues – either in pursuit of war or to bolster the lifestyles of Russian consumers.

Russian policymakers say that the war in Ukraine has been budgeted for another year, but by then the long-term damage may have been done.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia