Moscow: Russia’s sanctions-hit, militarized economy is anticipated to slow in 2025, with bank profits expected to decline and the benchmark interest rate potentially reaching 23% by the end of 2024, according to Andrei Kostin, CEO of VTB, Russia’s second-largest lender.
Kostin forecasted a 1.9% GDP growth rate for 2025, exceeding the International Monetary Fund’s (IMF) projection of 1.3%, though below the Russian government’s optimistic estimate of 3.9% growth for 2024. Inflation is projected to decelerate to 6.4%, down from its current 8.5%.
“The war has been going on for almost three years, and a huge number of sanctions have been imposed. We are living in an absolutely unusual situation,” Kostin remarked in an interview with Reuters. He added that approximately one-third of the state budget is allocated to military expenditures.
“It is impossible for the economy to go through such events without consequences. But the country has been living for three years, there is economic growth, and overall a healthy economy,” Kostin stated.
Criticism of Central Bank Policies
Kostin voiced cautious criticism of the central bank’s hawkish monetary policy, arguing that the current inflation rate does not justify a benchmark interest rate “three times this level”. He likened the central bank governor, Elvira Nabiullina, to Britain’s 20th-century Prime Minister Margaret Thatcher, often referred to as the “Iron Lady.”
“I am, of course, not as much of a monetarist and believe that an inflation rate of 8.5% is not so critical for Russia; it could be tolerated,” he noted.
Key Rate’s Effectiveness Under Scrutiny
Western sanctions, elevated military spending, state-subsidized loans, and high inflationary expectations have rendered the key interest rate, currently at its highest since 2003, less effective as a tool to manage inflation, Kostin explained.
“In the context of high military expenditures and sanctions, an instrument like the key interest rate may not be fully effective in managing inflation,” he said.
Despite recent volatility, Kostin predicted the Russian rouble would stabilize around 100 to the U.S. dollar. The rouble’s value fell 15% following new U.S. sanctions last month targeting Gazprombank, Russia’s third-largest lender.
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Decline in Lending Growth and Profits
Kostin anticipates that overall lending growth will slow to 10% in 2025, down from 20% in 2024, citing high-interest rates as a primary factor. VTB’s profits are expected to fall by 27% in 2025.
However, Kostin reassured that even vulnerable sectors like coal mining and real estate are unlikely to face mass bankruptcies despite economic pressures.
“We do not see the situation of 2008, when major companies collapsed. I do not see any companies that are currently feeling completely bad,” he affirmed.
