Russia's economy on the brink: investments are collapsing!

Russia's economy on the brink: investments are collapsing!

Russia faces a potential economic crisis looming after years of resilience. Russian Economy Minister Maxim Reshetnikov said at the International Economic Forum in St. Petersburg, which took place from June 18 to 21, 2025, that the country's economic performance is under severe pressure. Of particular concern is the decline in foreign investment, which is seen as one of the biggest challenges. In 2024, Russia attracted only $3.35 billion in direct foreign investment (FDI), a dramatic 91 percent decline compared to 2021. This marks the lowest value since 2001, as fr.de reported.

The problems facing Russia are compounded by the Ukraine war and associated Western sanctions, which are hindering the flow of FDI. The EU was a significant source of investment in Russia in 2021, with a total amount of around 255 billion euros. These financial cuts mean that Russia is increasingly having difficulty attracting new investment partners, particularly in the Global South. High-profile guests and top Russian executives were absent from the St. Petersburg International Economic Forum, adding to concerns about the country's attractiveness as an investment location.

Military spending and economic challenges

Despite the economic difficulties, Russia plans to dramatically increase military spending. According to a State Duma report dated November 21, 2024, the defense budget is expected to increase by 25 percent to 13.5 trillion rubles (approx. 130 billion euros). As a result, military spending is expected to amount to 7 to 8 percent of gross domestic product (GDP), which is a record in post-Soviet history. In 2021, this spending amounted to 3.6 percent of GDP. High government demand has led to a so-called war boom in parts of the Russian economy over the past two years, but this is not without its challenges.

Although incomes in Russia have risen, the economy is suffering from a labor shortage and ongoing Western sanctions. Economic growth stalled in 2024 while inflation remained stubborn. The central bank is struggling with high interest rates and has raised the key interest rate from 7.5 percent to 21 percent since July 2023, which could contribute to a rise in corporate bankruptcies. Forecasts for 2025 assume growth of only 0.5 to 1.5 percent, which is worse than originally planned. The challenges of guaranteeing access to critical imported dual-use goods and machinery are seen as crucial for the defense industry.

International relations and geopolitical tensions

The geopolitical situation is also tense for Russia. A leaked report shows that Russia is struggling to bind former Soviet republics such as Kazakhstan and Kyrgyzstan closer to itself. These states are increasingly distancing themselves, making the Kremlin's efforts to assert its influence in Central Asia much more difficult. China, as a strategic partner, is benefiting from the situation by negotiating large discounts on the purchase of Russian gas while blocking the construction of the “Power of Siberia 2” pipeline.

Russia sees the BRICS countries as a counterweight to Western dominance, but there are also tensions within this group. The decline in Russia's share of FDI collected in China from 1.0 percent (2015-2020) to 0.3 percent (2021-2023) shows how fragile the economic situation is. While public coffers have deficits of around 2 percent of GDP, which are not considered threatening, the new tax increases show that the state is relying on consolidation to address its financial problems.

In summary, Russia is at a critical juncture. While it strives to expand its military strength, it also faces serious economic and geopolitical challenges. Experts agree that without fundamental changes in economic and political strategy, there is a risk of recession, which could further aggravate the already unstable situation.