Madi Kapparov: Weekly Economic Update on Russia

Weekly Economic Update on Russia

By Madi Kapparov, 7 July 2025

This is a new newsletter by Eurofile. Every Monday evening, we publish a weekly review of major economic news from Russia with a brief analysis. As most data on Russia’s economy is provided by the Russian state, many of the sources referenced will be either Russian state-controlled media or Kremlin-connected state and non-state organizations. Exercise caution using these sources.

Russia-Azerbaijan tensions – the role of South Caucasus in Russia’s geoeconomic strategy

On June 27 Russian law enforcement raided homes of Azeri nationals residing in Yekaterinburg, Russia killing two, injuring several others, and detaining nine. The same weekend Azerbaijan responded in protest by cancelling all cultural events organized by Russian state and private institutions and detaining Sputnik journalists operating out of Baku, capital of Azerbaijan. A few days later the Russian propaganda network, Sputnik, suspended its operations in Azerbaijan. The rising tensions were accompanied by Russian disinformation attacks against Azerbaijan, going as far as calling Azerbaijan “Russia’s next war front after Ukraine.” On December 25, 2024, Russia shot down an Azeri airliner further complicating the wrought relationship between the two countries.

The tensions between Russia and Azerbaijan have been percolating since the collapse of the Soviet Union primarily due to the Russian support to Armenia in the multi-decade Nagorno-Karabakh conflict, where Armenia claimed territories within internationally recognized borders of Azerbaijan with Moscow’s backing. While Russia never officially entered the conflict on either side, it provided extensive diplomatic and materiel support Armenia, going as far as having the Armenian occupied Republic of Artsakh, breakaway region of Azerbaijan, recognized by Russian puppets of Abkhazia, South Ossetia, and Transnistria. In the First Nagorno-Karabakh War (1992-1994) alone, Russia supplied arms worth around $1 billion. However, Russia also sold weapons to Azerbaijan in the years following the First Nagorno-Karabakh War, which ended in Armenian victory. Moscow’s goal was not to have either side win the conflict decisively but to have both sides locked in struggle for as long as possible allowing Moscow to maintain its influence over the two nations of South Caucasus. Afterall, the Nagorno-Karabakh conflict started in 1987, before the collapse of the USSR, and not without the involvement of the KGB in Moscow and Yerevan. Following the Second Nagorno-Karabakh War (2020), Russia brokered extremely favorable terms for itself inserting its peacekeepers into the disputed territory and having its security services act as “supervisors” of all vital transit routes in the region.

However, Russia’s stranglehold over Armenia and Azerbaijan started to diminish with the full-scale invasion of Ukraine in 2022. In September 2023, Azerbaijan capitalized on Moscow’s distracted state and conducted a two-day offensive ousting Armenian forces out of the disputed territories. On September 28, 2023, the unrecognized Republic of Artsakh, Armenia’s claim in Azerbaijan, ceased to exist and officially dissolved on January 1, 2024. However, Armenia and Azerbaijan only have a Russia-mediated ceasefire agreement of September 20, 2023. There is still no peace treaty and theoretically the Republic of Artsakh could be revived as a government in exile.

You might wonder what any of this has to do with Russia’s economy. Two weeks ago we discussed the role of Iran and the International North-South Transport Corridor. While Russia does trade with and via Iran utilizing the Caspian Sea, it also needs Azerbaijan to supplement the sea lane (or rather, lake lane) with a rail line. Iran is currently building the Astara-Resht rail line, that would complete the Russia-Iran rail connection via Azerbaijan. Azerbaijan on other hand needs either Georgia or Armenia to gain access to trade routes leading into Turkey and further into Europe.

The recent pro-Western pivot of Armenia following the Azeri offensive of 2023 inspires cautious optimism. Armenia suspended its membership in the Moscow-led CSTO and stopped paying membership contributions in 2024. Armenia booted FSB border guards from the Yerevan international airport in 2024. Earlier this year Armenia took control of all its border checkpoints from the Russian border guards (branch of the FSB). And just last week Armenia’s parliament approved the nationalization of “Power grid of Armenia,” the only electric power distributor in Armenia belonging to Samwell Karapetyan, a Russian-Armenian oligarch. Accompanied with the normalization of relations with Turkey, a longtime supporter of Azerbaijan, perhaps Armenia could reach a peace treaty with Azerbaijan that could work in the interests of both nations and without Moscow’s oversight. Moscow’s terrorist nature was laid bare to the leadership in Baku and the Azeri people when the aforementioned Azeri airliner was shot down. And the most recent afront of murders in Yekaterinburg could not have been left unanswered by Baku.

Both Turkey and the EU would be wise to capitalize on the growing rifts that Baku and Yerevan are having with Moscow as the South Caucasus are of vital strategic importance as the region grants access to Central Asia, a part of the world rich in oil, natural gas, rare earth metals, and uranium and with a population of over 80 million. The combined region of South Caucasus and Central Asia does not enjoy many options when it comes to neighbors (see map below). To the north there is only Russia, to the east – only China, to the south – Iran and Afghanistan. Only to the west there is Turkey and the Black Sea via Georgia. However, Georgia is currently under direct and indirect Russian occupation.

Map of South Caucasus and Central Asia (in blue), neighboring countries in dark gray and labeled, other countries in gray.

The Russian invasion of Georgia in 2008 was in part motivated by the development of the Baku-Tbilisi-Ceyhan pipeline, completely bypassing Russia. During that war Russian air force attempted multiple times to bomb the pipeline. Russia also sabotaged the pipeline ahead of the invasion. And in 2015, Russia seized another Georgian pipeline, Baku-Supsa, transporting Azeri oil to the Black Sea. And with the continued occupation of Abkhazia and South Ossetia within internationally recognized borders of Georgia and near total capture of the Georgian government, Russia is in no hurry to relinquish control over Georgia. This leaves only Armenia *and* (not or) Azerbaijan in the South Caucasus as potential partners for the EU if they wish to trade with Central Asia.

However, both need to be approached cautiously. Armenia is still part of the Eurasian Economic Union, Russia’s poor imitation of the EU, which puts it in deep economic ties with Russia. Moreover, Russia still maintains military presence in Armenia at the 102^nd military base in Gyumri, where Russia started expanding its presence just a few days ago in response to the rising tensions with Azerbaijan according to the Main Intelligence Directorate of Ukraine. Armenia denies these claims. Oil-rich Azerbaijan on the other hand is less dependent on trade with Russia. However, Baku could be influenced by Moscow if Russia manages to secure a Nagorno Karabakh peace treaty favorable to Azerbaijan or if Moscow sabotages pipelines critical to the Azeri economy. Both Armenia and Azerbaijan are transactional (as most other countries in the wider region).

With the most recent news indicating that Turkey, Armenia, and Azerbaijan reportedly reached an agreement on the Zangezur Corridor, which entirely bypasses both Russia and Iran, we might be on track where Russia’s economic and strategic influence fades into the background.

NB: it would seem that Iran attempted to capitalize on the Russia-Azerbaijan tensions by offering to buyout other owners of the strategically important port of Astrakhan on the Caspian Sea, the primary Russian port that connects Russia to Iran. Iranian company, Nasim Bahr Kish, currently owns 53.07% of the port. One of the Russian owners, Rostec, rejected the offer. Rostec is a Russian defense conglomerate and the primary supplier of the Russian military.

The Financial Congress of the Bank of Russia

Last week Russia held the Financial Congress of the Bank of Russia on July 2-4 in St. Petersburg. Think of it as a follow-on event to SPIEF with the focus on the financial markets and macroeconomics. The event was attended by all major players in the banking industry, financial services, and representatives of the Central Bank. Overall, the event was not starkly different from the recent St. Petersburg International Economic Forum, however, Nabiullina had more room to motivate the high key rate as a measure against inflation.

Most notably, Nabiullina highlighted that Russia might have “very turbulent times” ahead, explaining that the Central Bank has a difficult task of combating inflation which remains above the 4% target and not letting the Russian economy “overcool.” The task is complicated by the decreasing consumer spending on goods, she added.

The other speaker at the event that is worth highlighting is Andrej Kostin, CEO of VTB Bank. He directly stated the two primary reasons behind Russia’s economic woes – high military spending and Western sanctions. As far as I know it is the first time a Russian industry leader connecting the two causes to the economic problems. However, it should not be interpreted as an act of rebellion as Putin himself recently promised to curb military spending.

Finally, German Gref, CEO of Sberbank, called Russian wage growth data a “watermelon, green on the outside, and red on the inside.” He clarified that in 2025 55% of the working population had their wages increased, 11% - unchanged, and 34% - decreased. Moreover, 7% of the working population had their wages halved. According to Gref, the same descriptor is applicable to inflation – the hikes in utility and maintenance bills will contribute to the inflation and “this means that we must drop prices in other sectors of the economy, and that would be either difficult or painful.”

Gref was also critical of the digital ruble initiative. In response to a question on the digital ruble becoming a common method of payment, he responded: “I don't see such prospects yet. I don't see its advantages. As an individual, I don't understand why digital rubles are needed. As a bank, too, and as an enterprise, I don't understand it very well yet.” Recently, the Russian State Duma announced that a pilot payments program utilizing the digital ruble will be launched on September 1, 2026. Without delving into the details, my impression is that Russia is attempting a dual currency system with a nominal exchange rate of 1:1 (digital to currency), where a digital ruble would grant the Kremlin total control that is not afforded by cash. The USSR also had a dual currency system, where there were the standard rubles for the “commoners” and Vneshtorgbank rubles for the elites. Vneshtorgbank rubles were required to shop at Beryozka, a state-run retail chain for luxuries, consumer electronics, and other imported goods.

OPEC+ expands production, Russian oil revenues plummet

OPEC+ countries agreed to increase the daily production quota for the fourth consecutive month – the daily volume will be increased by 548,000 barrels per day in August. As results Wall Street analysts expect oil price futures will fall below $60 per barrel this year. Recall that the Urals, the Russian oil brand, always trades at a discount to other major oil brands and is subject to the current oil price cap of $60 per barrel. Unsurprisingly, the Urals discount has been shrinking and is no longer a good deal for Indian buyers. “The price gap that once made Russian Urals crude a go-to for Indian refiners is rapidly shrinking. Traders say the discount on Urals oil for August delivery to India has narrowed to just $1.70–$2 per barrel below dated Brent—the tightest spread since Russia invaded Ukraine in 2022,” reports OilPrice(.)com.

Russian tax revenues from oil production reached a record low – in June the Federal budget received only 495 billion rubles, 34% decrease vs. June 2024. For the first six months of 2025 the revenue fell 17% vs. same period last year. The two primary drivers are low global oil prices and strong ruble. Russia shifted to taxation at the well (vs. taxation upon export) some years ago and the average Urals price for tax purposes was $52.1 per barrel vs. $67.4 per barrel last year. Moreover, Russian natural gas exports to Europe dropped to the 1970s levels – for the first six months of 2025 Russia pumped 8.33 billion cubic meters of gas, a 47% drop vs. same period last year.

Russia will have a hard time capitalizing on the OPEC+ production quota increases as Russian oil companies are having difficulties expanding their production due to Western sanctions limiting their access to equipment and the specifics of Russian wells.

Wholesale prices of gasoline at SPIMEX were at record highs again last week and finally eased on Friday. The Russian domestic gasoline price crisis is exacerbated by the renewed Ukrainian strikes against Russian refineries. On July 1 Ukrainian drones struck the Saratovorgsintez oil refinery in Russia's Saratov Oblast. On July 7 Ukrainian drones targeted the Ilsky Oil Refinery in Russia’s Krasnodar region.

Nationalizations continue

Last week’s victim of Russia’s nationalization program was Yuzhuralzoloto, one the largest gold miners in Russia. Yuzuralzoloto belongs (or rather belonged) to Konstantin Strukov, a longtime Putin supporter and naturally a United Russia party member. Sturkov is one of the richest men in Russia taking up 78^th spot in the Forbes Russia 100 list. The Office of Prosecutor General has already filed a motion to confiscate all of Strukov’s assets. Share trading for Yuzhuralzoloto on the Moscow Exchange were suspended. Strukov attempted to flee Russia to Turkey, however, was detained aboard his private jet. Vedomosti, a Kremlin-controlled outlet, published a collection of opinions on the implications of the nationalization of Yuzhuralzoloto with most concluding that tougher inspections looking further into the past are coming.

Russian Coal and Steel

Mechel, a Russian mining conglomerate and one of the largest coal miners in Russia, decreased coal production by 24% in January-May 2025 vs. same period last year. The reduction is driven by the cooling demand on the global market. Mechel received targeted government support which includes deferment of tax and insurance payments in excess of 13 billion rubles for three years. Russian ports currently store record inventories of coal waiting for buyers – 50 million tons or nearly 26% of all coal exports for 2024. The inventories accumulated despite the output reduction by the largest coal mining region of Russia – Kuzbass (Kemerovo Oblast) reduced production for the first five months of 2025 by 6.1% on annual basis. Unsurprisingly, due to the shortage of funds in late June one of the largest Kuzbass coal mines employing 900 ceased operations.

The catastrophic situation in the coal industry was discussed at a Federal Council session, the upper chamber of the Russian Parliament. Deputy director of the Ministry for Energy, Dmitry Lopatin, stated at the session that if the situation on the global coal markets did not improve, Russian coal miners would lose 350 billion rubles in 2025. He added that the miners already lost 112 billion rubles in January-May 2025, the same loss they suffered for the entire year of 2024. The coal industry is experiencing “the most acute crisis since the 1990s,” according to Vladimir Korotin, CEO of Russian Coal. The EU embargo has deprived the company of Western markets, and world prices have collapsed to four-year lows.

Starting from September 1, the Chelyabinsk Electrometallurgical Plant (ChEMP) will have a four-day workweek. This measure will affect 1,200 employees of the plant and is necessary to preserve jobs as the sales fall. The ChEMP is the largest producer of ferroalloys in Russia.

Aleksei Mordashov, owner of the largest steel producer in Russia Severstal, received more than 200 billion rubles in dividends despite the troubles that the company is facing. At the recent SPIEF, Severstal CEO Aleksandr Shevelev complained that the decreasing demand might leave 10% of the annual production volume unsold.

In Crimea

Regional authorities of the illegally occupied Crimea are to auction off the ports of Yalta and Yevpatoria. The combined starting bid is set at 1.7 billion rubles. The Foreign Intelligence Service of Ukraine also reports that Russia is seeking to attract Chinese companies in their attempts to expand transport infrastructure in Crimea.

Labor market and other Rosstat data

For Q1 2025 wages and salaries payable (owed) tripled quarter on quarter, reaching 1.5 billion rubles if official data is to be believed. Labor unions’ data however suggest that wages and salaries owed exceeded 2.4 billion rubles for Q1. This is a nice anecdote showing that even the Russians get confused by their fabricated data.

Payroll taxes owed grew 22% in January-March 2025, reaching 352 billion rubles. This is double what the Accounts Chamber reported last year. Net income of corporates shrank 1.4% on an annual basis for the first four months of 2025. Considering that the *official* inflation rate is about 10%, the real reduction is more dramatic.

Labor shortage issues are not easing despite recent statements by the Russian Central Bank. The most recent Rosstat report shows that the unemployment rate set a new historic low at 2.2%. However, the monthly report by hh(.)ru indicates that finding a job in Russia is getting tougher – in June the ratio of posted resumes on the job platform to the number of jobs posted increased to 5.5 vs. 3.1 for the same month last year.

Higher School of Economics estimates that the recent tax increases will dampen income growth in Russia by 0.4%.

Rosstat also reported that for the first five months of 2025 the Russian economy grew 1.5% in annual terms vs. the forecasted 2.5% for the entire year by the Ministry of Economics. Kommersant reports that the probability of reaching the forecasted 2.5% growth is “practically zero.” Retail sales in May grew 1.8% vs. expected 2.1%. For the first five months of 2025 retail sales grew 2.3%.

June 2025 might be the worst month for the Russian manufacturing sector in three years. S&P PMI for June dropped to 47.5 vs. 50.2 in May. The reduction is driven by falling purchasing power of clients and low exports. Rosstat’s indicator does not mirror the finding (why should it). Rosstat’s confidence index in mining dropped 1.4% while for manufacturing it increased 0.5%.

This is it for today. Until next week.