Russia’s economy expanded by just 1% last year, a steep drop from growth of around 4% recorded in 2023 and 2024.

Huge spending on its forces in Ukraine had initially spurred growth and helped Moscow buck predictions of economic collapse after it launched its offensive in 2022.

But the outlays pushed up inflation, while businesses have railed against high borrowing costs.

“The economy continues to return to a balanced growth path,” the central bank said in a statement, referring to the cooling economy.

It also said that inflation had “accelerated significantly due to one-off factors” in January, specifically tax hikes.

“Inflation expectations remain elevated. This may impede a sustainable slowdown in inflation,” it said.

As a result, the central bank said interest rates would need to stay higher than previously expected, forecasting an average of 13.5-14.5 percent this year.

It says high borrowing costs are needed to bring inflation down to its 4% target, which the bank hopes to reach in the second half of 2026.

Russia’s state finances have been strained by the costs of the war and pressure on its vital energy exports.

Oil and gas revenues, which provide roughly a quarter of state budget income, fell to a five‑year low last year, as exports are crimped by Western sanctions.

The budget deficits during the war have pushed Russia’s external debt to its highest level in 20 years, though its debt-to-GDP ratio of around 16% is well below that of most developed economies.

Still, the Kremlin has tapped the pockets of ordinary Russians to plug the gap, raising the value-added tax by two percentage points this year, to 22%.