Finland's central bank predicts that Russia's GDP will grow by around two percent this year and then by about one percent in 2026.
The Bank of Finland Institute for Emerging Economies (BOFIT), which monitors and analyses trends in such economies, noted that much of Russia's GDP growth in recent years was driven by the government spending on the war in Ukraine.
"We expect government spending to increase further this year, but production is already stretched to capacity, limiting potential for further output gains," the central bank's press release read.
The bank said that Russia's "incessant rise in government spending" and its focus on supporting the war effort had contributed to structural imbalances that have taken a toll on its economy.
"Although a full-blown economic crisis in the immediate future is unlikely, failure to address economic disparities could eventually have serious repercussions," the press release stated.
Citing Rosstat figures, Finland's central bank said that Russia's GDP grew last year by four percent, a development the bank said had outpaced its forecast in October.
"The strong growth reflects robust increases in government spending, especially on branches involved in the war effort. In the second half of the year growth slowed down substantially. Production capacity is approaching its limits, so increasing output is becoming more challenging," the bank's release read.
War funding 'top priority'
At the same time, the bank said structural imbalances in Russia's economy have worsened, noting that the government faced deficits for three years, adding that consumer price inflation had accelerated into double digits.
The bank said it expected Russia to continue as it has, and that it would provide funding for sustaining the war effort as a "top priority".
The central bank said there were a "great number" of risks facing the Russian economy as it continues its war of aggression in Ukraine.
"The government must continually increase spending to fund additional war activities. While such spending can give a brief boost to production above our forecast, it also worsens structural imbalances in the economy," the Bank of Finland's release said.
It pointed out that Russia's central bank will need to further tighten monetary policies to curb inflation.
"While high interest rates hurt the growth possibilities for industries not involved in supporting the war effort, abandoning the tight monetary policy regime could lead to an uncontrollable inflation spiral and economic crisis", the bank said.
It said Russia's relationship with China and international sanctions posted the most significant external factors that could affect the country's economic outlook.
"A significant tightening of sanctions would weaken Russia’s economic development. A sharp and prolonged drop in oil prices would also significantly curtail Russia’s government finances and ability to make war. Russia’s economy could severely suffer if relations between China and Russia degrade. Russia has become highly dependent on China in recent years," the bank noted.
Further, it said if the war in Ukraine were to end, Russia would be able to end such spending.
"The spending needed to sustain the war effort is unlikely to diminish, however, as it would go to stockpiling and regenerating resources for future conflicts," the bank's release read.