Macroeconomic Situation: From swift growth to stagnation

Dmitry Kruk

Summary

The year 2025 saw the Belarusian economy lose its rapid growth drivers. Amid declining external demand and dip in exports, the economy swiftly exited the accelerated growth phase of 2023–2024 and reverted to sluggish expansion, with a growth rate of just 1.3 % in 2025.

Internal demand benefitted from momentum sustained by rising wages and administrative incentives encouraging investment, and partly cushioned the external shock. However, this was accompanied by mounting macroeconomic imbalances — deterioration of the external balance, growing inflationary pressures, and further worsening of corporate financial health. Institutional policy remained inertial, focused on a dirigiste model and deepening reliance on Russia, with no effort toward structural reform.

The year’s outcomes were significantly worse than original expectations, heightening the risk that the economy would be entrenched in stagnation, with increased sensitivity and vulnerability to shocks.

Trends

Ambitious plans of the authorities vs. accumulated risks

The Belarusian economy appeared to be in a quite favorable shape at the start of 2025. Throughout 2023–2024, GDP grew by 8.7 % (4.1 % in 2023 and 4.3 % in 2024).1 By early 2024, this rapid growth had already offset the output losses of 2022, caused by the war and sanctions. Increased demand for exports from Russia and the gradual recovery of two key export commodities — petroleum products and potash fertilizers — had a direct positive effect on output and broadened opportunities to stimulate domestic demand.

Taking advantage of the favorable external trade environment, the economic authorities actively put in place monetary and fiscal incentives, thereby boosting internal demand. Additionally, domestic demand (notably household consumption) enjoyed a strong impetus as wages were growing faster than output amid labor shortages. By early 2025, real wages were 27.3 % higher, and GDP was 4.9 % above the level recorded at the end of 2021 (before the war and sanctions tightening).

The economic authorities were in a state close to euphoria, optimistic about continued rapid growth. According to the official forecast — which in Belarus often looks more like a directive target — GDP was projected to increase by 4.1 % in 2025, with planned investments in fixed capital rising by 7.8 %.

Overall, the government’s plan was based on the following assumptions: (a) external conditions would still favor increased demand from Russia and growth in exports of strategic commodities; (b) labor shortages would continue to drive rapid growth in wages and consumption; (c) targeted investment stimulation would further bolster GDP growth while keeping it better balanced.

However, even on the eve of 2025, alarming signals began to appear, challenging the optimistic logic of the authorities.

First, in the second half of 2024, exports in volume terms significantly declined, contributing to the widening foreign trade deficit.

Second, the financial health of the real sector, despite improvements in the macroeconomic environment, remained rather fragile. This constrained its ability to increase investments and made it vulnerable to shifts in external demand.

Third, inflationary pressures grew more pronounced, even despite ongoing directive price controls. Elevated wages and overheated domestic demand exerted upward pressure on prices, prompting the authorities to at least partially loosen price regulations. By early 2025, consumer inflation stayed close to 5% in annualized terms due to directive measures, albeit showing clear signs of and potential for acceleration.

Institutional environment: drifting with the tide and efforts to bring down sanctions barriers

In 2025, Belarus’s institutional environment remained largely stagnant, developing along the trajectory set between 2021 and 2024. The core principles that had effectively taken shape during that period were further reinforced.

First, the institutional shift associated with deepening integration with Russia within the framework of the “Union State” continued to influence a significant portion of economic policy: many decisions and tools were driven by commitments and coordination with Russia.

Second, dirigisme intensified: the state persistently increased its interventions in private sector activities, combining regulatory pressure with direct involvement through investment management, directive crediting, and debt redistribution. The consolidation of this model was formalized de jure in the programs adopted in 2025 — specifically, the socio-economic development program for 2026–2030 and the government activity plan for 2025–2029. While these programs appeared to focus on the future, they essentially institutionalized the existing model. Compared to earlier programs (2021–2025), the new documents show a marked reduction in emphasis on structural reforms, liberalization, and expanding the private sector; instead, they underline the rhetoric of stability, controllability, and state coordination.

The year 2025 saw no significant institutional transformation: the authorities continued to actively deploy fiscal interventions, including regular redistribution of expenditures and funding for specific projects and initiatives. In parallel, the practice of alleviating enterprise debt burdens through asset and liability redistribution managed by the JSC Asset Management Agency persisted.

These mechanisms were most notably applied in the cement industry and agriculture, where systemic debt issues prevail. The government utilized the Development Bank and related instruments to fund projects, frequently revised the state investment program, and increased bond issuance and guarantee provisions. Although these measures helped support the economy, they also heightened dependence on centralized resource redistribution.

In other areas of economic policy, the logic of adaptation without reform dominated as well. Price regulation continued (with some fluctuations: minor relaxations were often followed by new tightening measures) as a tool to curb inflation, and currency regulation was based on special regimes of currency transactions and restrictions. Together, these measures reinforced the existing model of a managed and highly dirigiste economy.

Among the few institutional innovations, the adoption of medium-term government programs for 2026–2030 in demographic policy, energy, and the labor market stands out. These documents enshrine the priority of an active role for the state in overseeing demographic processes, developing energy infrastructure, and balancing the labor market, including measures for workforce redistribution and employment stimulation in priority sectors. Furthermore, the concept of “mobilization” has gained prominence both in the rhetoric of government agencies and at the regulatory level. For example, the Ministry of Economy was formally tasked with functions related to the economy’s mobilization preparedness.

The institutional environment was largely shaped by the concept of “deepened integration,” pursued since 2021, and particularly by a package of measures for 2024–2026. Central to this was industrial and science and technology cooperation. In 2025, tangible progress was made in this area, rather than mere declarations. The most significant developments occurred within production chains and R&D: interactions increasingly took the form of joint production of components and technologies, as well as integration into import substitution chains.

At the same time, certain selectivity remained: deepening integration focused on priority sectors (industry, technology, logistics), but did not extend to sensitive areas such as energy or a fully unified common market. For instance, the creation of a common market for oil and petroleum products (initially scheduled for 2025) was postponed again, now to 2027. A similar situation de facto persisted in the natural gas market: parties relied on bilateral agreements, contrary to the goal — repeatedly proclaimed since 2021 — to establish a unified market.

Within the integration framework, the security component intensified significantly, often overshadowing economic considerations. For example, the security guarantees treaty ratified in 2025, while mainly addressing military issues, also partially covered economic aspects such as sanctions adaptation and infrastructure placement. Overall, military-strategic priorities increasingly began to shape and subordinate economic decisions.

In 2025, the sanctions environment regarding Belarus exhibited mixed trends. The European Union continued a course of gradual tightening; however, this primarily involved fine-tuning the existing regime rather than significantly expanding the sanctions perimeter. The EU’s decisions focused on strengthening enforcement mechanisms, countering circumvention, and broadening criteria for listing entities (notably through links to the military-industrial complex and hybrid activities). Furthermore, the logic of aligning Belarusian sanctions with the Russian track, which had gained momentum since 2024, further constrained the autonomy of decision-making on Belarus.

In contrast, the U. S.’ policy showed an opposite trend: following limited negotiations with the Trump administration, the U.S. sanctions strategy shifted from unconditional pressure to a transactional approach, based on targeted concessions in exchange for political steps — primarily the release of political prisoners. This change was reflected in a series of licenses and de facto relaxations concerning certain Belarusian state companies, including the key case of Belaruskali and associated export entities.

The alleviation of the U. S.’ policy is likely to produce some positive impact on the affected companies and the sector overall — such as increased bargaining flexibility for Belarusian potash exporters and reduced transaction costs. However, the systemic macroeconomic effect is unlikely to be significant, as the main pressure on Belarus remains driven by the more stringent and comprehensive sanctions regime of the European Union.

Export collapse and altering economic conditions

In 2025, Belarus’s economic landscape started to change significantly. The main catalyst for this shift was the decline in external demand, which impacted export performance. During 2023–2024, exports underpinned rapid growth, driving direct demand for production and serving as a buffer for the external balance. However, in 2025, this foundation was lost. By the end of the year, exports had fallen by around 4.7 % in real terms, accompanied by considerable volatility in volumes. After hitting a record high in mid-2024, physical export volumes declined by roughly 15 % by year’s end. A brief recovery occurred in early 2025, but from spring onwards, exports resumed their decline.

Notably, the decrease was geographically widespread, encompassing Russia and other destinations alike. This suggests that the previous cyclical growth drivers, particularly the favorable conditions in the Russian market in 2023–2024, had been exhausted, bringing structural limitations — especially low productivity — back to the forefront.

Major fluctuations and divergent trends are characteristic of two key strategic commodities — oil products and potash fertilizers. Throughout the year, exports of oil products declined (by approximately 10–15 % according to estimates) and experienced significant volatility. Logistical challenges and opaque supply arrangements caused sharp swings in volumes during certain periods. For instance, in the fourth quarter of 2025, the situation with oil refining temporarily improved: Ukraine’s strikes against Russian oil infrastructure led to increased demand for Belarusian oil products within Russia. However, much of these supplies were routed through tolling schemes, which limited their influence on overall export figures and the external balance.

Meanwhile, exports of potash fertilizers grew, partially offsetting the negative trends seen in other sectors.

In contrast to contracting exports, imports adapted much slower. By the year’s end, imports had edged down by only 0.1 % in real terms, buoyed by persistent strong domestic demand fueled by rising incomes and wages. Consequently, the contribution of net exports to GDP growth was sharply negative.

In nominal (U. S. dollar) terms, the external trade deficit also widened, but not dramatically, as favorable behavior of export and import prices partly offset the decline in physical export volumes. In relative terms (% of GDP), the foreign trade deficit and overall current account balance actually shrank a bit, driven by GDP growth in dollar terms. Nonetheless, the economy remained firmly in a deficit zone for external trade and current account.

The slowdown in export activity deepened existing domestic imbalances. The reduction in foreign currency earnings worsened the already weak financial position of companies, putting additional pressure on liquidity and limiting their capacity to maintain wage and investment growth rates. Simultaneously, the increase in the external deficit amid limited access to external financing compelled policymakers to gradually adjust their strategies and reduce the stimulus to domestic demand.

The government’s response was phased. In the first half of the year, the authorities pursued a relatively ambitious strategy, seeking to offset weak external demand through active investment promotion. Following personnel changes in spring 2025, directive tools were used more actively to reallocate financial resources towards the corporate sector. This led to a robust 10 % increase in investments, making their contribution to GDP comparable to that of household consumption.

Amid a sharp deceleration in growth — from 2.1 % year-on-year in January–June to around 0.5 % in July–December — the economic authorities de facto embraced the subdued economic pace. This was evident in the moderate tightening of monetary policy and reduced intensity of directive stimuli. Consequently, investment in fixed assets had also slowed by the end of the year.

Wages and consumer confidence: high due to momentum, albeit with signals of decline

In 2025, wage growth and consumer optimism remained key macroeconomic drivers, although indications of their weakening became visible as external conditions deteriorated. Due to a structural labor shortage, nominal wages continued to increase at a fast pace in the first half of the year (about 18 % year-on-year), with real wages rising approximately 9–11 % year-on-year. This significantly boosted household disposable incomes and sustained consumption as a main engine of domestic demand.

During the first half of the year, consumer demand remained overheated: household expenditures grew by around 8 % year-on-year, ensuring the largest contribution to GDP expansion. The high income growth was coupled with limited savings and investment options amid sanctions and administrative restrictions, which further fueled consumption. Despite these factors, strong consumer optimism persisted, rooted in the rapid income growth achieved in 2023–2024.

Nonetheless, during 2025, early signs of instability in this trend became evident. Wage growth greatly outpaced productivity gains, resulting in higher unit labor costs and added strain on corporate financial health. As export conditions deteriorated and revenues declined, companies faced growing limitations in sustaining previous wage increase rates. In the second half of the year, this led to a gradual moderation of wage push (growth slowed to around 14% year-on-year in nominal terms and approximately 6.5% in real terms) and a deceleration in consumer activity. Consumer confidence also waned as households encountered sluggish income growth and escalating economic uncertainty.

Macroeconomic outcomes of the year: contradictions and rising risks

By the end of 2025, Belarus’s economic growth had markedly decelerated — to 1.3 %, compared to 4.3 % in 2024 — with the slowdown intensifying in the second half. On the demand side, domestic demand remained the main driver, as household consumption expanded by about 6.0 % year-on-year, while investment went up by 10 % year-on-year, contributing 3.5 and 2.3 percentage points respectively to GDP growth. The net export contribution was negative (minus 3.3 percentage points), due to declining exports and relatively stable imports.

On the supply side, the growth structure underwent a fundamental change compared to the previous two years. Manufacturing and trade, previously the main engines of growth, contracted by 2.3 % and 0.7 %, respectively. The largest contributions to GDP growth came from the construction sector (which expanded by 8.0 %), ICT sector (3.5 %), transportation (2.9 %), and agriculture (0.8 %).

Simultaneously, a trade and current account deficit (1.9 % of GDP) re-emerged and established a stable pattern, reflecting the disconnect between domestic demand and the economy’s external capacity. Consumer inflation remained high at around 6–7 % annually, even amid strict price controls, indicating ongoing inflationary pressures and macroeconomic imbalances.

Another, increasingly pressing, issue is caused by the weak financial health of real sector companies. Since 2022, non-financial firms have been forced to absorb sanctions-induced losses, followed by the financial strain of excess growth in labor costs (which surpassed productivity gains). Meanwhile, their revenues from the domestic market were artificially restrained by price regulation. Consequently, in recent years, their profitability has declined from the typical range for the economy (7–8 % profit margin and 9–10 % sales margin) to lower figures (6–7 % and 7–8 %, respectively). Throughout 2025, the situation further deteriorated due to declining export revenues and the widening gap between wage increases and labor productivity.

A further sign of emerging issues was the steady growth of finished goods inventories, which by the end of 2025 had reached all-time highs. This indicates increasing pressure on liquidity and limitations on sustaining previous levels of production and investment.

Conclusion

By late 2025, it became evident that the growth model of 2023–2024 — driven by heightened external demand from Russia, rapid wage and consumption growth amid labor shortages — had nearly reached its limit. Widening disproportions, such as a weakened external position, diminished financial health of firms, and inflationary pressures, curtailed the ability to encourage domestic demand and revealed risks of macroeconomic turbulence. Absent these temporary drivers, the economy reverted to growth potential at a rate of 1–2 % annually. From a medium-term perspective, this essentially represents a return to stagnation, marked by high vulnerability to recessions, inflation surges, and financial instability episodes.