From War Surge to Slump: Is the Russian Economy Heading Toward Recession?

The Russian financial system has been teetering getting ready to recession for months as monetary authorities take actions to gradual development in a bid to keep away from runaway inflation.

Russia in Q1 of this yr suffered its first quarterly GDP contraction since 2022. 

Though official Q2 GDP figures usually are not but out there, most analysts estimate development to be about 0%, that means Russia narrowly averted a technical recession, which might require two consecutive quarters of GDP decline.

Economist Dmitry Polevoy estimates the expansion in Q2 to be “close to zero after seasonal adjustment,” whereas Bloomberg said that the Russian financial system “barely grew quarter-on-quarter.”

Liam Peach, an analyst with Capital Economics, and Stanislav Murashov, an economist with Moscow-based Raiffeisenbank, each estimated quarterly development in Q2 at 0.3%.

Why is development slowing? 

Russia’s slowdown is pushed by efforts to rein in inflation, which had risen after the federal government opened its coffers to finance the struggle and to cushion the impression of sanctions. 

That spending boosted demand, however provide lagged on account of labor shortages and better logistics prices attributable to sanctions, inflicting costs to rise. 

Unstable excessive inflation makes planning tough, so the Central Financial institution raised rates of interest to chill the financial system, encouraging saving and rising borrowing prices for companies.

After a yr of tight financial coverage, indicators of cooling are actually seen. 

One indicator of that’s industrial output, which measures the amount of products produced by manufacturing, mining and utilities — masking every thing from automobiles and metal to electrical energy and clothes.

Industrial development slowed to 1.4% year-on-year within the first half of 2025 (H1 2025), down from the three.9% development within the second half of 2024, in response to Financial Growth Ministry statistics.   

The economic development was supported by war-related industries, the place firms had been supported by authorities contracts and subsidies.

These embrace the manufacturing of transportation tools (+34.6% year-on-year in H1 2025), computer systems or digital and optical merchandise (+15.1%), in addition to fabricated metallic manufacturing (+13.6%).  

Different sectors, nonetheless, are struggling. 

Among the many declining industries had been meals manufacturing (-0.7% year-on-year in H1 2025), electrical tools manufacturing (-1.5%), mild trade (-3.2%), wooden processing (-3.2%) and motor autos, trailers and semi-trailers (-16.6%). 

Mining output — together with oil, fuel and coal manufacturing — fell by greater than 2.4% year-on-year within the first half of 2025.  

Vladimir Salnikov, an economist on the Middle for Macroeconomic Evaluation and Quick-Time period Forecasting, a assume tank, said that industrial output in non-military associated sectors truly declined by 0.9% between February and June year-on-year. 

The consumption growth can be cooling as borrowing prices stay excessive and wage development decelerates. 

Retail commerce turnover — the entire worth of products purchased by households — grew by 2.1% within the first half of this yr in contrast with the identical interval in 2024. 

That is slower than the ten% development seen within the second half of 2024 and the 7.7% development for the entire of final yr.

In keeping with SberIndex, Sberbank’s statistics unit, Russian client spending development slowed to 9.5% year-on-year in Aug. 3-17, in contrast with a mean of 13.9% in January-July. 

What ought to we anticipate subsequent? 

Although these developments sign a slowdown somewhat than a collapse, it’s clear that the post-2022 struggle enhance is fading. 

Many analysts anticipate 2025 GDP development to stagnate and even contract, which might mark Russia’s first annual decline since 2022.

“The financial system could, and probably will, contract in 2025,” economist Vladislav Inozemtsev advised The Moscow Instances.

He urged the Russian financial system could decline by 0.5-1.2% as “there have been no actual causes for development, not even initially of the yr.”

Moscow-based economist Dmitry Polevoy of Astra Asset Administration expects modest GDP development of 0.6% in 2025 — nonetheless optimistic, however beneath the Central Bank (1-2%) and the Finance Ministry (1.5-2%) forecasts. 

Sofia Donets, chief economist on the Moscow-based T‑Investments brokerage, told the Vedomosti enterprise each day that the slowdown is more likely to deepen in late 2025 and early 2026 amid broad stagnation throughout a number of sectors.

The excess funds which have been used to spice up the Russian financial system are drying up, Inozemstev mentioned.  

To maintain the struggle trade going ahead, he argued, authorities will now want to boost taxes or divert sources from the civilian financial system, restraining development.

“Consequently, I anticipate that the Russian financial system is more likely to stagnate, with components of each decline and restoration — however all throughout the margin of statistical error,” Inozemstev added.

He in contrast the scenario to 2014-2020, when the primary wave of Western sanctions strained the Russian financial system however stopped in need of triggering a social or political disaster.