Russian Economy - From War Euphoria to the Threat of Recession

Vladimir Putin meets with Donald Trump in Alaska at a time when the Russian economy is going through a difficult period. Revenues from oil and gas sales are falling. Other revenues are growing, but they do not compensate for the losses. The deficit already significantly exceeds the plan for the whole year. Inflation is decreasing, but remains high. Economic dynamics in general have clearly lost momentum.

In the first years of the Russian Federation's war against Ukraine, high growth rates - higher than in the previous decade - were ensured by exceptionally high export revenues, generous budget injections (a significant part of which went to the defense sector) and business investments, which it was forced to resort to in order to adapt to sanctions.

The potential of these factors has been largely exhausted, and by 2025 the Russian economy is on the verge of recession. According to economists, a recession could have been recorded as early as the second quarter. According to preliminary data from Rosstat, this did not happen, but the statistics do not contain any signs of sustainable growth.

 

 

In the second quarter, the Russian economy grew by 1.1 percent on an annualized basis after 1.4 percent in the first three months. This is noticeably lower than the forecast made by the usually conservative Central Bank of Russia (+1.8 percent). The consensus forecast of analysts regularly surveyed by Bloomberg gave a growth of 1.5 percent compared to the previous year.

Adjusted for seasonal factors, growth, compared to the first quarter, froze at around zero.

"There has not been a technical recession yet, but there is no clear growth either," says economist Dmitry Polyovy.

"The economy may have narrowly avoided a technical recession," says Capital Economics economist Liam Peach.

He estimates growth compared to the previous quarter at 0.3 percent. However, the economist notes, "Russia is clearly struggling with imbalances created by military actions."

A technical recession is a decline in real GDP in two consecutive quarters compared to the previous one, taking into account seasonal adjustments. In the first quarter compared to the fourth quarter of 2024, GDP decreased by about 0.5 percent.

However, such estimates are largely conditional. Methods for calculating the seasonal factor may be inaccurate: some economists see a barely noticeable increase, while others see an equally insignificant decrease.

For example, according to the calculations of analysts on the Telegram channel MMI, created by the adviser to the head of the Central Bank of Russia, Kirill Tremasov, a technical recession may have occurred. However, they note that at the beginning of the year a recession was almost inevitable: an excessively high result was recorded in the last three months of 2024, when many enterprises were in a hurry to fulfill annual plans.

 

 

The further prospects for the Russian economy are uncertain. The Central Bank of Russia expects GDP growth in the range of one to two percent. This assessment is contained in the medium-term forecast published after the results of the last meeting of the board of directors - at which the regulator lowered the key interest rate from 20 percent to 18 percent.

The easing of monetary policy is having a certain effect. Starting in July, the Russian economy has shown signs of recovery, say analysts at Alfa-Bank. They point out in particular that, against the background of a decrease in interest rates on loans, sales of new cars in July increased by 33 percent compared to the previous month, and the purchase and sale of apartments in Moscow - by 17 percent. Their forecast for the end of the year is growth at the level of one percent, which corresponds to the lower limit of the Central Bank of Russia's forecast.

International analysts expect approximately the same dynamics. Thus, the International Monetary Fund (IMF) in its latest forecast expects Russian GDP growth of 0.9 percent in 2025 and one percent in 2026. The July report by Consensus Economics, which regularly polls more than a thousand analysts from different countries, predicts growth of 1.4 percent this year and 1.3 percent next.

But there are also more gloomy forecasts. Experts from the Center for Macroeconomic Analysis and Forecasting, which is close to the Russian government, believe that even a further reduction in the key interest rate will not stop the processes that have already begun: in 2026, the Russian economy could shrink.

 

 

Even if growth is maintained at one to two percent in the coming years, it will be a noticeable slowdown compared to the war years. In 2023 and 2024, the Russian economy grew by about four percent per year - such a pace has not been seen for a long time. After the 2008 crisis, the average annual growth was only 1.2 percent. The country will return to such a pace only under an optimistic scenario.

The short-term increase in economic activity gave the Russian authorities reason to report that the country is developing in the right direction and that the war and sanctions are not hindering it. But has Russia really become richer?

The new rating of countries by nominal GDP per capita, compiled by the IMF, shows that the real picture is not so rosy. Russia's result - $ 14,300 per capita - is close to the world average and has hardly changed over the past 10 years.

For comparison: in Germany, this figure is $55,900. Moreover, Russia has been overtaken in the IMF rating for the first time by a country that was formerly part of the USSR - Kazakhstan. Its result is $14,800 per capita per year.