Cold, freezing, icing: will recession start in Russia?

The cooling of the Russian economy continues, the second quarter looks like "technical stagnation", Sberbank CEO Herman Gref said on the sidelines of the Eastern Economic Forum in early September.

Other Russian officials and bankers earlier this year described what was happening in the country's economy in different ways. At the St. Petersburg International Economic Forum in June, Maxim Reshetnikov, head of the Ministry of Economic Development, admitted that it was "on the verge of going into recession. Central Bank head Elvira Nabiullina called the situation "coming out of overheating." Russian Finance Minister Anton Siluanov called it a "cooling, which is always followed by a hot summer". And Andrey Kostin, head of state-owned VTB Bank, said: "Recession is what? It's negative growth. I don't see such a situation yet. I believe we are in a positive zone. ... Another thing is that, of course, there is what is called icing, freezing, cooling."

In 2022, Rosstat first estimated the economy's decline at minus 2.1%, and then improved the estimate to minus 1.2% due to revised figures for agriculture, construction, transportation and some non-basic industries - the decline was caused by large-scale sanctions. But in the two years that followed, Russia's GDP, supported by defense spending, surged upward, growing 3.6% in 2023 and 4.3% in 2024, one of the highest annual rates in 10 years.

But already last year the first signs of slowdown appeared: the quarterly dynamics of GDP was uneven - it was growing in the first and fourth quarters, and declining in the second and third quarters.

Nevertheless, the Bank of Russia has often pointed out the danger of overheating this year (e.g., here). It explained that the excess of demand over production capacity has been working for inflation for a long time. Especially under conditions of staff shortages and sanctions - with parallel imports and complicated settlements with suppliers due to secondary sanctions.

The Ministry of Economic Development now expects the economy to grow by only 1.5% this year, instead of the 2.5% expected in the April version of the baseline forecast. Analysts and economists participating in the Central Bank's macro survey also worsened their forecasts in September and now expect GDP growth of 1.2%, closer to the lower boundary of the Central Bank's medium-term forecast (1-2%).

On a formal basis, there was a technical recession - for two quarters in a row Russia saw a decline in GDP. In January-March, Rosstat recorded GDP growth of only 1.4% (against 4.5% in Q4), in April-June - 1.1% according to preliminary estimates. The Central Bank writes that the overheating peak was passed in Q4 2024.

But regarding the seasonally adjusted quarterly GDP dynamics, "there is a certain spectrum of opinions among economists": it is around zero, but some have it positive, others negative, notes Alexander Isakov, head of Sberbank's Macroeconomic Research Center and author of the Cold Calculation telegram channel. "In general, in terms of the level of GDP and, accordingly, the assessment of the output gap, this difference is not qualitative - activity is still above its pre-GDP trend. But in terms of current dynamics and the economy's transition to a state of techno-recession, the sign of the increase is important," he wrote.

Dmitry Polevoy, investment director of Astra UA, says that Russia has "entered a technical recession": he refers to the Central Bank's estimate, according to which the GDP with excluded seasonality in the second quarter of 2025 amounted to minus 0.6% quarter-on-quarter after minus 1% in the first quarter.

Grigory Zhirnov from the macrostructural modeling laboratory of the National Research University Higher School of Economics believes that the current situation "definitely cannot be called a classic recession". According to him, the economy is shrinking from the high levels of the end of last year, no significant problems are still observed in the labor market, wage growth supports consumer demand. But the economy is holding up at the expense of the defense industry sector, while in "non-military" industries signs of recession have already been observed since the beginning of the year, he admits. This is confirmed by the data of the Center for Macroeconomic Analysis and Short-Term Forecasting - in July it estimated the decline in output in industries not related to the defense industry at 2.3% year-on-year, although in June it was 0.9%. In other words, the decline in civilian industries is accelerating.

Industries related to the defense industry also note the deterioration of the situation. Metallurgists have faced many challenges, but in terms of its severity, the current downturn in demand in the domestic market is comparable to the crisis of the 1990s, Severstal CEO Alexander Shevelev told RBC. According to him, it is caused by an unprecedentedly long period of high key rate, which is aggravated by export restrictions.

A recession manifests itself through a set of markers, where a decline in GDP is just one of them.

Another one is the financial condition of Russian companies. Although it is deteriorating, it is not dramatic. The balanced profit (including losses) of Russian companies in the first half of the year decreased by 8.4% against the same period last year. It was more significant in extractive industries than in manufacturing and trade. But this is a decline from the record levels of 2023-2024, when the economy was overheating, the Central Bank reminds.

The debt burden of the real sector increased, but remained at a moderate level: only 4.2% of corporate loans are now problem loans, and banks' risks on the corporate loan portfolio are covered by 71%. Most companies continued to successfully service their debts, notes the Bank of Russia.

Business lending statistics from the Central Bank show an increase in lending since February.

Another marker of a deteriorating economy is a sharp increase in unemployment, which becomes a catalyst for social problems.

But in Russia, the slowdown in economic growth has not been reflected in the level of official employment, with unemployment remaining near a low of 2.2% in July.

The fact is that this indicator in Russia does not reflect the real state of affairs. Vladimir Gimpelson, head of the Center for Labor Studies at the National Research University Higher School of Economics, drew attention to the fact that the ratio between registered and actual unemployment has fluctuated from one to three to one to five over the last 20 years (during which time the country has experienced several crises). That is, there were three to five unregistered unemployed per one registered unemployed person. There are several reasons for this. Companies do not fire people because of "administrative leverage", and the unemployment data do not include those who have been sent on leave without pay. The small amount of unemployment benefits does not encourage citizens to register with the employment services.

Now hidden unemployment is growing, which is recognized by both the Central Bank and the Kremlin. Since the beginning of 2025, the number of part-time workers has grown from 98,000 to 199,000 as of August, the Kremlin estimated.

What is happening to the level of household incomes and expenditures? The growth of real wages (adjusted for inflation) and real disposable income is slowing down. In the first half of 2025, real wages grew by only 4.1% against 18.1% a year earlier. According to the forecast of analysts surveyed by the Central Bank, growth at the end of the year will amount to 3.5%. Real disposable income rose 8.7% in the first quarter and 7% in the second quarter, but its seasonally smoothed growth fell from 4% to 0.9% quarter-on-quarter. Raiffeisenbank analysts attribute this to falling wages and reduced social payments.

According to Sberindex calculations, real consumer spending slowed down in August. That is, people became more cautious in their spending.

The population now keeps Br60.8 trillion in deposits (of which Br57.5 trillion in rubles). But since the summer, when deposit rates fell following the key rate cut, the total volume of deposits has stopped growing significantly.

Annual inflation in August 2025 slowed to 8.14% from 8.8% in July, according to Rosstat. This slowdown also indicates a rapid cooling of the economy, says Dmitry Polevoy.

The Bank of Russia notes that the strengthening of the ruble made a significant contribution to price dynamics. However, pro-inflationary risks, among which the regulator emphasized the deterioration of foreign trade conditions and the fall in demand and energy prices in summer, still prevail over disinflationary risks.

"The situation with economic growth now looks like a managed cooling of the economy to bring it to balanced growth, rather than a harbinger of the coming crisis. But the inflation situation so far raises concerns related to the growth of budget spending," said Natalia Orlova, chief economist at Alfa-Bank.

According to the Ministry of Finance's preliminary data on budget execution in January-August, the treasury received Br23.7 trillion (3% more than in the same period last year), while it spent Br27.9 trillion (21% more in annual terms, while the growth in government procurement, for example, amounted to 31%). As a result, the budget was formed with a deficit of 1.9% of GDP.

The first adjustment of the budget for 2025 in June assumed a deficit of 1.7% of GDP. In the fall, the Ministry of Finance plans to make a second round of adjustments to the 2025 budget parameters due to the growth of expenditures.

It is also important to note here that the situation with oil and gas revenues in 2025 has worsened: the annual plan for them has been revised from Br11 trillion to Br8.3 trillion, and the Finance Ministry this month has already lowered the forecast price of Urals oil to $59 per barrel for 2026. In the budget, the oil price for next year was considered at $66 per barrel.

The key rate remains one of the important factors in restarting the economy, Herman Gref is confident. Sberbank estimates that it will be around 14% at the end of the year, which, according to Gref, is not enough for normal economic growth. "It will be much harder to revitalize the economy than to cool it down," he warned at the WEF. With the current inflation rate, we can only hope for revival if the key rate is below 12%, Gref concluded.

It will no longer be possible to jump-start the economy by simply lowering the key rate. All the more so because many industries, such as chemistry, metallurgy, and the coal industry, are accumulating problems, including with the servicing of loans received at high rates, according to Alexander Shirov, director of IPN RAS. Vladimir Korotin, general director of Russian Coal, told Forbes earlier about the problems in the coal industry, especially among producers of thermal coal: according to him, it is in the worst crisis since the 1990s.

These problems will have to be solved through point support measures and synergy of efforts of the state, development institutions and private lenders, Shirov believes.

"For the federal budget, the duration of tight monetary conditions will turn out to be another increase in spending, with some of it, such as high spending on defense and on social policy, remaining an imperative," he said.

If the Central Bank decides to maintain tight monetary conditions for a long time, it will lead to debt servicing problems for even more companies, agrees Grigory Zhirnov from the Higher School of Economics. However, given that the cycle of easing of monetary policy has started, such a development looks unlikely.

"The most realistic scenario is to maintain near-zero quarterly growth rates at least until the first quarter of 2026. And annual GDP growth next year will also be less than 1%," he believes.

This article was AI-translated and verified by a human editor