At Russia’s annual marquee event for business investment, a Kremlin-funded bubbly celebration of promise and opportunity, the country’s top economic minister poured cold war on the party.
“According to the numbers, yes, we’ve got a cooling down now,” Maksim Reshetnikov said at the St. Petersburg International Economic Forum. “Based on current business sentiment, it seems to me we are on the brink of transitioning into recession.”
If that wasn’t enough of a damper, the head of the Russian Central Bank seconded the downbeat sentiment.
“We have been growing for two years at a fairly high rate due to the fact that free labor resources were used,” Elvira Nabiullina said during the same panel discussion on June 19. “But we need to understand that many of these resources have really been exhausted. We need to think about a new model for growth.”
And there was also this from German Gref, the head of the state-owned banking giant Sberbank, on the sidelines of the forum: “We are colliding with a large number of problems, which today we can call a perfect storm.”
For more than 40 months now, since the start of the all-out invasion of Ukraine, Russia’s economy has been on a war footing, growing at a robust -- at times torrid -- rate, and showing resilience -- unexpected to many Western experts -- in the face of punishing sanctions.
The Kremlin has retooled the economy to power its war, pouring money into defense industries to churn out guns, tanks, drones, and uniforms. It’s poured money into wages for defense industry workers and paid soldiers sky-high salaries and benefits to entice them to fight in Ukraine.
That’s transformed local economies in many of the country’s poorer, remote regions, and also bought support for the conflict.
But high wages have fueled inflation, and Nabiullina hiked the key interest rate to 21 percent in October to try and tamp it down. Despite public complaints from the country’s industrial lobby, she has held firm, committed to slowing inflation and downshifting the economy.
It’s working, and now Russia is facing the first significant economic slowdown since the start of the full-scale war.
“I think a lot of indicators point to growth stopping, or close to it,” said Iikka Korhonen, head of research at the Bank of Finland’s Institute for Emerging Economies. “Manufacturing is still growing, but most other things are not.”
“For two years [the] Russian economy was overheated and growing at a pace way above its normal growth rate,” said Alexander Kolyandr, an economics expert with the Center for European Policy Analysis in Washington. “So what’s happening now is the economy returns to where it should be. For the moment it stands as a correction, coming back to the long-term growth rate.”
“The main challenge for the government at this point is to make this a soft landing, rather than a complete collapse,” he said.
What Comes Next?
Russia’s gross domestic product grew by 1.4 percent in the first three months of the year, compared with the same period in 2024, according to government statistics. In the last six months of 2024, however, the economy was humming along -- with average growth of around 4.4 percent.
Official estimates now forecast GDP growth at around 2 percent in 2025. The International Monetary Fund predicts even lower growth -- 1.5 percent.
The unemployment rate stands at a historic low of around 2.3 percent, underscoring how distorted the labor market has become as men are drawn away from civilian jobs to fight in Ukraine.
Faced with inflation running at over 10 percent in the first half of 2025, Nabiullina has warned repeatedly about an “overheated economy.” In early June, she engineered a small rate cut, to 20 percent, which experts called largely symbolic.
But the impact of the high interest rate is showing up in official statistics, according to data and forecasts from the Center for Macroeconomic Analysis and Short-Term Forecasting, a government-linked research group.
For some in the Kremlin, a soft landing would be a welcome correction to the two torrid previous years. The danger is if it becomes a hard landing.
“By keeping the key rate very high, despite the state continuously pumping money into the economy, they have been able to achieve economic slowdown,” said Maria Snegovaya, a senior fellow in the Russia program at the Washington-based Center for Strategic and International Studies.
“It’s unclear how sustainable the situation is for the Kremlin if the economy is actually declining. It’s not something that they want either,” she said during an online discussion on June 17. “In general, the Russian macroeconomic team seems to be quite concerned.”
What this means politically is harder to predict.
So far, President Vladimir Putin has given Nabiullina and other top economic officials his blessing for their handling of the economy.
A day after the panel discussion at the St. Petersburg forum, Putin weighed in himself, with a cautionary note in a speech at the business forum:
“Some specialists, experts, point to the risks of stagnation and even recession,” he said. “Of course, this should not be allowed under any circumstances.”
“Our most important task this year is to transition the economy to balanced growth,” Putin said.
With other parts of the economy crimped by sanctions, Kremlin coffers are even more heavily dependent on oil and gas revenues than they have been in the past. But oil prices have fallen since the beginning of the year, and the Finance Ministry has lowered its forecast for oil-linked revenues for 2025.
“Unless we see a decline in oil prices, [or] some significant increase in sanctions enforcement, and an overall decline in civilian production, then I think there will be a soft landing,” Kolyandr said.
Balanced -- or slower -- growth will ripple through the economy, putting a brake on wage growth. It will also crimp household budgets at a time when Russians have been accustomed to fatter wallets, which could fuel discontent.
A growing number of companies and factories are also falling behind in wage and salary payments to workers, according to the newspaper Nezavisimaya Gazeta. And a growing number of regions have started cutting recruitment bonuses for new volunteer soldiers -- a trend that reflects worsening economic conditions on a local level.
Still, Putin seems determined to push forward in the war -- even faced with eyewatering casualty rates that are approaching 1 million men killed or wounded. The government plans on spending about 13.1 trillion rubles ($144 billion) on defense- and security-related expenditures in 2025. That’s 6.3 percent of its GDP, one of the highest levels since the Soviet era.
“Unfortunately, yes, this war will not stop for economic reasons, and Russia can continue to produce [weaponry] at the current level for quite a while,” Korhonen said. “The only economic factor that could really hamper Russia’s war effort is the price of oil.”
