Russia Faces Possible Economic Contraction by Year-End Amid Persistent Challenges

Russia’s economy may enter a recession by year-end, following three successive quarters of declining growth, as cautioned by the Central Bank.

The Economic Development Ministry reported that the GDP experienced a year-on-year increase of 0.6% during July to September, a decline from the 1.1% growth in the second quarter, 1.4% in the first, and 4.5% in the last quarter of 2024.

The Central Bank attributed its revised forecasts to a substantial base effect from late last year, which saw a «temporary spike in production in certain sectors.»

It now predicts the GDP could oscillate between a contraction of 0.5% and an expansion of 0.5% in the fourth quarter, a significant reduction from its previous July estimate of 0-1% growth for that period.

A drop in quarterly GDP would represent Russia’s first year-on-year decline since the first quarter of 2023, during which the economy shrank by 1.6%.

The 0.6% growth in the third quarter fell short of the Central Bank’s August prediction of 1.6%.

Officials stated that while the economy’s “overheating” is subsiding, challenges such as labor market pressures, persistent inflation above 4%, and projection models suggest that the overheating may extend longer than previously anticipated, potentially into the first half of 2026.

Consequently, the Bank indicated that high interest rates would need to be maintained for a prolonged period.

“The economy isn’t cooling down; it’s in a state of freeze,” commented Anton Tabakh, chief economist at Expert RA. “Many industries are already feeling the chill.”

The Central Bank also recognized significant performance disparities across different sectors.

This year, output has contracted in export-driven sectors like mining and ferrous metallurgy, while domestic market-oriented sectors have generally continued to grow, albeit unevenly.

Defense-related industries remain the primary catalyst for growth, whereas most civilian sectors are experiencing declines.

Data from the Kremlin-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) reveals that production in civilian industries has been consistently decreasing since the beginning of the year.

Output has fallen in 73% of the 129 major product categories, and the financial health of many companies is increasingly deteriorating.

The proportion of firms at a high risk of financial instability could climb to 32.5% of total industrial income next year, a rise from the current 23.7%.

The slowdown is compounding the already precarious financial situation faced by numerous businesses.

“When demand stagnates or decreases, meeting high interest obligations becomes nearly impossible,” noted investment banker Yevgeny Kogan.

Business activity has contracted for four consecutive months, with a slight uptick in October primarily driven by a temporary increase in services.

Economist Dmitry Polevoy characterized this as a fleeting occurrence.

“The overarching trend of decelerating growth in both industry and services persists,” he stated, predicting a 0.7% decline in GDP for the fourth quarter.

Analysts at Promsvyazbank warned that the likelihood of an “economic overcooling” remains elevated, indicating that Russia’s economy is currently growing at a rate below its potential range of 1.5-2.5%.

They observed that the growth of 0.9% in September, following 0.4% in July-August, was largely a result of a brief recovery in stagnant sectors, while key growth engines continue to lose momentum.