Quantity is a quality of its own in economic life. Scale can generate efficiencies that cannot be replicated without larger workforces, physical or capital markets, and reliable demand. But Russia’s reliance on large state-owned enterprises and procurement, which account for as much as 30 percent of direct demand before considering the expansion of military orders, is strangling its capacity to innovate and generate future growth.
The consultancy SBS found that, between 2020 and 2025, 86 percent of firms earning 2−20 billion rubles annually failed to grow their earnings faster than inflation, while only 1.1 percent managed both to outpace inflation and to generate returns above the Bank of Russia’s key rate. Despite pockets of improvement in 2026 for some businesses benefiting from disruptions to larger retail platforms, this is a troubling indicator for the structure of potential future growth.
If small businesses have seen their earnings fail to keep pace with inflation, then they lack pricing power. Businesses with monopolies, oligopolies, or other market advantages can typically pass cost increases on to consumers and retain higher profit margins when costs begin to fall. Smaller businesses competing intensely for consumers and foot traffic—and otherwise facing genuine competition, unlike most SOEs and large Russian firms, though to varying degrees depending on the political salience of the sector—lack that capacity.
What is particularly revealing about this dynamic is that there has still been meaningful growth in registered small businesses, which now number nearly 7 million nationwide. Some of this reflects the integration of businesses in the occupied territories, but the broader underlying trend likely reflects an increase in entrepreneurship indirectly linked to military recruitment and directly linked to the lack of economic dynamism among large firms and declining capital investment. Large inflows of money into local economies have exceeded their capacity to absorb it. Using that cushion to turn toward self-employment and capitalize on rising local spending power makes sense.
These are stylized observations, but CORE. XP’s forecast 23 percent decline in real estate investment—from 1.1 trillion rubles to 800−850 billion rubles this year—makes clear that businesses, investors, and entrepreneurs are extracting what they can primarily from existing assets. There are no genuine construction booms linked to any measure of “real wage growth.”
For smaller businesses, news that regional governments are beginning to reduce recruitment bonuses would be another headwind heading into 2027. Add inflation rising to roughly 7 percent in annualized terms amid poor underlying trends, and there is no interest-rate relief on the near-term horizon. If the dollar strengthens further after the US midterms, driven by renewed upward pressure on US interest rates, businesses exposed to import prices will feel the heat.
The Duma is now discussing formally simplifying state and state-enterprise procurement processes for small businesses and continuing emergency measures introduced in 2022. Federal and SOE procurement accounted for roughly 30 percent of all direct demand before the war, and likely accounts for more now given military spending. By law, state firms must award one quarter of their contracts to small and medium-sized enterprises. But if the law enshrines mutual liability for failure to meet contractual terms, state firms will realistically face little consequence for late payments, while small businesses risk far more if they fail to deliver.
The lowering of tax thresholds is, according to a survey by the Retail-Industrial Chamber of Russia—a trade organization with 23,000 members—pushing as many as 27 percent of its membership to consider closing. Any formal simplification of what the state can offer looks less like a meaningful intervention than shuffling deck chairs on a sinking ship.
Returning to the question of pricing power against this backdrop, small businesses are stuck. They must compete ruthlessly on price and cost in an imbalanced macroeconomic environment that makes capital, labor, and inputs exceedingly expensive. They also suffer because of the centralization of economic power in the hands of state enterprises. As price takers for labor, capital, and inputs, their share of GDP is likely to shrink over time unless they can increase earnings faster than inflation. In recent history, small and medium-sized businesses have accounted for roughly 20−22 percent of GDP—roughly the same share they contributed when Dmitry Medvedev called for increasing it during his presidential campaign nearly 20 years ago. Individuals may want to own businesses simply to have some say over their economic fate, but their capacity to generate margins is breaking down and will not readily correct itself until the regime allows unemployment to rise.
The relative growth of small businesses is an increasingly valuable barometer of what aggregate macroeconomic data may otherwise conceal. The failure to increase earnings supports the assumption that wage growth has not matched official real-terms figures, as reflected in consumers’ actual behavior. It is also a leading indicator for larger businesses: 38 percent of respondents to the Russian Union of Industrialists and Entrepreneurs’ Q3 survey said demand for their products was falling. Another 36 percent cited a lack of working capital and non-payment by counterparties.
Taken together, the atrophying effects of Russian rentierism are spreading from consumers to larger industries. Without a more productive and innovative economic base to drive investment, support productivity, and generate substantial demand beyond the state and its firms, collapsing profit margins pose a systemic risk. Small businesses have been the canary in the coal mine for Russia Inc.; for those watching regional economies, they will be the first to suffer when conditions deteriorate.
