There are few, if any, good options these days to address the contraction of Russia’s non-military industries. Minister for Industry and Trade Anton Alikhanov has nobly proposed one solution that has not worked efficiently since 2015: banning the state from buying imported light industrial products worth less than 1 million rubles. These purchases apparently account for 98% of all relevant procurements in physical terms and 40% of relevant procurement spending. By extension, Alikhanov has set a goal of domestically producing 65% of the light industrial products Russia consumes by 2036—a decent increase from the current level of 45%. Assuming the 45% figure is true (it certainly could be, though I doubt it based on the imported value of the consumption basket prior to the invasion), this policy aim would seek to expand production even as the labor force shrinks, demography bites harder, and consumers’ real spending power declines.
Proposed under the technocracy’s favorite banal keyword—”optimization”—the idea theoretically achieves two aims at once: reducing imports to preserve a healthier trade balance if oil prices fall, and acting as an indirect subsidy to domestic producers. Coupled with a new proposal from the Ministry of Finance to assess VAT on goods sold through e-commerce platforms—another way to reduce the competitiveness of consumer imports and grab revenues—there is now a visibly coherent effort to drive domestic production without subsidy spending, boost businesses struggling to compete with imports from China, and wring more tax money from households in the process.
Like virtually every policy approach, these maneuvers raise questions about how to best manage inflation. The consensus among economists in Moscow is that something on the order of 5−6% is likely for 2026—logical assuming that contracting consumer demand drags down some key prices in the consumption basket. But even for goods whose demand has fallen significantly since 2022, things like steel continue to see price increases. If the government must shift its smaller light industrial procurements to domestic producers, that may—in theory—inflate demand for SMEs or some larger companies. In practice, it would be inflationary since these companies won’t be the lowest-cost option with the ruble where it currently trades, nor can companies do much to expand through hiring if the shortfall is too great. It’s just as likely that contracts for these goods will simply be repriced above 1 million rubles wherever possible to dodge the regulation and secure the best quality available.
Cutting off your nose to spite your face is a time-honored tradition within the quasi-populist authoritarian playbook the regime has developed over the last two decades. However, one wonders how much nose they have left to cut. Consider for a moment what exactly is being achieved. The primary examples Alikhanov cited as success stories were clothing and workwear. Growing textile businesses have performed well enough that MinPromTorg and MinSel’khoz are proposing to launch wool futures contracts to make pricing more transparent and provide end-users and producers the ability to hedge against price volatility. No country has surged up the development ladder and uplifted wages by leveraging its wealth of engineering and IT talent, its nuclear energy and scientific capacities, and its solid foundations for a strong services economy—only to make more garments, many of which are being produced for soon-to-be-dead men.
Were Alikhanov’s procurement proposal to become a durable instrument to further expand Russia’s light industrial base, it would by necessity be inflationary. MinPromTorg may be demanding that state enterprises establish automation plans to build dark factories requiring little to no human labor, but these developments can only expand net production meaningfully if they can compete against China and others on cost as an exporter—or if the civilian economy at home is healthy. Forcing state organs and enterprises to track down products within Russia that they currently import will inevitably drive a supply/demand imbalance that bids up prices.
In normal conditions, this might lead to a surge of investment that expands production. At present interest rates, that seems highly unlikely. What’s more, mortgage costs are a huge structural impediment. Though demand for mortgages surged 34% year-on-year in December, they ended 2025 only about 3% higher than net demand in 2024, while net square footage sold declined slightly by 3%. It’s early days, but over 5% of developers are now delinquent on their loans—a figure that seems likely to rise if the Bank of Russia doesn’t continue cutting rates. In reality, these are structurally lower levels of demand than the boom years from 2020−2023. Housing sales drive a ton of consumer purchases for durable goods, including things like bedding, curtains, and other textiles that might otherwise be performing «well» in the wartime economy. Nor does kickstarting the market again help with the inflation problem. Housing today is, by and large, less affordable than it was in 2019 in real terms—barring individual men or families making use of war bonuses, salaries, and benefits.
The implication from the macroeconomic data collected by TsMAKP is straightforward. GDP growth is on a decelerating path—now likely under 1% if we take it at face value and still falling—while inflation’s deceleration is slightly more uneven. Were a huge influx of state money to start chasing more domestically produced goods, the net effect would likelier be inflation that outpaces whatever growth is produced—for the simple reason that labor shortages are a universal price driver. Every sector is affected by them as they outbid each other to retain talent, even if that talent isn’t particularly keen to switch jobs or move towns. If domestic producers can dodge competition with imports, they will mark up prices and sell fewer goods for more rubles in the process—reigniting the tug-of-war between households, businesses, and the state over who absorbs the costs of adjustment to inflation.
It’s a massive red flag that businesses diverge so strongly in their views of inflation from the Bank of Russia. According to a survey from the Russian Academy of Sciences’ Institute of Economic Forecasting, businesses expect inflation closer to 9% than 4−5%. This isn’t just pessimism; it suggests that we now need to scrutinize who’s being surveyed by whom and cross-reference multiple sources to an ever greater degree—assuming that there’s mounting pressure on bigger businesses to act like everything is fine. Not yet definitive, we are now seeing industrial data that shows annualized declines, with underlying trends suggesting the economy can’t be pushed past current limits unless military production directly reallocates capacity or labor from other pursuits.
One wonders how many ways policymakers can come up with to create inflation risks that further administrative interventions and manual control will then have to address. Yet they keep soldiering on and finding new ways to rely more heavily on one blunt instrument—high interest rates—to address the damage, creating further privation as they go.
