On September 4, Sber CEO German Gref stated the obvious at the Eastern Economic Forum: «The cooling of the economy continues, as evidenced by the slowing rate of GDP growth. The second quarter can practically be considered technical stagnation.» Since then, GDP growth indicators have slowed to nearly zero. Naturally, President Putin countered next day, claiming, «There is no stagnation in the economy of the Russian Federation.» This is an old debate, one that has resurfaced periodically between Putin and his trusted advisors, notably Defense Minister Andrei Belousov, who infamously declared in late 2013 that stagnation existed only in officials’ heads. In Belousov’s view, as long as Russia maintained a trade surplus, stagnation was not real. Both his and Putin’s claims are farcical.
It’s noteworthy how the narrative around the economic slowdown has shifted—from a necessary «corrective» measure for a war economy fueling rampant inflation to what is now misrepresented as sustainable growth. While this reframing is not new, it must be understood in light of evidence that the Russian army is reportedly amassing approximately 100,000 troops for another sustained effort to capture Pokrovsk. Military offensives in Russia are inflationary due to the haphazard mobilization of the economy for war. Casualty rates typically rise, state procurement demands to replace losses increase and often accelerate, and the need to replace casualties intensifies, which is reflected to varying degrees in labor market data. New recruits, often volunteers, also deposit their bonuses in banks for themselves or their families, money that eventually enters circulation. The Bank of Russia has revised its 2025 inflation forecast to 6−7%, up from its earlier, politically pressured claim of 4−4.5%. Inflation at this level, without real wage growth, undeniably signals stagnation—or worse.
Several factors indicate that this balancing act of projecting calm is fragile. First, Maxim Reshetnikov, effectively a prisoner in his role as overseer of «economic development,» used the forum to declare that the ruble is expected to remain «stronger for longer.» On one hand, this reduces inflation by lowering import costs. On the other, it harms businesses that invested in domestic production to compete with imports post-invasion. Meanwhile, Deputy Prime Minister Alexander Novak, the long-time point man for OPEC negotiations, correctly noted that Trump’s trade wars are slowing global growth. The problem is that Putin’s fantasy of «no stagnation» hinges entirely on Russia’s energy exports, whose demand and prices typically suffer when global growth decelerates, though the supply of oil, refined products, and gas is equally critical at present.
Exports will not save the Russian economy, especially if it is to become the «high-wage» economy Putin has long insisted it should be. Although the Forum featured Putin’s call to expand rail capacity along the Trans-Siberian and Baikal-Amur Mainline routes by 50% by 2032, this plan is a decade too late to matter. Demand for oil will peak in the coming years, first in China and then globally. Despite the hype surrounding Power of Siberia 2, there is still no progress on pricing, and Gazprom can no longer use European price levels as a reference since the EU is phasing out imports. Moreover, there is no clarity on how the pipeline would be financed. Assuming it relies on offtake prepayments, China holds significant leverage over Gazprom. Additionally, pipeline costs in Russia are multiples higher than abroad, compounded by delays and technical issues. Plenty of LNG will reach the market before the pipeline is completed.
Public investment in productive initiatives is the best stimulus available, especially with interest rates remaining prohibitively high for many businesses. However, this requires money, which the government claims it lacks. Putin even stated the need to increase budget revenues without raising taxes. The current proposal to achieve this involves lowering the threshold at which businesses owe VAT—a de facto tax hike on small businesses that have driven much of the private sector’s «growth» since 2022 by capitalizing on wartime payouts and wage pressures. It seems shortsighted to burden smaller retailers with this tax hike when that segment of the economy is already struggling. As seen in 2018−2019, when VAT increased from 18% to 20%, businesses will pass these costs onto consumers, pushing inflation higher. This approach disproportionately burdens smaller firms compared to larger players, many of whom are seeing profit declines this year at rates signaling a looming recession.
Chief economist of VEB, Andrei Klepach—formerly a deputy to Elvira Nabiullina when she was Minister of Economic Development—has made a bold claim that seems obvious: the Russian economy has contracted by 0.6% quarterly since last December. Other banks have not yet reached this conclusion, and there is room to dispute these calculations. However, non-military industries continue to contract, according to data from Dmitry Belousov at TsMAKP, and 60% of businesses surveyed by the Institute of Economic Forecasting at the Russian Academy of Sciences cite inadequate demand. The Academy does not anticipate a demand recovery until interest rates fall to 10−11% for general business and 12−13% for production. Meanwhile, consensus suggests Nabiullina will cut rates further but keep them around 16% until the inflationary effects of a renewed offensive and ongoing attacks on refineries become clearer.
While Reshetnikov admitted at the Forum that the economy is cooling faster than expected, recession is becoming a reality. Local contractions in civilian economic activity are significantly impacting 42 regions. Developers have slashed real estate investment by 44% this year and face a worker shortage of an estimated 160,000 in the construction sector. Bank of Russia surveys indicate that regional economies are seeing reduced labor market tightness, a clear sign that consumer demand is structurally weakening. If falling interest rates are the only relief available, inflation will likely rise again. There is no resolution to the macroeconomic imbalances driven by the war. The regime’s underinvestment and underdevelopment over the past two decades have ensured this outcome.
In the strictest sense, Putin is correct that there is no stagnation. Stagnation implies a growth stimulus sufficient to offset the contraction in the consumer economy that has taken hold this year. Not only has the war failed to provide that stimulus, but it has also driven the rest of the economy into the ground. Political scientists and economists often describe Russia’s institutions as extractive, built around capturing unearned rents. In truth, they are vampiric. The war has exposed this with bloody, tragic, and needless finality.
