Now that the Duma elections have passed and, for now, no major mobilization has been announced, ministry forecasts offer valuable clues about when the current economic slump might end. The Ministry of Economic Development has revised down its baseline forecast for 2027. Maxim Reshetnikov’s staff now expect investment to grow by just 0.2% next year, following a projected 5.4% decline in 2026. The downward revision from 2% makes clear that expectations of a “bounceback” next year have evaporated. The Bank of Russia has likewise lowered its 2026 GDP growth forecast to 0−1%, from 0.5−1.5%. The question is when, under present circumstances, the economy will hit bottom. MinEkonomiki’s forecast for an investment recovery seems optimistic, given that 86% of business leaders polled by RUIE said they had had to cut spending.
The orthodox explanation for why investment has dried up over the past nine months centers on confidence. In this account, the creeping expansion of business nationalizations and the state’s willingness to bend everything to the war have finally broken what confidence businesses still had that the state would not interfere excessively. Leaders of other large businesses likewise want to know what, exactly, the state intends to protect now that most assets appear vulnerable to Ukrainian strikes. The Kremlin’s insistence on shifting the social costs of its own aggression onto the private sector at home has come at a steep price. Why build new assets in the face of such risks and such high interest rates?
As a matter of accounting, any GDP growth officials record despite these investment declines will come from rising consumer spending, which MinEkonomiki apparently expects to grow by 2.4%. The problem is that consumers are withdrawing money from banks, drawing down savings or holding more cash to cope with the daily disruptions caused by Ukraine’s long-range strikes and associated Russian policy responses. The only buffer sustaining consumption, then, is deficit spending and whatever share of it reaches households. The fact that tourism and food services are leading sectoral wage growth suggests, at the same time, that real wage growth has largely stalled, service sectors are suffering disproportionately from labor shortages, and broad-based wage growth is no longer forthcoming. Now that MinFin is looking at raising taxes on deposit income to discourage households from parking excess savings in banks, it may only accelerate the shift toward cash at banks’ expense.
With business sentiment weak enough to stifle investment and consumers growing more pessimistic, the Kremlin has few levers left to change the economy’s direction without mobilizing it. The orthodox account of why businesses are pulling back misses a deeper disequilibrium, of which nationalizations are only a symptom. Businesses invested so freely in 2023−2024 in large part because wartime payouts drove substantial real wage growth and sharply increased the spending power of poorer households. Unlike, say, urban middle-class households in Moscow or Petersburg, those households generally spent less on imports. Surging nominal growth and lower real interest rates—remember that inflation erodes the real value of interest payments—made investment attractive even as businesses competed aggressively for labor, inputs and customers.
Now, even with inflation persistently above target, real interest rates are far higher than they were then. There is no longer strong nominal growth to fall back on, either. Businesses may be terrified of the state and furious at the lack of protection for new investments, but budget deficits are no longer driving consumption higher. Instead, they are doing more to sustain it at its current level. If MinFin succeeds in reducing the deficit, the adjustment will most likely fall on households and reduce their consumption, making a wide range of investments less attractive. In September, just 36% of industrial firms surveyed by INP RAN described demand for their products as “normal.”
Fiscal policy has become an almost steady-state feature of the economy: wartime deficits no longer drive growth, but they continue to put upward pressure on wages and prices. What remains is an economy more exposed to external shocks. The budget rule that once sequestered “excess” energy revenues now has a weaker effect on the ruble, leaving prices more exposed to changes in Russia’s export earnings. When Prime Minister Mishustin points to domestic demand as a more important factor in 2027 growth, he is, in effect, expressing the hope that higher export prices will somehow support consumption, since investment is unlikely to rebound. On its face, that hope seems misplaced given the effectiveness of Ukrainian strikes on refineries and the emerging risk of global diesel shortages.
The hangover from the wartime boom continues to plague policymakers who, by design, cannot change the macroeconomic conditions businesses face. It may be convenient to blame the state’s creeping expansion for the loss of investment confidence, but that is only half the story. State spending no longer provides an additional boost to demand. Over the past three months, 1,454 construction companies have declared bankruptcy, a 41% increase over the same period last year. As housing goes, so goes the broader consumer economy. The Kremlin faces a longer trough than officials suggest, with no apparent mechanism for reversing course in the foreseeable future.
