Among Russia watchers who focus on the economy, this weekly analysis is often criticized for being too gloomy. But every «boom» contains the seeds of its own destruction. In the case of Russia’s wartime economy, nominal growth has come at the expense of real growth and future growth potential—both of which were already dismal beforehand and did not benefit significantly from the 2021 commodity price surge, despite impressive topline GDP figures.
The Ministry of Economic Development has published Q1 figures showing a 0.3% GDP decline, a number bolstered by apparent growth in March. Skepticism is warranted regarding the accuracy of this figure. Still, given Russia’s surprising economic endurance, it is worth addressing these pessimistic views in light of recent events as a thought exercise.
The Orthodox View: Stagflation
What’s the worst thing that could happen? This question is the subject of considerable debate. The orthodox argument—shaped by the institutional preferences of the Bank of Russia, the Ministry of Finance, and the reflexive conservatism of those socialized within Russia’s economic ecosystem—is stagflation. Analysts do not dismiss recession risks, but they ultimately see the conveyor belt of war spending and low unemployment as a perpetual engine of misery: marginal or null real GDP growth accompanied by high inflation.
Military spending, in this view, is sufficient to prevent a freefall or make any recession very shallow while continuing to provide a fiscal multiplier for nominal growth. The revealed preference of this analysis is that inflation is the foundational crisis of wartime economic management—a position that merits sympathy, though not full agreement with every aspect.
In this rendering, official topline inflation figures from the Bank of Russia’s surveys, now hovering around 5−5.5% annually, signal the final lurch into stagflation. Consumer confidence has fallen to levels last seen during the initial sanctions shock in 2022, suggesting that prices are not rising as much because spending is pulling back. It is equally telling that, according to the Bank’s surveys of «broad money,» cash and the most liquid forms of money are growing while other components are trending downward (albeit slowly). In other words, people prefer holding cash, and high interest rates are strangling the appetite to borrow.
Altogether, this situation resembles a slow grind—one that only gradually strips the gears of the mechanisms supporting growth and economic activity.
A Gloomier Perspective
A gloomier view emerges here, though one that does not lend itself to a steady forecast or precise timeline. To be clear, collapse narratives are unhelpful, and the regime is not expected to crumble amid an economic crisis. However, it is necessary to think more granularly about how dysfunctions—such as labor shortages, human and business psychology, and the evident lack of decisiveness within the Kremlin on economic matters—interact.
In other words, orthodox frameworks do not suffice for an economy and political situation that do not follow orthodox parameters or respond to inputs and outputs in conventional ways.
The Problem with Linear Thinking
One major flaw in the stagflationary «orthodox» rendering of the wartime economy is that systems as complex as Russia’s do not exhibit the strains of contradictory forces in a linear fashion. Markets and prices rarely move linearly either. While subject to considerable inertia, they still shift over timeю Start with trade. Even though import volumes are showing some signs of recovery, their structure has shifted: investment goods are declining while consumer and finished goods are rising. Many observers have noted that this points to future declines in Russia’s productive capacity, but that understates the problem. Manufacturing and industries that benefit most from onshoring consume equipment and inputs every year. What begins as a decline in future production can accelerate non-linearly into harm to current production as inventories are depleted and businesses begin to extend the operational life of their plants, cutting corners—especially if costs keep rising.
While consumer price inflation appears to be slowing, producer price inflation hit 2% in March and, with permanently stretched labor markets and rising commodity prices, is likely to climb further this year. Pressure to maintain margins will not relent. This discussion feels especially odd given that Russia now imports roughly $ 60 billion less than it did in 2021, much of it marked up through middlemen, while production data shows no substantial «boom» in consumer goods output since 2022.
Non-Linear Bottlenecks and Past Decisions
These non-linear bottlenecks extend backward to past investment decisions. Every time infrastructure investment has been slashed, it has created a future inflation risk in the event of any upsurge in demand—just as was seen in 2023−24. Yet when future capacity is sacrificed to redirect resources elsewhere, the relative impact later is amplified while overall growth prospects are diminished.
Russian Railways (RZhD) is forecast to see further cargo declines in 2026—declines severe enough that it could mark the network’s worst year in a quarter century, despite the strong economic growth recorded after 2001. Heading into 2026, RZhD cut its already inadequate investment program by 20%, to barely more than 710 billion rubles. (It exceeded 1.2 trillion rubles in 2024—a nominal record that is likely not one in real terms.)
These cuts begin to affect today’s businesses because there is only so much investment that can be slashed and only so many assets (like office buildings) that can be sold. To avoid an unsustainable debt burden at high interest rates, freight tariffs will have to rise, which then increases costs for both consumers and producers.
Labor Market Dysfunctions
Labor market dynamics in the current environment likewise do not follow linear or traditional «market» rules. The labor market is increasingly segmented, with different sectors bidding against one another for scarce talent in an economy that cannot generate new labor and is actively sacrificing male workers. White-collar workers in service-sector jobs are struggling and face stiffening competition, while shortages of blue-collar workers and specialists (such as trained doctors) continue to worsen.
Shortages of doctors create non-linear costs for public health, leading to lower economic activity and higher burdens on the healthcare system—effects that are rarely captured well in official statistics. When blue-collar labor is scarce, accurately measuring the relative cost increases across sectors or the future losses from building less at higher prices becomes challenging. Last year, the number of major accidents at utility facilities reached 41, up from 24 in 2024 (not counting smaller disruptions). Quantifying the growing costs of deferred modernization is difficult. These effects can be measured, but they do not conform neatly to the concept of stagflation.
The Real Risk
The worst that could happen to Russia is not simply being stuck on a treadmill of stagflation. It is facing a consistent, downward economic correction in which investment in public goods and productive capacity falls faster than household incomes—which will eventually follow unless the state steps in with transfers.
It can take years for falling investment to show up clearly in the statistics, particularly in a system designed to preserve employment at the expense of wages and efficiency, and to exploit existing assets to their breaking point. Years may pass before the average person feels the full consequences. But more than four years have already passed.
Stagflation only makes sense if the fiscal multiplier from wartime spending—the amount of GDP created per ruble spent on the war—is assumed to remain static. It does not. It is falling and may now be reaching a negative tipping point. Between 2021 and 2024, the volume of investment in fixed assets per capita rose 70% in nominal terms, yet there was no explosion in Russian light industry. Even in 2025, according to Rosstat, investment in manufacturing and value-added production accounted for only 18.3% of total investment—less than the 19.4% combined share that went to real estate (15.3%) and construction (4.1%).
There has been no revolutionary restructuring of the economy, and the underlying drivers of economic activity are not static. It is hoped that this view is wrong. Things rarely break exactly as expected, even when the warning signs are clear.
