A Broad Front and Narrow Spots: Industry turns towards decline, though several pockets of growth blur the overall picture

Shades of alarmism and climate issues

The Russian economy is slowing, as evidenced by both official statistics and business surveys. Yet the picture remains contradictory, due to the mixed signals that shape it. Nevertheless, the overall mood has changed dramatically. This year, for the first time since the start of the war, the St Petersburg Economic Forum saw the once-unified chorus of optimists give way to an almost equally unified chorus of alarmists.

However, alarmism at the forum came in two distinct forms. The first and more dominant line of thought led the audience to conclude that the main problem facing the economy is the high Central Bank interest rate. Proponents of this view spoke of an ‘overcooling’ or even ‘freezing’ of the economy, and these metaphors implied that the halt in growth and threat of recession were the result of Central Bank policy. Reversing these measures, they argued, would bring the economy back to life. The second line was presented in the speech by Central Bank head Elvira Nabiullina, echoed in part by Sberbank CEO Herman Gref, long-standing head of the Duma’s budget committee Andrey Makarov, and several economists (such as former Finance Minister Mikhail Zadornov). This group warned of the exhaustion of the factors, or the 'growth model', that had driven the economy in previous years. They pointed to high government spending and deficiencies in the business climate that, to put it mildly, discourage investment, ultimately suggesting that the root of the problem is not the interest rate itself.

Nonetheless, both versions of alarmism reflected a fairly broad consensus within the business community about the sharp deterioration of the situation. Signs of significant economic slowdown were captured in the Central Bank’s June enterprise survey, which covered 13,500 businesses. The business climate indicator derived from this survey fell sharply from 4.8 to 2.9 points over the course of a month. However, as we noted earlier, this figure is traditionally skewed upwards by the 'expectations' component, which tends to be around 15 points higher than current situation assessments on average (→ Re:Russia: Optimism Inflation). Therefore, to understand the actual business climate dynamics, it is more important to look at the latter. In the June survey, which reflects companies’ assessment of May, the index of current conditions dropped to –3.24, which is slightly below the average for the first four months of the year (–2.03) and significantly worse than the average for 2023–2024 (1.28), though not yet at a crisis level.

However, if we look at the sectoral components of the indicator, it becomes evident that assessments of the situation in industry (both extraction and manufacturing) declined at the beginning of the year and deteriorated sharply in the latest reading. In manufacturing, the balance of assessments collapsed from –2.9 in April to –10.4 in May. As a result, these figures now sit below the levels seen during the crisis episode from late 2014 to late 2015 (a period when the economy contracted following the collapse in oil prices). Indicators in the retail sector are roughly at the crisis levels of that period. In contrast, construction and transport, while still in negative territory, appear significantly better than during the crisis period, and agriculture and services show no signs of crisis at all, and are ultimately helping to pull the overall economic indicator upwards. Therefore, we can currently speak of crisis-level business climate indicators in industry, near- or pre-crisis levels in retail and construction, and no signs of crisis in agriculture or services.

Average values of actual business climate assessments for the corresponding period

Structural shift: extraction is no longer the anchor of industrial output

At first glance, the actual dynamics of industrial production, according to Rosstat data, appear highly contradictory. For instance, the latest data for May showed a genuine surge in output (the previous similar spike occurred in December 2024). Compared with April, industry grew by 2.6% (adjusted for seasonal and calendar factors). In April, the month-on-month growth was only 1%. According to the Telegram channel ‘Hard Figures,’ with seasonal and calendar adjustments, the May figure was even higher at +2.8% compared to April. This is a significant spike, and as a result, the likelihood of the second quarter showing a negative GDP dynamic, and the Russian economy entering a technical recession, has decreased.

However, the statistical jump in May appears paradoxical against the backdrop of fully crisis-level business climate assessments in industry, as reported by enterprises in the Central Bank’s monthly survey. According to the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), the spike was driven by a sharp increase in a narrow segment of industry connected to military production and in no way indicates a reversal of the downward trend in the industrial sector. Experts at the centre estimate that war-related industries saw a seasonally adjusted production increase of 12.2% compared to April. The rest of the growth came from non-ferrous metallurgy (due to an increase in exports to China). Calculations by Vladimir Bessonov from the Higher School of Economics show a slight rise in the output index when military production is excluded, but this remains within the range of normal fluctuations.

To understand the broader trends in industrial production, it is more useful to look not at monthly figures but at aggregated data for January–May. Over these five months, according to Rosstat, Russian industry grew by 1.3% compared to January–May 2024, when the growth rate stood at 5.2%. During the same period, output in the extractive sector declined (–2.7% year-on-year), while positive figures were provided by the manufacturing sector (+4.2% year-on-year).

It is important to note that a lower result for industrial output over the January–May period has only been observed in the past 12 years during the crisis years of 2015–2016 and 2020. Moreover, the structure of growth has fundamentally changed compared with the pre-war period: the extractive sector, once a stabilising force, is now dragging industry down, while manufacturing pushes upward. Since 2023, extraction has remained in negative territory. The January–May 2025 result in the extractive sector is the worst in 12 years (according to comparable data, negative growth rates were last recorded in the first half of the year in 2009).

Growth in Russian industrial output in January–May in annual terms, 2015–2025, %

In the pre-war period, by contrast, extraction acted as a stabilising and balancing factor during episodes of crisis-induced contractions in domestic demand (as was the case during the 2015–2016 crisis), only slipping into negative territory in 2020 and 2021. This structural shift, incidentally, points to additional risks for a potential contraction in manufacturing output: this time, extraction will not be able to serve as an anchor. Although Rosstat does not publish specific data on the oil and gas segment of the extractive industry, it is clear that the primary factor behind weak performance in extraction, and the emerging structural shift is linked to this sector: the collapse of gas exports.

A broad front of decline and a narrowing growth bottleneck

Comparing the dynamics of the manufacturing sector in January–May 2025 to the same period last year reveals that out of 20 key subsectors, 11 experienced growth during January–May 2024 but have shifted to output contraction this year (five of these are in the consumer segment). In one more sector, the decline has deepened, and in four others, the growth rate has slowed significantly. Only four out of the 20 have shown stronger performance than last year (pharmaceuticals, oil refining, other transport equipment, and repair and installation of machinery and equipment).

Consumer sector: year-on-year output growth in January–May in 2024 and 2025, %

Intermediate goods: year-on-year output growth in January–May in 2024 and 2025, %

High-tech sector: output growth for January–May in annual terms in 2024 and 2025, %

In essence, positive and significant growth rates in manufacturing in January–May 2025 have been driven by just a few sectors: oil refining, chemical production, the manufacture of fabricated metal products, computers, electronic and optical products, and 'other transport equipment.' However, a closer look at these sectors reveals that growth is concentrated in even narrower subsectors.

For example, the 'manufacture of fabricated metal products' grew by 12.8% in January–May 2025, following an increase of 46% over the same period in 2024. While last year six out of seven subsectors saw growth, those linked to construction (such as the manufacture of structural metal constructions and steam boilers) have now shifted to a decline in output. The abnormally high growth rate of 22.5% is now concentrated in the category of 'fabricated metal products not elsewhere classified', in other words, military production.

In the electrical equipment sector, four out of six subsectors experienced rapid growth last year, but this year only one (the manufacture of motors, transformers, and generators) continues to expand. Meanwhile, the 'household appliances' subsector has shifted from strong growth last year (+17%) to a nearly equivalent contraction (–14%). This effectively means that output has returned to 2023 levels, when the subsector had hit rock bottom following the start of the war and the imposition of sanctions, producing only 64% of its 2021 volume. Thus, in this area, there appears to be no meaningful import substitution as a result of the sanctions, even after three years.

In the 'other transport equipment and machinery' sector, three subsectors posted growth last year, contributing to an overall growth rate of 29%. This year, however, output of railway equipment has dropped sharply, while the 'aircraft production' subsector, after growing 32% in 2024, has surged by 76% in 2025. This reflects Russia’s efforts to catch up with and surpass Ukraine in the drone war.

Thus, we are witnessing a broad shift in manufacturing industries from growth to contraction, with a narrowing set of high-growth areas limited to certain export-focused industries (such as non-ferrous metals and agrochemicals) and military production. The latter, however, is unsurprising: according to Finance Ministry data, government expenditure in January–May was 21% higher in nominal terms than the previous year, which translates to over 10% in real terms. This is comparable to the growth in January–May 2024, which was 17% in nominal terms, with lower inflation (8% year-on-year). However, as we can see, the effect of this spending is narrowing and is increasingly failing to 'spill over' into adjacent industries.

The underlying factors behind these trends appear to have emerged before the economy had fully felt the impact of declining export revenues. More likely, they reflect the conclusion of the adaptive investment cycle of 2022–2024 and the government’s withdrawal from several channels of broad-based economic support. The new negative factor – the reduction in external financing of the economy – seems to have begun affecting conditions only toward the end of the second quarter, and is likely to be more fully felt in the third.