Sluggish Stagflation: What the continued growth in incomes and wages says about structural changes in the Russian economy
The rapid growth of wages and incomes has become one of the most striking signs of the economy’s shift onto a war- and sanctions-oriented footing and, according to the head of the Central Bank, Elvira Nabiullina, together with extremely low unemployment figures, indicates that the Russian economy is far from recession.
However, the situation in the Russian labour market is being shaped not by market forces, which would make Nabiullina’s claim entirely correct, but by the structural transformation of the economy, its adaptation to conditions of war and sanctions. And those processes which under market conditions signal the 'health' of an economic organism may, in this case, prove to be manifestations of its 'illness'.
For example, in the first year of the war alone, around 1% of workers left the Russian labour market, while the ongoing recruitment of contract soldiers in the following three years removed a further 1.7% of the workforce from the productive sector of the economy. A 2.7% reduction in productive employment combined with the defence sector’s rising demand for labour created a structural imbalance. As a result, the share of labour compensation in GDP rose sharply in 2023–2024, while the share of profits fell just as sharply.
At present, the growth rates of both wages and incomes have begun to slow, though they remain at quite a solid level. What is more, real wages continue to rise even in those sectors and branches of the economy that are already in a downturn, seeing a significant contraction in output. And although the labour-market shortage has eased, it still persists, despite the economy having entered a zone of near-frontal stagnation.
These distortions are producing sluggish stagflation. While growth rates are tending towards zero, inflation has remained at 8% or above for 20 months. And the Central Bank has acknowledged that the period of elevated inflation will last longer than previously forecast.
In the Russian version of sluggish stagflation, one characteristic feature of the classic stagflationary scenario is missing: high unemployment. On the contrary, the labour shortage, even under stagnation, becomes the driver of a 'wage race', while the resulting rise in incomes and consumer demand fails to elicit a corresponding increase in supply. The main cause of this sluggish stagflation is the split within the economy, including the labour market, into two sectors: the military-budgetary and the civilian, consumer sector. Preferential treatment for the former is ensured at the expense of suppressing the latter, distorting market incentives in both.
Income anomaly
In her address to the Duma two weeks ago, Central Bank Chair, Elvira Nabiullina stated that it was wrong to speak of recession in the Russian economy, since in a recession 'two things are inevitable', a sharp rise in unemployment and a fall in real wages, 'neither of which we are seeing now, not even remotely'. Yet this reasoning by the head of the Central Bank can hardly be considered fully correct in the context of the current situation.
It would be entirely valid for an economy whose main driving forces are market factors. But the Russian economy is still operating under what Nabiullina herself prefers to call 'structural transformation'. The main conditions of this 'structural transformation' are defined by two processes: the economy’s adaptation to the conditions of war, and the radical changes in trade flows and external links caused by sanctions. Both are essentially external, non-market forces acting upon the economy. The Russian labour market has also been fully drawn into this 'structural transformation', and therefore the processes which under normal market conditions indicate the 'health' of the economic organism may here prove to be signs of its 'illness'.
Indeed, in recent years the Russian economy has shown rates of wage and real income growth that may seem anomalously high at first glance. According to Rosstat, average nominal monthly wages in January–August 2025 rose by 14.4% compared with the same period the previous year, already indicating a slowdown, since the growth for that period a year earlier had been 18% year-on-year. Growth appears especially impressive when 2022 is taken as the baseline. Yet this is not entirely correct, as 2022 was precisely the year the economy entered the phase of 'structural transformation' (adapting to war and sanctions), during which both average wages and incomes declined.
If the last pre-war year is taken as the starting point, nominal average wages in the second quarter of 2025 were 75% higher than in the second quarter of 2021, and 19% higher in real terms. This corresponds to an average annual real growth rate of 4.4%, which is also quite high. The picture is similar for household incomes: in nominal terms, average per-capita incomes in the third quarter of 2025 were 80% higher than in the same period in 2021; in real terms, they were 25% higher, corresponding to an average annual real growth rate of 5.7%.
Chart 1. Dynamics of nominal and real average monthly wages compared to the corresponding period of 2021 and their quarterly growth rates, 2022–2025, %
Chart 2. Dynamics of nominal and real incomes compared to the corresponding period of 2021 and their quarterly growth rates, 2022–2025, %
In the third quarter of 2025, real wages increased by 19% compared with the third quarter of 2021, while real incomes rose by 25%. At the same time, the real volume of GDP over this period grew by only 6.9–7.1% (with GDP in the third quarter of 2025 forecast to grow by 0.4–0.6% year-on-year). This discrepancy indicates that the rapid growth of wages and incomes is linked not so much to economic growth as to the redistribution of resources within the economy in favour of the labour-compensation sector.
‘Structural transformation’ of the labour market and income distribution
Indeed, over the past five years the structure of Russian GDP has undergone changes uncharacteristic of the economy during the previous decade (Chart 3). In 2021–2022, economic revenues increased due to a sharp surge in commodity prices and, accordingly, due to a rise in total exports in value terms. As a result, the balance between labour compensation and gross profit in the structure of Russian GDP, which in 2019–2020 stood at roughly 45% to 45%, changed dramatically: the share of labour compensation fell to 41%, while the share of profits rose to 52%. However, from 2023 onwards the process reversed. By 2024 the share of labour compensation had risen to 44%, while the share of profits had declined to 48.4%. In the first half of 2025, labour compensation already accounts for 50%, and gross profit for 44% (Chart 4). Thus, the additional revenues of the economy, along with the reserves mobilised in 2022–2023 (including funds from the National Wealth Fund), are now being redistributed in favour of the population.
Chart 3. Shares of labour compensation and gross profits in GDP, 2011–2024, %
Chart 4. Shares of wages and gross profit in GDP structure, quarterly dynamics, 2020–2025, %
At the same time, such rapid redistribution of funds has become possible precisely as a result of the 'structural transformation' of the labour market discussed above. The scale of this transformation has been determined, as we have repeatedly written, by a combination of several factors. First, there is the unfavourable demographic trend: the shrinking cohorts of young people entering the labour market (→ Gimpelson: ‘The Russian Model’ in Search of Unemployment). Second, the artificial reduction in the number of employed due to emigration outflows (around 0.5 million workers) and the 'partial mobilisation' (roughly 0.3 million workers) in 2022. Third, the additional demand for labour created at the same time by the defence sector (→ Re:Russia: Structural Frenzy). The combination of just two factors – emigration and mobilisation – removed at least 1% of the labour force from the productive sector, while the additional demand for labour from the budget-funded defence sector triggered a chain effect of labour shortages across the entire economy.
Moreover, in 2023–2025, the factors artificially distorting the labour market continued to operate. According to a fairly broad consensus among analysts, around 35,000 people per month were recruited into contract service for the war during this period. Deputy chairman of the Security Council, Dmitry Medvedev, claimed in November 2023 that since the start of the war, the army had gained 410,000 contract soldiers. In 2024, this figure, he said, amounted to 490,000. And in the first 10 months of this year, a further 366,000 people have joined the fighting force, Medvedev again claims. Thus, in under three years, about 1.3 million people have moved into non-skilled but highly paid positions outside the productive sector of the economy, which amounts to 1.7% of all those employed. As a result, over the course of three and a half years, there has been a labour outflow from the productive sector totalling no less than 2.7% of the workforce.
Near or far, the unprecedented happens
Discussion of the issue of 'recession' in the Russian economy provokes fierce argument and sharp objections from the Russian leadership (recall that technical recession was identified in calculations by the VEB Institute, based on an enhanced methodology for removing seasonality; the Institute’s monthly press releases with GDP estimates for June–August were never published on its website → Re:Russia: Drones Against Recession). However, few publicly dispute the characterisation of the current economic situation as stagnation, ongoing since the end of 2024 (although Elvira Nabiullina still prefers to speak of a 'slowdown'). According to the Central Bank’s forecast, growth in the third quarter is expected to be around 0.4%, and in the fourth quarter close to zero, as stated in the Central Bank’s commentary on its medium-term forecast released a week ago. At the same time, real wages over the first eight months of 2025 increased by 4.4%, and in August by 3.8% compared with August last year. Growth in real disposable incomes in the third quarter of 2025 has been estimated by Rosstat at 8.5% year-on-year. The labour-market shortage, though somewhat weakening, still persists. Thus, as we can see, a labour shortage and decent income growth are quite possible under economic stagnation. And the question of how 'far' stagnation is from recession is largely philosophical and defies precise calculation.
Today, economists often argue that the current problem of the Russian economy is 'the outpacing growth of wages relative to growth in labour productivity' (according to the Ministry of Economic Development, labour productivity in the Russian economy grew by 2.8% in 2022–2025). But this description seems not entirely accurate: a similar situation of incomes rising faster than productivity against a backdrop of generally low growth has occurred regularly in the Russian economy in the past (a phenomenon explained by the presence of rent-based incomes). What is far rarer and more serious is a situation in which economic stagnation is accompanied by labour shortages and quite intensive income growth.
Across different economic sectors and branches of industry, a specific segmentation can now be observed, ranging from cases where strong output growth is accompanied by moderate wage growth, to cases of deep decline alongside continued noticeable wage growth (Table 1). Thus, in mining, real wages fell over the year from August 2024 to August 2025 by 1.7% amid a 2.5% decline in output. Here we see a normal picture of contraction. In manufacturing overall, moderate output growth has been accompanied by moderate wage growth (2.4% and 2.8%, respectively). In construction, however, full stagnation coexists with continued wage growth (3.5% in real terms).
The largest segment of manufacturing shows average real wage growth of 4.5% across industries while output shrank by 2–11% (6.3% on average). In several industries, wages are stagnating against output falling in the range of 7–29%. Finally, a number of well-known branches primarily involved in military production are demonstrating extremely high output growth, pulling the entire manufacturing sector, while real wages rise at a moderate pace of around 4% year-on-year.
Thus, if not across the entire economy, then at least across a fairly substantial part of it (including in terms of labour resources involved), we are seeing continued real wage growth against the backdrop of an intensifying decline in output.