The Business Climate is in Crisis: Leading indicators of business sentiment point to a contraction of the Russian economy in early 2026

A downbeat mood

Despite relatively respectable formal indicators of 1% GDP growth, 1.3% growth in industry and 2.7% in services, the Russian economy ended 2025 in an unstable, transitional, pre-crisis state. This is evidenced not only by the sharp slowdown across all indicators compared with the previous two years of the ‘war boom’, but also by an unusual bifurcation within industry: a zone of anomalous growth in a narrow set of subsectors and even individual industries linked to state ‘military’ demand, which accounted for the aggregate increase, alongside a broad zone of decline that by year-end encompassed up to 70% of all industrial subsectors (→ Re:Russia: Man-made Slowdown or Crisis in the Air). Finally, a clear sign of the reversal in economic dynamics was the decline in fixed capital investment, down 5.3% in the fourth quarter and 2.3% for the year as a whole, according to Rosstat data.

This reversal was driven by several factors: first, the Central Bank’s refinancing rate, whose elevated level reflects structural imbalances in the economy; second, a further marked reduction in the fiscal impulse, roughly halving relative to 2023 and declining by around one-third relative to 2024, according to Ministry of Finance estimates; third, a deterioration in corporate financial conditions, with profits, a key source of investment, coming under pressure; and fourth, subdued consumer demand, linked on the one hand to high interest rates on consumer credit and, on the other, to attractive deposit rates, which have encouraged a reallocation of funds away from the consumer sector towards the military sector (→ Re:Russia: The Vicious Cycle of Military Post-Keynesianism).

The first two months of the new year show signs of the economy slipping further into crisis territory. However, the fact that in January 2026 Russia’s GDP, according to the Ministry of Economic Development’s estimates, was 2.1% lower than in January of the previous year is not in itself sufficient evidence of a crisis trend. As Vladimir Putin rightly noted, this January had two fewer working days, 15 instead of 17. A calendar effect was also present in February, with 19 working days compared with 20 in 2025. However, the actual impact of this factor is difficult to assess. With strong demand, firms can increase capacity utilisation and partially offset additional non-working days, whereas under weak demand extra working days may fail to generate a commensurate increase in output.

Be that as it may, over the first two months of the year Rosstat reports that the industrial production index declined by 0.8% year on year. Manufacturing, in contrast to the trends observed in 2025, fell by nearly 3%, while extractive industries posted modest growth of 0.7% relative to January–February 2025. This outcome was driven by a notable increase in both conventional and liquefied gas production, up 10% and 7% respectively. In manufacturing, however, year-on-year growth was recorded in only four military and adjacent subsectors, namely pharmaceuticals and related materials, computers, electronics and optics, other transport equipment, i.e. drones, and other finished goods. All other subsectors recorded declines ranging from 0.5% in food production to 15% in electrical equipment and motor vehicles. Particularly striking is the 11% contraction in metallurgy, where the situation in steel production has become especially severe. Domestic demand for steel has fallen by 14%, according to estimates by the Centre for Strategic Research (CSR), a reliable indicator of contraction in investment and engineering sectors, while exports, amid intense competition, logistical constraints and high borrowing costs, generate little to no profit (→ Re:Russia: Low-margin Successes).

Estimates of sequential production trends (that is, compared to the previous period and adjusted for seasonal and calendar effects), carried out by the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), indicate that industry experienced a sharp downward correction in January, followed by a slight rebound in February. The key trend at the start of the year, according to the centre’s experts, has been an acceleration in the decline of output in civilian manufacturing, with investment-linked industries at the epicentre of the downturn.

The poor start to the year could, in addition to calendar effects, be partly explained by statistical accounting features noted by analysts at the Central Bank, as well as by firms bringing forward part of their planned output into December ahead of the introduction of a new VAT rate. However, when considered together with leading indicators from business surveys, the data should be interpreted as a fairly clear signal that the economy is moving into a recession.

Negative business climate 

The February reading of the Central Bank’s composite business climate index, which aggregates survey data from more than 10,000 enterprises, fell below zero, to –0.1 points, for the first time since autumn 2022, when mobilisation was announced in Russia. As noted earlier, the aggregate value of this index is significantly influenced by the subindex of business expectations. These expectations, however, may reflect distortions in the information environment, either in the form of an overhang of official optimism or surges of social pessimism linked to particular events (→ Re:Russia: Optimism). For example, business expectations rose markedly in the first quarter of 2025, yet it was from the second quarter that the economy entered a phase of sharp deceleration, to which expectations responded only with a lag. Conversely, in September 2022 expectations dropped sharply following the mobilisation announcement, even as the actual economic environment was improving, which was reflected in subsequent data. For this reason, the subindex of current business conditions, rather than the composite index, is a more reliable leading indicator (Figure 1).

Figure 1. Business climate assessments in Russia, 2014–2026, seasonally adjusted data

A closer look at this indicator shows that its February reading of –9.4 points, and the January–February average of –8.5 points, correspond not so much to autumn 2022 as to the levels of April–May that year, when the Russian economy was still in shock from the outbreak of war and Western sanctions, as well as to those observed in the crisis year of 2015. In both episodes, the economy was in a phase of contraction, at –3.7% in the second quarter of 2022 and around –2% on average over 2015.

Even in the second half of 2025, the average value of the index, at –5.2, pointed more towards stagnation with a negative bias. At the same time, several sectors were already exhibiting clearly crisis-like conditions, including manufacturing at –9.1, extractive industries at –7.7 and trade at –10.2, while others remained in a borderline state, notably transport at –4 points and services at –3. Data for the first two months of 2026 indicate a further deterioration, which has now spread to sectors that had previously appeared relatively resilient (Figure 2).

Figure 2. Observed business climate assessments by sector, 2020–2026

The weakest business climate readings are observed in trade, where the index has fallen to –14.4 points. In extractive industries, the index dropped sharply at the start of the year, to –11.4. As in the case of manufacturing, where Rosstat data showed growth in the second half of 2025 despite crisis-level business climate indicators, the positive dynamics in extractive industries in January–February do not contradict the sharp deterioration in the indicator. Rather, they suggest that growth in both cases is concentrated in narrow segments, while the majority of firms remain in a downturn, as reflected in the Central Bank’s February survey covering 138 extractive companies. In construction, the index declined to –7.8 points on average in January–February and to –9 in February. Particularly significant for overall economic dynamics, however, is the sharp deterioration in transport, to –7.4 points in January–February, and especially in services, where the index stood at –5.9 in January and fell to –9.2 in February. As a result, business activity indicators in services now resemble those of the second quarter of 2022; in transport and construction they are somewhat better; in manufacturing somewhat worse; and in agriculture and especially mining significantly worse.

The Central Bank survey also indicates that the main driver of the deterioration is demand. Across the economy, the demand indicator declined from –2.4 points in the first quarter of 2025 to –4.5 in the fourth quarter and to –9.4 in January–February 2026, indicating a sharp acceleration in the contraction of demand at the start of the year. In the survey of small and medium-sized enterprises conducted by the Centre for Strategic Research in March 2026, demand constraints were likewise cited as the primary limitation by 42% of respondents, compared with 33% pointing to the cost of borrowing. Capacity utilisation in industry fell to 73.4% in the fourth quarter of 2025, a level comparable to the pandemic shutdown in the second quarter of 2020 and only slightly above that of the 2015 crisis at 71%, whereas in 2023–2024 it stood at 78.2%, according to Central Bank monitoring. The largest decline in utilisation relative to the boom period occurred in investment-related industrial sectors, down 6.5 percentage points, while the smallest decline was in consumer sectors, at 3 percentage points.

Indicators of investment activity at the end of 2025 remained above those seen during the crisis episodes of 2015 and 2022. However, compared with the peak of the investment boom in the second half of 2023 and the first half of 2024, the investment index declined across the economy from 8.4 points to 3 in the second half of 2025; in industry, from 12.1 to 1.8; in extractive industries, from 12.3 to zero; and in the production of investment goods, the index fell sharply from 12.9 to –2.7. By contrast, in the consumer segment of manufacturing both the boom and the subsequent decline were more modest, with the index decreasing from 9.9 to 4.7 points.

Thus, leading business climate indicators point to a substantial deterioration in the Russian economy at the start of 2026. During the first phase of gradual slowdown, from August 2024 to May 2025, the current business conditions index fluctuated around –2 points; in the second phase, from June to December 2025, its average value was around –5; and in January–February it dropped to –8.5, a level that in previous episodes corresponded to an economic contraction of at least 1.5–3.5%. The sharp decline in assessments of current demand has made the largest contribution to this deterioration, while in sectoral terms the most pronounced falls have been in extractive industries and services.

The additional export revenues accruing to the Russian economy and budget as a result of the war in Iran are likely to support some recovery in oil and gas extraction and provide an additional stimulus to growth in military and related industries. However, they are unlikely to have a systemic impact on manufacturing or on the economy as a whole, at least over the coming months. Higher budget revenues may help reduce the deficit and limit new domestic borrowing to finance it, but are unlikely to lead to a renewed expansion of fiscal stimulus.