On The Brink of Recession: The Russian economy has entered negative growth territory, at least partially
The era of a wartime boom in the Russian economy has definitively come to an end, and preliminary estimates and indicators for the first quarter point to a contraction of between –0.3% and –0.7% of GDP. A more precise assessment of economic dynamics at present is, however, complicated by differing expert views on the weight of calendar effects and by inconsistencies observed in Rosstat data. Interpreting the slowdown as a ‘man-made slowdown’ in growth is clearly far from reality.
However, an analysis of first-quarter dynamics across sectors and industries provides a sufficiently clear picture of further deterioration across several areas. The deterioration in performance at the start of the year was driven by industrial stagnation, a sharp contraction in construction, and a more gradual decline in freight transport turnover.
One of the most notable developments is that manufacturing, which underpinned economic growth last year, has itself entered negative territory (–0.7%) for the first time since 2022.
Throughout 2025, the performance of the manufacturing sector was characterised by a split into two areas: contracting civilian production and relatively fast-growing military and quasi-military output. This divergence continues to widen. While the military sector continues to improve the overall indicator, the ‘military’ growth zone is also contracting.
Overall, analysis at the level of industries, sub-sectors and individual production lines shows that over the past year the situation in industry deteriorated as an increasing number of sectors shifted into declining output. In the first quarter of this year, the main contribution to further weakening came from a deepening downturn in several significant industries, including metallurgy, wood processing, clothing and electrical equipment manufacturing.
Whilst the Central Bank has left its GDP growth forecast for 2026 unchanged within a broad range of 0.5–1.5%, other forecasts are being revised towards the lower end of this range. A further factor contributing to the weakening of economic performance over the course of the year may be the sharp deterioration in the financial condition of enterprises recorded in January–February. Given that enterprises’ own resources are their main source of both working capital and investment, and that the forecast for a cut in the key rate has become more conservative, this factor may exert further downward pressure on economic activity.
A downturn with unknown parameters
In the first quarter of 2026, the Russian economy entered a downturn. This transition has been officially reflected by the preliminary estimate of the Ministry of Economic Development, according to which the economy contracted by 0.3% compared with the first quarter of 2025. Rosstat’s estimate will be released later, but the leading proxy for GDP, the index of output in basic economic activity (BVED index), showed a 0.7% year-on-year decline at the end of the quarter, according to the agency’s March report. More alarmist estimates from the Institute for Economic Forecasting suggest that the decline amounted to as much as 1.5%.
In any case, the fact of negative growth has been officially acknowledged. It should be noted that, in the middle of last year, a number of analysts and think tanks also assessed the GDP dynamics as negative, but the Russian authorities resisted such interpretations, insisting that this was merely a ‘man-made slowdown’ in growth aimed at combating inflation (→ Re:Russia: Drones Against Recession). The current acknowledgement likely indicates that the government has accepted that a single quarter of marginal movement into negative territory will not be the end of the matter. In any case, the wartime economic boom of 2023–2024 and the growth associated with it have definitively passed. Given the stronger performance in the second half of the year, the state of the Russian economy in 2025 can be characterised as stagnation (Rosstat’s official estimate is +1%; see Figure 1), but it is unlikely to be possible to maintain this level this year. However, the scale of the downturn and the interpretation of its causes will once again become, and have already become, the subject of heated debate.
Figure 1. Dynamics of GDP, the output index by key economic sectors and industrial production, 2022–2026
Assessing the scale of the first-quarter contraction is indeed a task fraught with many unknowns. In addition to calendar effects (January–February 2026 had three fewer working days than in 2025), the impact of which is assessed differently by various think tanks, there is also the issue that Rosstat has shifted to a new base year for calculating production indices, moving from 2018 to 2023. That said, the decline in the first quarter of 2026 would have been more severe had it not been for the surge in industrial output in March following the significant drop in January–February recorded by Rosstat. At the same time, Rosstat’s old and new data series do not fully align with one another, as experts have pointed out (including the authors of a review by the Centre for Macroeconomic Analysis and Short-Term Forecasting, CMASF). For example, according to the underlying data, the industrial production index increased by 2.3% year on year in March, whereas the seasonally and calendar-adjusted month-on-month index shows growth of 4.6%. The influential MMI Telegram channel is categorical in its assessment, arguing that monthly dynamics in Rosstat’s data do not align with annual figures, and that for now ‘there is no confidence in the numbers’.
Debates over percentage points have limited value at present. Not only will Rosstat publish its GDP estimate later, but it will also be subject to multiple revisions. The Governor of the Central Bank Elvira Nabiullina believes that firm conclusions can only be drawn after the first half of the year. The loss of three working days in January and February may have reduced annual growth by up to 0.5 percentage points, but this effect is expected to be offset by additional working days in May and June, which will have three more working days than a year earlier. At the same time, an analysis of first-quarter dynamics across sectors and industries provides a sufficiently clear picture of further deterioration in economic performance across several areas.
Fragmentation amid contraction
In the first quarter of 2026, industrial production, which carries the greatest weight in the structure of the BVED index (over 40%), remained roughly at last year’s level, whilst a significant deterioration was observed in freight transport and construction (Figure 2). The 10% decline in construction relative to early 2025 levels has been attributed by some analysts to the severe cold snap in January; however, others have strongly disputed this explanation. In any case, at the start of 2026, retail trade is the only component among the ‘basic’ sectors remaining in positive territory, posting growth of 3.6% compared with the first quarter of 2025. According to Rosstat, the bulk of this increase also occurred in March and was driven by the non-food segment, which rose by 9.1% year on year.
Figure 2. Main components of the index of output in basic economic activity, 2025–2026
According to Rosstat, industrial output increased by 0.3% compared with the first quarter of 2025, whereas estimates by the Centre for Macroeconomic Analysis and Short-Term Forecasting indicate a decline of 0.2%. In either case, the key development is that manufacturing, which supported positive economic dynamics last year, has itself entered negative territory (–0.7%) for the first time since 2022, while the overall positive result for industry was driven by a modest increase in extractive industries, likely of a temporary nature.
Throughout 2025, the dynamics of manufacturing were shaped by its split into two segments: contracting civilian production and relatively fast-growing military and quasi-military output. This divergence continues to widen, and output in civilian industries in the first quarter of 2026 appears to be at levels that may already be below those seen before the war, at the end of 2021. At the same time, according to estimates by the Centre for Macroeconomic Analysis and Short-Term Forecasting, more than 80% of the 2.3% increase in industrial output recorded in March, which significantly improved the quarterly figures, was driven by higher production in sectors dominated by the military-industrial complex.
Figure 3. Dynamics of overall industrial production and in civilian sectors, 2021–2025, seasonally adjusted, 100 = average monthly value for 2021
However, the ‘military’ growth sector is also contracting. For example, growth in the sub-sector ‘other transport equipment’ slowed from +39% in the first quarter of 2025 to +25% in the first quarter of 2026. Production of drones itself continues to expand at a similar pace, at +66% year on year, but civilian segments within the sub-sector, such as the production of railcars and locomotives, are experiencing a much deeper downturn, with output falling by 25% compared with the first quarter of 2025, when the decline had been 10% year on year. Another defence-related sub-sector, the manufacture of fabricated metal products, which had been a key driver of manufacturing growth during the high-growth period of 2023–2024, has shifted into contraction, declining by –0.8% in the first quarter of 2026 after growth of 23.4% in the first quarter of 2025 and 18% over the year as a whole. This appears to be partly linked to changes in the nature of hostilities, with reduced demand for heavy military equipment and artillery, and partly to a downturn in civilian segments of the sub-sector, including the production of boilers, tanks and other metal goods for civilian use. Growth has also slowed in the production of computers, electronic and optical equipment, from +12% at the beginning of 2025 to +5% in the first quarter of 2026, again reflecting contraction in civilian output.
Among civilian industries, the most notable developments are a deepening downturn in metallurgy, with output falling by 10% in the first quarter of 2026 compared with a decline of 1.5% in the first quarter of 2025 and 2% over the previous year, as well as in wood processing, where the contraction reached 7% compared with 2% a year earlier. Finally, sectors that had shown growth or stagnation at the start of 2025, such as chemicals and textiles, recorded a pronounced decline at the beginning of 2026. Overall, analysis at the level of sectors, sub-sectors and specific industries shows that over the past year the situation in industry deteriorated as the range of sectors experiencing a decline in output increased (→ Re:Russia: Man-Made Slowdown). In the first quarter of this year, the main factor contributing to the further weakening of indicators came from the deepening downturn in a number of significant sectors: metallurgy, wood processing, and the manufacture of clothing and electrical equipment.
Performance of selected manufacturing sectors, 2025–2026, % year on year
In the April update to its forecast for GDP growth in 2026, the Central Bank left the broad range of 0.5–1.5% unchanged.The Ministry of Economic Development’s forecast, prepared in September last year, projected growth of 1.3%, but at the end of March the minister, Maxim Reshetnikov, warned that it would be revised downwards. By the end of April, Sberbank had already downgraded its forecast from 1–1.5% to 0.5–1% of GDP, noting that business turnover had fallen by 2.2% in nominal terms over the quarter for the first time since 2022. The Central Bank lowered its forecast from 0.9–1.3% to 0.5–0.7%, specifying in a separate commentary that the positive contribution from higher oil prices would be offset by the risks of reduced production and exports resulting from attacks on port infrastructure and oil refineries.
In our view, the forecast for economic dynamics should take into account another important development at the start of 2026. The results for the first two months point to a sharp deterioration in the financial condition of enterprises. According to Rosstat’s calculations, the balance of profits and losses for organisations in January–February (3.35 trillion roubles) amounts to 67% of the level for the same months last year. In previous years, the indicator showed growth of 16% in 2024 and 23% in 2025. In the extractive sector, the net result amounted to 68% of the previous year’s level, and in the manufacturing sector it was 55%. At the same time, internal financial resources are the primary source for firms of both working capital and fixed investment, while the Central Bank’s forecast for the pace of the key rate cut has become more conservative (→ Re:Russia: A Cat in the Bank). These factors, combined with an increasing fiscal burden, are likely to exert additional pressure on economic activity over the course of the year.