The Bipolar Nature of a War Economy: Near-zero growth is not stagnation, but rather the simultaneous coexistence of growth and contraction

An economy hovering around zero

According to Rosstat’s initial estimate, GDP grew by just 0.6% in the first half of 2026. In the second quarter, GDP increased by 1.3% year on year, following a slight contraction in the first quarter. Monthly readings of the output index for the main economic activities, a measure that comes closest to GDP, fell below the previous year’s level on three occasions in 2026 (January: 97%; February: 97.7%; May: 99.5%). On five occasions, they were higher, with growth ranging from 0.8% to 1.6%. Industrial production recorded no year-on-year growth at all, either in the first half of 2026, following data revisions, or over the first eight months of the year, from January to August. The index stood at 100.0%. Monthly industrial production figures were slightly negative on four occasions and slightly positive on four others. At first glance, the Russian economy appears to be hovering around the freezing point.

Over the course of the protracted war against Ukraine, the Russian economy has experienced three distinct phases (Figure 1). The first was a four-quarter period of shock following the imposition of sweeping sanctions, forced adaptation and structural change. These developments involved both the reconfiguration of logistics and production chains and the establishment of a military economic circuit. During this period, GDP and industrial output contracted at annual rates of 1–2%. This was followed by a seven-quarter period of military-driven boom, from the second quarter of 2023 to the end of 2024, when growth rates exceeded 5%.

Finally, the third phase began in the early months of 2025. Economic momentum shifted sharply towards a slowdown, and a further slide into recession appeared highly likely. Yet this did not happen. The economy has managed to stay afloat, at times dipping below the waterline and at others briefly rising above it. This no longer looks like a transitional phase between growth and contraction, but rather a distinct phase of a wartime economy. Near-zero growth rates conceal dramatic underlying tensions that largely determine the character and nature of this phase.

Figure 1. Three phases of the protracted war: GDP and industrial growth rates, 2022–2026, %

Although industry accounts for a relatively modest share of economic activity in modern economies (in Russia, it represents around a quarter of total value added), it remains one of the most important indicators of economic performance and a kind of core of economic activity. It reflects impulses from the broader economic environment and transmits them onwards to trade, consumption and private demand through employment and demand for labour. Moreover, methods of monitoring industrial activity and the available statistics are particularly well developed, making industry the most convenient subject for in-depth analysis.

For three and a half years, Re:Russia has been monitoring developments in Russian industry, including by dividing its sectors and subsectors into three groups: those experiencing growth, stagnation and contraction (→ Re: Russia: Apples and Oranges; Re: Russia: Growth on Growth; Re: Russia: Military Post-Keynesianism). The aggregate industrial indices compiled by Rosstat depend primarily on the performance of large sectors that account for a substantial share of total industrial output. Oil and gas extraction, for example, accounts for 30% of this output, petroleum product manufacturing for 9%, metallurgy within manufacturing for 8%, and food production for 7% (2023 weights). Together, these four sectors account for almost 55% of the total. At the same time, 13 of the 34 industrial sectors each carry a weight of less than 1%. Combined, they account for just 6%, less than the food sector alone.

Consequently, changes in output in the sectors with the highest weightings, or significant shifts in medium-sized ones, largely determine the headline figures for extraction, manufacturing and industry as a whole. However, sector-specific market conditions can influence their performance in ways that obscure the broader economic impulse. Conversely, when we examine output trends across all sectors, regardless of their weight, we obtain something closer to the ‘average temperature’: an indication of the extent to which a shift towards growth or contraction, and its acceleration or deceleration, represents a trend common to industry and the economy as a whole. This provides a second measure of economic performance, complementing Rosstat’s aggregate indicators.

The ‘average temperature’

The sector-level statistics reveal a much sharper and more informative turning point at the beginning of 2025 than the aggregate figures. As Figure 2 shows, at the end of 2024 around 85% of industrial sectors, both large and small, were experiencing growth. By the end of the first half of 2025, however, only around 30% remained in the growth category, while 30% had moved into stagnation (defined as changes within a range of 1% in either direction) and 40% had entered into the recession zone. By August 2025, the situation had deteriorated further. Only around a fifth, or slightly more than 20%, of sectors remained in the growth category, while stagnating and contracting sectors each accounted for approximately 40%. Within the much narrower group of growing sectors, growth rates were not declining at this stage but were actually accelerating. Meanwhile, the scale of output contraction in the declining group was also increasing. The situation in Russian industry therefore looks nothing like an economy approaching the freezing point. It is better described as a kind of bipolar disorder.

Figure 2. ‘Average temperature across the sector’: shares of industrial sectors experiencing growth, stagnation and contraction, 2024–2026, %

Further fluctuations have been driven by shifts in a number of sectors from stagnation to either modest growth or moderate contraction. Following a degree of stabilisation towards the end of 2025, when both the growth and contraction categories expanded, conditions deteriorated again in early 2026. Only a fifth of industrial sectors remained in the growth category (21%), while almost two-thirds (65%) were contracting. At the same time, growth rates among expanding sectors slowed, while output contraction intensified among those in decline. As a result, both industrial production and GDP recorded negative growth in the first quarter of 2026. However, by the summer, conditions had begun to stabilise somewhat. The share of growing sectors rose from 20% to almost 30%, while the proportion of contracting sectors fell by roughly the same margin. Growth rates within the expanding group also edged up, while the depth of contraction in the declining group eased slightly. Although the contraction category remained significantly larger in 2026 than in 2025, industry as a whole did not slip into negative territory.

The reasons for the sharp reversal in industrial trends at the start of 2025 are well known. By early 2025, the broad-based growth impulse generated in 2024 by strong state demand and expanding credit had run out of steam. A significant overheating of the economy, fuelling inflation, forced the Central Bank of Russia to raise its key interest rate in two successive rounds. By autumn 2024, the nominal rate had reached 21%, while the real rate, adjusted for inflation, stood at 11–12.5%. With a short lag, credit began to contract in the first quarter of 2025, affecting both the corporate and consumer sectors. The withdrawal of broad-based preferential mortgage lending and rising consumer credit rates compounded the squeeze. The picture was further exacerbated by rouble appreciation, which reduced exporters’ profits, and an increased tax burden. As a result, companies’ own financial resources declined alongside the contraction in credit.

At the same time, the second major driver of the military boom, strong demand generated by government budget spending, remained in place, keeping industry afloat. Although the Central Bank began a gradual easing of monetary policy in mid-2025, the key rate fell in parallel with inflation, leaving the real rate at around 10%. Meanwhile, corporate financial conditions continued to deteriorate, and the government intensified the tax squeeze through an increase in VAT and a reduction in the threshold for VAT exemption. Consequently, the beginning of 2026 was marked by a 14% fall in investment in real terms. Only by mid-year did the real interest rate fall to around 8%, accompanied by some revival in lending, particularly in several manufacturing industries, including chemicals, machinery and equipment, and motor vehicles and other transport equipment.

Russian industry, and the economy as a whole, resemble a boiler with a heating system connected to one side and a cooling system to the other. The temperature at the centre is therefore influenced alternately by one impulse and then the other. In 2026, however, a further factor began to affect this heating and cooling system, with its influence gradually intensifying.

Bipolar disorder and the drone factor

The polarisation between expanding and contracting sectors during the third phase in the evolution of Russia’s wartime economy can also be traced in Rosstat’s aggregate industrial data. As noted above, the overall result is shaped primarily by medium-sized and large sectors recording high rates of growth or contraction, since each sector’s contribution depends on the product of its growth rate and its weight in total output. Under the polarised conditions observed in industry, expanding sectors generate a positive impulse, while contracting sectors exert a negative one. Their combined effect, through mutual offsetting, produces a final result that has fluctuated around zero over the past year.

In January–August 2024, the combined positive contribution of growing sectors amounted to around 5 percentage points. Half of this contribution came from four industries: fabricated metal products (All-Russian Classifier of Economic Activities, known by the acronym OKVED, 25), computers and electronics (26), other transport equipment (30), and pharmaceuticals (21). The other half came from the remaining 26 industrial sectors that were on a growth trajectory at the time (Figure 3). Growth was broad-based at this stage, as the ‘average temperature across the hospital’ indicator also showed, but, as these calculations demonstrate, it was highly uneven.

Figure 3. Breakdown of industrial production trends, 2024–2026, %

By contrast, the overall picture for January–August 2025 is radically different. The contribution of the core growth group changed little, at +2.36 percentage points, yet the total positive contribution from industry as a whole almost halved. The four sectors that make up this growth core are closely linked to state demand. The first three serve military needs to a considerable extent, producing military equipment, UAVs, munitions, military electronics, optics and related products. Each sector also includes civilian production, but this accounts for less than 30% of total output. It is the military component that drives the high growth rates and, consequently, the overall positive contribution, while civilian subsectors have been contracting in 2025–2026. Overall, the four sectors identified above account for 90% of the positive impulse to industrial output in 2025–2026.

At the same time, the negative impulse from contracting sectors intensified in 2025. The oil and gas complex was already making a significant contribution to this decline in 2024–2025. Initially, this involved petroleum refining (OKVED 19) and oil and gas extraction (06). Rosstat does not publish the relevant indicator for extraction, but it can be estimated fairly closely from the aggregate extraction figures. These were subsequently joined by support activities for mining (09), the bulk of which is associated with oil and gas extraction, and chemical manufacturing (20). From late 2025 onwards, these sectors formed a powerful core of contraction, accounting for 30% of the total negative impulse in industry at the end of 2025 and 60% in January–August 2026.

In 2026, the contribution of the growth core also weakened. Growth in output in the manufacture of other transport equipment slowed from 41% in January–August 2025 to 19% in the first eight months of 2026, while growth in electronics and optical products fell from 15% to 4.8%. As a result, the core’s positive impulse declined by roughly a third compared with its 2024–2025 levels. Meanwhile, a second core of contraction emerged alongside the oil, gas and chemicals complex: the investment and construction cluster, comprising metallurgy (OKVED 24), construction materials (25) and machinery and equipment manufacturing (28). Its negative contribution to industrial output intensified in early 2026, almost matching that of the oil and gas complex.

The negative impulse from the investment and construction cluster almost halved, from −0.92 to −0.54 percentage points. This appears to be linked to a revival in lending in certain industries, particularly machinery and equipment, which we in turn associate with lower interest rates. However, the positive effect observed in August compared with June was entirely offset by a further deterioration in the oil and gas complex. In the summer of 2026, the negative contribution from petroleum refining increased sharply, reaching −0.9 percentage points, as did that from oil and gas extraction. The combined negative contribution of the oil and gas complex rose by half, from 0.88 to 1.32 percentage points in absolute terms. The explanation is straightforward: following Ukrainian attacks on Russian refineries, petroleum refining output in May–August was 18% lower than in the same months of 2025, according to Rosstat’s calculations, and this decline led to a reduction in production.

Back in late July, we anticipated that strikes on Russian refineries would have a significant impact on industrial production figures, given the large share of oil refining in the sector, and would also interrupt the cycle of further interest rate cuts (→ Re: Russia: The Ripple Effects of the Petrol Crisis). Following the Central Bank’s board meeting on 11 September, Governor Elvira Nabiullina directly referred to conditions in the refining sector when explaining the decision to keep the key rate unchanged. As our calculations show, the damage inflicted on Russian refining by Ukrainian strikes effectively cancelled out the positive effects of lower interest rates. Those effects had been reflected in the relative improvement of indicators in several industries and an overall reduction in the scale of contraction across the non-military industrial sector.

Judging by the draft budget submitted to the State Duma last week, the Kremlin has opted to strengthen the mobilisation component of economic policy. Further increases in military spending would mean an aggressive stimulus for the military sector. On the one hand, this would return it to higher growth rates; on the other, it would make further interest rate cuts impossible. Industry would once again be characterised by opposing trends in its two sectors, intensifying the bipolar disorder of the Russian economy. In economic terms, these divergent trajectories reflect the redistribution of resources from some industrial sectors to others, a characteristic feature of the second stage in the evolution of a wartime economy. Ultimately, the consequences are likely to include lower consumption and household incomes (→ Re: Russia: Military Keynesianism 2.0).