The December surge in economic activity in Russia, as expected, did not gain momentum and was followed by a downturn. Moreover, the decline in industrial output in January offset not only the December result, but also part of the growth from the previous months.
In December 2024, the primary contributors to the overall growth were manufacturers of finished metal products and other military-industrial complex goods, which were ramping up their activity in order to fulfil their annual plans. At the same time, companies sought to increase output and pay bonuses to employees before the new higher corporate profit tax and personal income tax rates came into effect. This may explain the unexpected growth of output in the mining sector in December. In January it was replaced by the usual slight decline.
The main effect of the January slowdown in the manufacturing sector was that, whereas previously civilian industries had previously stagnated or exhibited weak growth, and war-related industries had been climbing steadily, in January the latter also largely shifted towards stagnation. Whether this is a new trend or a temporary halt, however, remains to be seen.
Growth was observed in several smaller industries catering to consumer demand, such as food, tobacco, and pharmaceuticals. However, production growth in these segments follows consumer activity trends, which are beginning to slow. In the coming months, the chemical industry is expected to show growth due to rising fertiliser exports.
The transition of the Russian economy to stagnation has taken place, and the main question now is whether this state will become entrenched or whether the decline in output will continue. This issue will be central to determining the strategy for the key interest rate. Meanwhile, as anticipated, inflation in Russia reached double digits by the end of February. However, its month-over-month dynamics indicate signs of deceleration. While the monthly price increase was 1.42% in November 2024 and 1.23% in January 2025, in February, it was only 0.87%.
The Russian economy has slowed down. When comparing the output dynamics of the country’s core industries (a real-time indicator closely correlated with GDP, which is not typically calculated on a month-to-month basis), growth in January 2024 was 5.3% year-over-year, while in January 2025, it slowed to 3.1%, according to the latest report by Rosstat on the country’s socio-economic situation. Industrial production grew by 2.2% this January compared to 4.3% the previous year, retail turnover increased by 5.4% versus 8.6%, paid services to the population rose by 2.5% against 4%, and residential housing completions amounted to 90.3% of January 2024 levels.
In month-to-month terms, the economy experienced a significant decline, though much of this was driven by temporary factors. The sharp spike in economic activity in December 2024 played a key role. That month, the output of core industries increased by 7.5% year-over-year, compared to an average monthly growth rate of 4.7% over the previous 11 months. Industrial production grew by 8.2% year-over-year under similar conditions.
It was expected that December’s acceleration would not continue. As previously noted (→ Re:Russia: Inflate and Dominate), the main contributors to growth in December were manufacturers of finished metal products, computers, electronic and optical devices, aircraft, and other transport equipment – primarily military-industrial complex production. These industries ramped up activity to meet their annual targets. As a result, according to the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), these industries grew by 19.4% compared to November, whereas all other sectors increased by only 3.2%. Meanwhile, growth in civilian sectors was mainly driven by one-time and seasonal factors.
Another likely reason for the December acceleration was the increase in corporate profit tax – from 20% to 25%. Analysts at Alfa Capital suggest that company executives may have rushed to complete as many projects as possible before the end of 2024 to avoid paying the higher tax rate. This could also explain the growth in the mining sector in December, despite the fact that since the second quarter, annual output in this industry had been declining.
Following such a surge, a slowdown was expected, but the contraction in January not only erased December’s gains but also offset part of the growth from previous months. According to Raiffeisenbank analysts, seasonally adjusted production fell by 2.9% in January compared to December, whereas December had seen a 2.5% month-over-month increase. CMASF provides similar figures, reporting a 3.2% decline in January after a 2.4% rise in December. However, the manufacturing sector was supported by machinery and equipment production, Raiffeisenbank analysts note: without this segment, the industrial production index would have dropped by 4.7% month-over-month, falling well below its long-term trend. This discrepancy between machinery manufacturing and other industries supports the hypothesis of a segmented economy, according to analysts. Growth in the machinery sector may have been fueled by targeted government budget allocations, while other industries have been forced to develop using their own resources.
The especially deep downturn in January after December’s spike was due, first, to a renewed drop in mineral extraction (97.9% of January 2024 levels, according to Rosstat, primarily due to a decline in gas production), and second, to the fact that war-related industries ceased to support growth. Previously, civilian industries had stagnated or grown weakly, while the military-industrial complex had been climbing steadily. However, in January, the military-industrial complex also turned toward stagnation. Analysts at CMASF note that production in defense-related industries returned to third-quarter 2024 levels. In sectors such as computers, electronic and optical products, January 2025 was the first month since late 2022 where output declined rather than increased compared to the previous month. In metal product manufacturing, it was the second such month, according to CMASF estimates. However, it is unclear whether this marks a new trend or a temporary pause.
Among civilian industries, the only major growing sector is the chemical industry, driven primarily by fertiliser production. This sector will continue to support industry due to the launch of new fertiliser transshipment terminals in Ust-Luga and Taman this year, with capacities nearly equivalent to half of Russia’s current fertiliser exports. Previously, limited terminal capacity constrained output, but this bottleneck has now been eliminated. Elsewhere, there is little optimism even in sectors where production remains far below pre-war levels. For example, passenger car production shows no signs of growth and remains 2.5 times lower than in 2019. Truck production is declining.
Meanwhile, the consumer sector is performing relatively well, likely due to tax-related maneuvers. In anticipation of the new progressive personal income tax scale taking effect, many companies paid bonuses and incentives to employees in advance – typically, these payments are made in February and March, according to the Central Bank’s March issue of the ‘What The Trends Say’ report. Consumer activity is supporting growth in several small industrial sectors, particularly food, tobacco, and pharmaceuticals, though their share of total industrial production is small. However, consumer activity is beginning to slow. Russian incomes in 2025 will grow more slowly than last year (→ Re:Russia: A Leap Instead of Growth). The labour market is finally cooling, Central Bank analysts observe. According to a survey by hh.ru cited in their report, businesses are reducing hiring and wage increase plans. The ratio of job seekers to job openings is rising due to a decline in available vacancies.
The results of enterprise surveys – leading indicators of the state of industry – give a contradictory picture. S&P Global's Global Russia Manufacturing PMI slipped to 50.2 points in February, down from 53.1 a month earlier, indicating that positive and negative assessments are now nearly equal. Survey respondents noted stagnation in new orders, while output continued to grow but at the slowest pace in four months. For the first time in two and a half years, companies reduced purchases of raw materials and supplies, as weakening demand made them more cautious in hiring. The Central Bank's enterprise survey, which was conducted in early February but reflected the situation in January, showed a slight improvement in business sentiment, but assessments of current business conditions have remained negative for six consecutive months. Expectations for demand improved slightly, while production outlooks remained virtually unchanged.
The transition of the Russian economy to stagnation has effectively taken place. The key question now is whether stagnation will take hold or if output will continue to decline, CMASF analysts conclude. This question will be central in determining the key interest rate strategy. The Central Bank favours keeping rates high for an extended period to cool the economy further, while dirigiste lobbyists advocate for an earlier rate-cutting cycle. Meanwhile, inflation, as we predicted (→ Re:Russia: Unequivocal Double-Digit Inflation), officially reached double digits in February 2024, hitting 10.1% year-over-year. However, the month-over-month price increase slowed to 0.81%, compared to 1.42% in November 2024, 1.32% in December, and 1.23% in January 2025. This is now a trend. Authors of the Central Bank report What The Trends Say – who represent the 'hardline disinflation' faction – note 'emerging signs of a trend toward slower price growth' but caution that to confirm its sustainability, inflation must slow even further. In February, price growth rates like these had only been observed twice in the past 15 years: in 2022 and 2015.