Russia Grapples with Economic Slowdown Amid Inflation Concerns
Russia is facing a complex economic situation, marked by declining inflation but also growing concerns about a potential recession. While the Kremlin attempts to manage price increases – so severe that reports of basic goods like butter being stolen have surfaced – the measures taken to curb inflation are contributing to a slowdown in economic growth.
Inflation in Russia spiked to 17.8% shortly after the invasion of Ukraine in February 2022. However, the Central Bank of Russia (CBR) has implemented policies aimed at controlling these rising prices, and has seen some success, with the inflation rate cooling to 8.8% by July.
This progress prompted the CBR to lower its key interest rate twice in recent months, frist by 100 basis points in June, and then by a further 200 basis points to 18% in July. The bank also revised its inflation forecast, anticipating it will reach a 4% target by 2026. Following its July meeting, the CBR stated that inflationary pressures, including underlying ones, were decreasing faster than expected, and that domestic demand was weakening, leading the economy towards a more “balanced growth path.”
However,analysts caution that this “balanced growth path” may represent a important slowdown. According to CEPA’s Maria Kolyandr, the term is a “euphemism for anemic growth,” and the CBR’s success in controlling inflation has come at a cost.
President Vladimir Putin himself has acknowledged the economic challenges, warning in June that Russia must avoid falling into recession.He defined “balanced growth” as a combination of moderate inflation, low unemployment, and continued economic progress, but also recognized warnings from experts about the risks of stagnation and recession, stating that these outcomes “should not be allowed under any circumstances.” He made these remarks at the St. Petersburg International Economic Forum.
Recent economic data supports concerns about a slowdown. russia’s economy grew by 1.1% year-on-year in the second quarter, a decrease from the 1.4% expansion seen in the first quarter.
Liam Peach, a senior emerging markets economist at Capital Economics, noted that the economy is “clearly struggling amidst imbalances that have built up due to the war effort,” and expects growth to continue to slow. He described the situation as Russia’s economy being “struggling under the weight of high interest rates and the ongoing war effort,” predicting a “prolonged period of weak growth.”
Business sentiment and investment intentions have fallen to multi-year lows, and the labor market is cooling. Capital Economics forecasts GDP growth of 0.8% for 2025,but also identifies a “very high risk” of recession this year.
