Russian economy slows sharply, with more turmoil on horizon

Reuters

08-04-2025

Summary
New data point to sharp economic slowdown
Oil price fall creates new risks
Industrial sectors outside defence are stagnating
Pressure rising on central bank to lower rates
MOSCOW, April 8 (Reuters) - The Russian economy has slowed sharply in recent months, according to the latest economic data, and may be at further risk if a fall in oil prices and global market turmoil persist.
Russia's growth, fuelled by spending on the three-year-old war in Ukraine, exceeded 4% in the past two years, but a labour shortage across many other sectors has contributed to a wage-price spiral that has pushed inflation above 10%.
In response, the central bank has raised its key interest rate to 21%, the highest level since the early 2000s, prompting howls from business leaders who say it is stifling investment. Meanwhile, the price of Russia's main export, oil, is falling.
GDP growth fell to 0.8% year-on-year in February from 3% in January, the lowest figure since March 2023, with transport, wholesale trade and mineral extraction leading the decline, according to data issued last week.
Industrial output growth plunged to 0.2% from 2.2%.
Economists said that, even though February was one day shorter than last year, signs of a slowdown were evident.
"The deterioration in a significant part of the industrial sectors is becoming persistent. Signs of a slowdown are taking hold," Raiffeisenbank analysts said in a research note.
They cited high interest rates, labour shortages, a lack of production capacity outside the defence sector and continued pressure from Western sanctions.
And the slowdown is set to be exacerbated by a fall in the price of oil, which has hit its lowest levels since April 2021 on fears that U.S. President Donald Trump's import tariffs will trigger a global recession.
STAGNATION CONTINUES
Reports prepared by the economy ministry and central bank for a February 4 meeting with the government - weeks before the news of sweeping U.S. tariffs shocked investors around the world - had already flagged lower oil prices, budget constraints and a rise in bad corporate debt as risks to the economy.
The ministry's report said it was becoming more likely that there would be a technical recession before inflation was under control, and that the slowdown in lending and investment caused by high interest rates was set to slow future growth.
The latest data show that only sectors linked to military production or involved in substituting sanctioned imports are still growing.
"In industry, stagnation continued," said experts from the TsMAKP think tank, which advises the government.
It had previously said sectors outside the military-industrial complex had been stagnating since mid-2023.
The data also showed that consumer demand, a major contributor to overall growth, slowed, with retail sales up only 2.2% in February after 5.4% in January.
"This is yet another confirmation that, even though incomes continue to rise, the real drive from consumption is fading. We are beginning to reach a plateau in consumer demand," said Sofya Donets, chief economist at T-Bank.
Furthermore, while Russia has been spared new U.S. import tariffs, Trump has threatened to impose sanctions aimed at further reducing Moscow's ability to sell oil unless it does more to achieve the ceasefire in Ukraine that he has demanded.
AKIN TO RECESSION
Car sales, which had grown at record rates over the last two years as the market recovered from the withdrawal of Western brands in 2022, were down by 25% year-on-year in the first quarter, and by 46% in March alone.
Railway freight, monitored by many economists, was down 7.2% in March and 6.1% in the first quarter, including loadings of key export commodities such as oil, grains and metals.
The S&P Global purchasing managers' index showed a sharp contraction in March in the manufacturing sector to the lows of 2022, amid a decline in production volumes and orders due to weak domestic and external demand.
Economists in a Reuters poll last month predicted that GDP growth would slow to 1.7% in 2025 from 4.1% in 2024. The economy ministry forecast 2025 growth of 2.5%, compared with a central bank prediction of 1-2%.
President Vladimir Putin urged his economic officials last month not to freeze the Russian economy as if it were in a "cryotherapy chamber" with their tight monetary policy, which many analysts interpreted as a call to start an easing cycle.
"Delay is not death, but it is akin to a recession," said Anton Tabakh, an analyst from the Expert RA rating agency.