(Bloomberg) -- Growth in Russia’s wartime economy has passed its peak after overheating in the first half of the year, according to analysts, even amid robust military production to support the ongoing war in Ukraine.
“The peak for growth was passed most likely in the middle of this year,” said Oleg Kuzmin, an economist at Renaissance Capital in Moscow. “What next year’s growth trajectory will be is an open question — whether it will be a ‘soft’ or ‘hard’ landing for the economy,” he said.
Military production, which drove the breakneck gains in recent quarters, continues to expand, but not by enough to offset declines in other sectors of the economy, the Bank of Finland Institute for Emerging Economies said in an October report. On Tuesday, the International Monetary Fund downgraded its forecast for Russia’s economy and now sees growth in 2025 at 1.3% as opposed to 1.5% earlier.
Russia’s manufacturing purchasing managers’ index in September moved into contraction territory for the first time since April 2022, according to S&P Global. The economy in August grew at an annual rate of 2.4%, mostly due to a delay in the harvesting period, Russia’s Economy Ministry said this month. That was the slowest since the recession immediately following President Vladimir Putin’s 2022 invasion of Ukraine.
The slowdown in growth outside the military-industrial sector underscores the continuing entrenchment of Russia into a war economy. The country quickly recovered in 2023 from the post-invasion recession, expanding its economy at an annual rate of 3.6% fueled by defense-related spending. Now there’s a real worry greater military production could come at the expense of civilian sectors.
Industrial production in September expanded by an annual 3.2%, compared to 2.7% in August, according to data from Russia’s statistical agency released late Wednesday. That included significant jumps in categories for the production of defense-related output. The figures matched the median forecast of five economists surveyed by Bloomberg.
Russians already face crisis-level interest rates, and on Friday the central bank could hike its benchmark to 20% — as high as in the weeks after the start of the invasion — as it tries to tamp down inflation. Any downturn in the economy could risk exposing consumers to the kind of economic pain from which they’ve mostly been shielded amid the punitive measures the US and its allies continue to impose.
The Bank of Russia warned in a recent report that economic growth in the third quarter was progressing at a more moderate pace than in the first half of the year. The economy is almost at its full production potential, the bank said.
To be sure, the central bank forecasts growth this year at 3.5%-4%, a level that would arouse envy in many countries. Russia this year has been trying to slow down its overheating economy as resources needed to boost production are nearly exhausted.
According to BOFIT, growth is expected to slow down in the second half of the year due to production constraints and a “stretched labor supply,” before further decelerating in 2025 and 2026 to around 1% annually.
What Bloomberg Economics Says...
Indicators suggest that Russia’s fiscal-impulse-fueled growth is past its peak. Construction and transport services have flat-lined since the start of 2024 as mortgage rates started to soar, while transport has hit capacity constraints. Military-related manufacturing continues to expand, but since May hasn’t been able to offset the decline in the “civilian-demand” driven sectors, leaving overall industrial production flat.
— Alex Isakov, Russia economist
Bloomberg Economics’ composite tracker of economic activity, which distills around 60 core indicators of the health of Russia’s economy, suggests that activity has been softening steadily since late 2023. That means that after two years of roughly 3.5% growth, the economy will likely slow to around 1%-2% in 2025, Bloomberg Economics’ Russia economist Alex Isakov said.
“Manufacturing growth has slowed recently, indicating that capacity constraints are beginning to bite,” according to Tatiana Orlova, an economist at Oxford Economics. An increase in investment is needed to maintain growth, but that’s “unlikely given the prohibitive level of the CBR policy rate.”
Investment is only likely to continue at such high levels for industries directly involved in the war effort, according to BOFIT.
“In the longer run, Russia’s growth prospects were bleak already before the full-scale invasion,” said Anders Olofsgard, an associate professor at Stockholm Institute of Transition Economics. They “now look even bleaker.”
(Updates with September industrial production data in the sixth paragraph.)
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