Drones Against Recession: Industrial decline has become almost universal, but three military sectors and consumer demand are keeping the economy afloat

Economists are divided on whether the Russian economy has entered a technical recession. The answer to this question depends on the methods of seasonal adjustment applied. Simpler approaches suggest that, in the second quarter, the economy showed meagre growth of 0.2%. This means recession could only be declared if the economy were to contract in both the third and fourth quarters, i.e. not before February 2026.

Meanwhile, following a spike in May, industrial output declined in June and July. The defence sector now offsets the decline in civilian industries to a lesser extent. The extractive sector is shrinking by 2.3% year-on-year. By industry, the downturn in manufacturing has become almost across the board: of the 20 main branches, only four are showing growth, three of which are directly linked to defence production.

The only sub-sector showing not merely expanding but actually accelerating is aircraft manufacturing. Due to the ramp-up in drone production, output in this sector has doubled since July last year. By contrast, the production of heavy military equipment is likely to decline. In the reality of drone warfare, such hardware is proving virtually redundant.

Business surveys suggest that conditions are better in consumer industries and services. Consumer demand continues to support the economy. Lending also resumed its growth in both the second and the beginning of the third quarter. However, the financial position of enterprises is worsening, and their own funds remain the principal source of investment. Another negative factor in the third quarter will be a reduction in government economic support programmes.

The main problem for the ‘soft landing of the economy’, as President Putin has described these processes, remains that, against the backdrop of falling national income and shrinking budget revenues, military spending continues to be prioritised and protected. This means the imbalance in resources diverted in recent years from the civilian to the military sector is not being reduced. Yet this very imbalance is the trigger of macroeconomic instability.

Seasonality vs. recession

The Russian economy is teetering on the brink of recession, although Vladimir Putin refuses to acknowledge this, and the very word is treated as almost a sign of disloyalty. The non-existent term ‘technical stagnation’, used by Sberbank CEO German Gref to describe the state of the Russian economy, refers to both of these circumstances – the uncertainty of the picture and the undesirability of the word ‘recession’.

The question of whether the Russian economy is in technical recession (GDP falling compared with the previous period for two consecutive quarters) has become the subject of debate among economists. According to Rosstat, after GDP grew by 1.35% year-on-year in the first quarter, growth slowed to 1.1% year-on-year in the second. Rosstat did not publish an estimate of sequential dynamics (quarter-on-quarter changes adjusted for seasonal factors). According to estimates by Raiffeisenbank analysts, the Russian economy managed to avoid recession: in the first quarter GDP fell by 0.3% compared with the fourth quarter of 2024, but in the second it rose by 0.2% compared with the first. The positive result in the second quarter was secured by the unexpected industrial surge in May.

At the same time, according to calculations by VEB’s Institute, the economy contracted by 0.6% in both the first and second quarters compared with the preceding quarter, meaning recession has already set in. These figures accidentally leaked to the press, while the official review containing them never appeared on the Institute's website. The difference in estimates is due to the more complex methodology for calculating seasonality used by the VEB Institute; as a result,its estimates often turn out more pessimistic than the official ones. They are, however, supported by a number of independent analysts, some of whom believe that the downturn was even deeper (–1.2% and –0.5% respectively), fully offsetting the abnormally high growth in the fourth quarter of 2024.

Rosstat’s seasonal adjustment methodology is closer to that used by Raiffeisenbank analysts. Therefore, the unexpected industrial spike in May, which ensured a tiny plus in second-quarter GDP estimates, will allow Russian economic officials and Vladimir Putin to avoid the awkward word 'recession' at least until early 2026 (when the results of the fourth quarter will be published), even if the economy declines in the third quarter.

Drones broke through the downturn

As Rosstat has not yet published a detailed estimate of second-quarter GDP, industrial dynamics remain the main indicator of real trends in both the second quarter and the start of the third. According to Rosstat, after the slump at the start of the year and the unexpected May surge, industrial output declined in June and July compared with the previous month, by 1.6% and 0.4% respectively (seasonally adjusted).

Industrial production according to Rosstat, 2024–2025, % compared to the previous month, seasonality removed

According to calculations by the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), and the Higher School of Economics (HSE), relative to the average monthly level of 2021, the industrial production index in July stood at 109.9 points, down from 112.2 in May and the peak of 112.3 in December. The downward trend is clearly visible in Rosstat’s aggregated data, although blurred by the spike in April–May. In the 'civilian' industries, after a period of stagnation or weak growth from summer 2023 through to the end of 2024, a distinct downward trend has also emerged over the past six months. The two trajectories – industry as a whole and civilian sectors – show that the contribution of the defence sector to total output has also begun to decline somewhat.

Industrial production volume according to Rosstat data, CMASF and HSE estimates, 2021–2025, seasonality eliminated, 2021 = 100

Although the surge in May slightly offset the depth of the decline from the peak output levels of December 2024, the sectoral range of contraction has, on the contrary, widened. Over the first seven months of the year (January–July), industrial production as a whole rose by a minimal 0.8% compared with the same period in 2024. At the same time, the extractive sector has shown a pronounced and persistent downturn in 2025: –2.3% over January–July. Out of the 20 main branches of manufacturing, 14 reduced their output in January–July year-on-year. In the first five months (January–May), there had been 12 such branches. Production of textiles (–1.7% year-on-year) and of chemicals and chemical products (–0.1% year-on-year) have now also slipped into negative territory. A year ago, 18 branches were showing growth. In the first seven months of this year, output increased only in pharmaceuticals, fabricated metal products (up 18% versus a 39% rise last year), 'other transport equipment' and 'computers, electronic and optical products'. Growth in petroleum products (+0.9%) looks highly unstable and is likely to give way to contraction in August–September (→ Re:Russia: Summer Infrastructure Offensive). Thus, whereas at the end of the first five months it was still possible to speak of a narrowing growth zone in industry and an expanding contraction zone (→ Re:Russia: A Broad Front And Narrow Spots), the downturn has now become virtually across the board. Three of the four growing subsectors, all strongly linked to military production, delivered a 3.3% increase in total manufacturing output over the seven months.

The only sector in which output growth is not merely being maintained but accelerating is 'other transport equipment', which includes UAVs (code 30.3 – 'Aircraft manufacturing'). Over the first seven months of this year, output in the sector increased by 32%, and in the 'aircraft' subsector by 59%. Compared with July 2024, output in the sector was up by almost 50%, and in the subsector by 99%. By contrast, growth in another military industry – 'fabricated metal products' – which had been one of the main drivers of manufacturing since the second half of 2022, has slowed sharply. This appears to reflect changes in the nature of combat: heavy equipment has at this stage proved almost useless against the wall of drones (the sharp slowdown in Russia’s military hardware losses has been noted by the publication Vazhnye Istorii (Important Stories), based on data from the OSINT project Oryx). Drones, meanwhile, have become the primary tool of warfare for both sides.

The pros and cons of the third quarter and the economic downturn

The Central Bank's economic surveys allow for a more detailed picture of sectoral business activity dynamics. Across the economy as a whole, current actual assessments of the business climate have deteriorated sharply: the three-month summer average stood at –4.5 points versus +4 in the same months of last year; in September the index dropped to –6.4 points, according to preliminary data from the Central Bank. Comparing business activity indicators with the crisis episodes of the past 10 years shows that the situation in extraction, construction and trade is close to crisis levels (see table). In manufacturing it differs markedly: in investment and intermediate goods production the situation looks crisis-like (worse than in the two previous downturns), while in the consumer segment the assessments, though in negative territory, appear substantially better. In services, the balance of assessments is hovering around zero. Thus the consumer sector and private consumption as a whole are partly offsetting the deterioration in the investment and export sectors. The present economic slowdown is taking place against a backdrop of rising real disposable incomes and a strengthening rouble, which sets it apart from classical recession episodes in Russia.

Indicator of actual business activity by sector, 2015–2025

The second anchor holding back the decline is lending. According to the Central Bank, after near-zero dynamics in the first quarter, in the second the volume of banks’ claims on companies grew moderately, by 2.4% quarter-on-quarter, or 2.2 trillion roubles. Both loans (+2%, or 1.7 trillion) and investments in corporate bonds (+9.2%, or 0.5 trillion) increased. Growth in corporate lending was driven mainly by property developers (0.7 trillion): they are less sensitive to the Central Bank’s key rate, since the rates on their loans depend on inflows to escrow accounts and average 10.7% compared with a market rate of 19%. Oil companies also actively borrowed, primarily to finance current operations (0.4 trillion). In July and August, corporate lending continued to grow, according to Sberbank's reports. Moreover, in August there was a fairly sharp acceleration: up 2.1% month-on-month (0.59 trillion) after a 0.9% rise in July (0.25 trillion). (It is noteworthy that this surge came immediately after Putin’s meeting with Gref on 29 July.)

Thus, after a decline in the first quarter, lending began to grow again in the second quarter, albeit at a slower pace than in 2024. According to Egor Susin, the author of the Telegram channel ‘TruEcon’, total growth in corporate lending could have accelerated from 0.67 trillion roubles in July to 0.97 trillion in August. This should provide some support to output in the third quarter. However, this positive impulse will be offset by a negative factor – the worsening financial position of companies.

In the first half of 2025, according to Rosstat, the consolidated financial result (profit minus loss before tax) of large and medium-sized enterprises amounted to just over 13.1 trillion roubles, which is 8.4% less than a year earlier (and in 2024 it had also fallen compared with 2023). In absolute terms the decline came to 1.2 trillion. At the same time, the tax burden in 2025 increased, meaning that the funds left at companies’ disposal will be even smaller. It is these funds, rather than bank credit, that remain the main source of investment. In the first half of the year, according to Rosstat estimates, fixed capital investment grew by 4.3% in annual terms (compared with 11.2% in the first half of 2024). Meanwhile, June-on-June inflation reached 9.4%, which means that in constant prices the volume of investment fell by almost 4%.

Finally, another challenge for industry will be cuts to government programmes supporting the economy. These will obviously hit the non-military sector first and foremost. And this lays bare the central problem of the 'soft landing of the economy', as President Putin calls it. Formally, a slowdown in the economy or even its shift into contraction brings actual growth rates closer to potential, thereby easing overheating. Yet against the backdrop of a cycle of shrinking national income and falling budget revenues, military spending remains a priority and is protected. This means that the imbalance in resources reallocated in recent years from the civilian to the military sector is not being reduced. And it is precisely this imbalance that serves as a trigger for macroeconomic instability.