Man-made Slowdown or Crisis in The Air: What the results of 2025 say about the economic dynamics of 2026

Vladimir Putin described the slowdown in Russian economic growth to 1% in 2025, following an average of 4.5% over the previous two years, as ‘man-made’, implying that the economy’s potential is substantially higher and that the drivers of its performance remain under the authorities’ control. In other words, the sharp deceleration is presented not as evidence of intractable problems that could herald a crisis after a period of ‘war overheating’, but as a deliberate adjustment.

Rosstat data indicates that GDP growth slowed down over the course of the year, although a noticeable uptick at year end, primarily in manufacturing, improved the final figures. Overall, more than half of annual GDP growth was generated by expansion in manufacturing and in the sector classified as ‘Public Administration and Military Security’.

More broadly, the defining feature of the economy in 2025 was its split into two zones: a zone of growth and a zone of decline. At the level of economic activities, nine fall into the former category, five into a zone of stagnation and six into decline. In industrial production the picture is markedly worse: almost 70% of sub-sectors recorded falling output, while growth was concentrated almost exclusively in a narrow group of industries geared towards the needs of the front. At the same time, amid budgetary constraints, the state reduced its own investment in civilian production, redirecting resources towards military purposes.

A significant structural shift also occurred in 2025: the share of wages in GDP rose noticeably, while the share of gross profits declined. This implies that companies’ investment resources, which are financed predominantly from retained earnings, will continue to shrink next year in the context of compressed profitability. The same applies to public investment. The government intends to economise by reducing expenditure in real terms and may be compelled to do so on an even larger scale than envisaged in the current budget plan.

Taken together, all this means that investment resources in non-military sectors will continue to contract, while borrowed funds will remain largely inaccessible. In other words, the factors driving the compression of sectors already in decline are likely to intensify rather than ease, contrary to the official narrative of a ‘man-made slowdown’. The Russian economy does not, at least at present, possess the resources to sustain both military spending and output at their current levels while also maintaining economic growth.

Man-made slowdown or crisis in the air?

The Russian economy grew by 1% in 2025, according to Rosstat's preliminary GDP estimate in early February. Although this is far below the average annual growth of 4.5% recorded over the previous two years, the outcome can nonetheless be regarded as a political success for the authorities. It was no coincidence that President Putin himself was the first to announce the figure (he had, however, already predicted it in December during his ‘direct line’ televised phone-in).

Six months ago, lively debate centred on whether the Russian economy had entered a technical recession (→ Re:Russia: Drones Against Recession). In August 2025, the authors of the influential Telegram channel MMI and VEB chief economist Andrei Klepach argued that output had contracted quarter on quarter in the first and second quarters of 2025. By the end of the year, however, assessments had become more optimistic. Analysts emphasised that corporate lending had not stalled and that economic activity remained in positive territory. The Institute for Research and Expertise at VEB, which held the view that there was a recession in the first two quarters, noted an acceleration in economic activity in September, and the latest data from Rosstat indicates a significant jump in industry in December.

Announcing the 1% growth figure, Vladimir Putin stressed that the slowdown was ‘man-made’, a deliberate move to curb inflation. The central narrative advanced by Russia’s economic authorities is that the economy is undergoing a phase of managed cooling, a soft landing following the overheating of previous years. This implies a return to firmer growth in due course. In early January, Putin instructed the government and the Central Bank to present a programme for accelerating growth by June, reinforcing the message that economic dynamics remain firmly under control.

In reality, this question forms the central intrigue of 2026. Is the sharp deceleration of 2025 genuinely a deliberate manoeuvre to suppress inflation, to be followed by renewed growth, as the authorities suggest? Or is it a sign of an impending crisis in the war-driven ‘Putinomics’ model after two years of artificially sustained expansion?

There is little doubt that the Central Bank’s exceptionally high policy rate was a key factor behind the slowdown. Yet it is not entirely accurate to describe the deceleration as manufactured. The Central Bank was compelled to raise its key rate to 21% after nearly eighteen months of struggling with accelerating inflation, during which more modest increases had failed to produce results. The inflationary pressure to which the Bank responded stemmed from structural imbalances linked to budget driven stimulus of domestic demand. The question, therefore, is whether the slowdown of 2025 has brought the economy closer to correcting these distortions and whether it can retain growth potential as fiscal stimulus weakens. The answers are closely tied to how the economic results of 2025 are interpreted.

Drifting ice floes

Rosstat has published its GDP estimate in year on year rather than sequential terms. Over the course of the year, annual growth steadily decelerated: 1.4% in the first quarter, 1.1% in the second and 0.6% in the third. In the fourth quarter, as in the previous year, the economy picked up somewhat, primarily due to manufacturing, where growth reached 7.8% in December. By contrast, over the preceding eleven months, average output growth year on year had been around 3%.

Manufacturing played a decisive role in supporting GDP over the year as a whole. By sector, growth was driven by manufacturing, which expanded by 3.9% over the year, and by public administration and military security, which grew by 4.8%. These are two heavyweight sectors, together accounting for nearly a quarter of gross value added at 24%, and they generated roughly 60% of total growth in 2025. Financial services and construction also made positive contributions. By contrast, the economy was dragged down by two other ‘heavyweight’ sectors (which together account for 20% of GDP): mining, down 1.7%, and wholesale and retail trade, down 1.1%. Mining output has now declined for a third consecutive year, standing at 96% of its 2022 level, a situation not seen in Russia since the early 1990s. Although detailed data on oil and gas production remains classified, it is reasonable to assume that the gas industry in particular is weighing on the sector following the cessation of pipeline exports to Europe. However, in early 2026, there were reports that oil drilling was also declining.

In simplified terms, state demand in manufacturing and public administration is pulling the economy upwards, while weak private and external demand is dragging it down. Across twenty broad categories of economic activity, nine recorded growth of more than 1%, five stagnated within a range of 99–101% of the previous year’s level, and six contracted by between 1% and 3.7%. This is revealing. Compared with the previous two years, one of the defining features of the Russian economy in 2025 was its growing bifurcation under adverse macroeconomic conditions, notably the exceptionally high policy rate, into two segments — one growing and one shrinking.

Jump and squat

The December surge in output has now occurred for a second consecutive year. According to Rosstat, it is most pronounced in industrial production and, more specifically, in manufacturing. Over the first eleven months, manufacturing expanded by 2.6% compared with the same period of 2024. Including December, the full year result improved immediately to 3.6%. In 2024, manufacturing had grown at an average rate of around 8% during the year, yet output in December leapt to 14% above its level of the previous December. A comparable December spike had previously been recorded only in the pandemic year of 2020, when fiscal stimulus also played a major role in sustaining economic activity.

Experts have put forward two main hypotheses regarding the nature of the year-end jumps. Some argue that they are driven by a seasonal increase in public expenditure, a view reflected in analysis by Finam, while others suggest that the phenomenon is linked to the statistical reporting practices of enterprises working on state defence orders, which are required to close their annual production targets at year end, as noted in a review by the Institute for Economic Forecasting of the Russian Academy of Sciences. The first explanation appeared plausible last year but finds less support in 2025. Between 2022 and 2024, the authorities made extensive use of advance payments to military producers, with 41 to 44% of total annual budget expenditure disbursed in the final quarter, October to December. In 2025, however, faced with a widening deficit, the government began to exercise restraint. Spending in October to December accounted for just 36% of the annual total, only slightly above pre-war levels in 2019 and 2021, when the corresponding share was 34%. This lends greater weight to the second hypothesis: the December surge reflects enterprises closing their annual plans, predominantly in the defence sector.

As illustrated by Figure 1, the December jump leads to a sharp increase in the gap between civilian and military production at the end of the year. At the same time, according to estimates by economists at the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) and the Higher School of Economics, once industries with a high defence component are excluded, the industrial production index displayed a clear downward trend throughout 2025. In other words, rising output in the military sector, particularly evident at the end of the year, was accompanied by contraction in the civilian sector, the main effect of which was concentrated in the first half of the year.

Figure 1. Dynamics of overall industrial production and ‘civilian’ industries, 2021–2025, seasonality adjusted, 100 = average monthly value for 2021

Quantitative growth or qualitative decline?

The division of industry into two sectors — growing and declining — began as early as 2024. Over the course of 2025, the zone of growing industries and sub-sectors steadily narrowed, while the share of those in decline expanded, as shown in Figure 2. Out of 93 principal industrial industries and sub-sectors, 63 were recording growth at the end of 2024, 10 were stagnating and 20 were contracting. More than two thirds of sub-sectors therefore fell into the growth category at that point. By March 2025, however, the growth zone had shrunk to roughly one third of sub-sectors, while the contraction zone had widened to 60%. In the second half of the year, the growth segment narrowed still further. Only 20 sub-sectors continued to expand, while around 70 were in decline.

Figure 2. Distribution of industrial sub-sectors across categories of ‘growth’, ‘stagnation’ and ‘decline’, 2024–2025, %

The principal driver of this ‘splitting’ of industry is clearly the source of financing. Under conditions of an exceptionally high policy rate, growth is sustained almost exclusively in activities with access to state orders or subsidies. Therefore, as shown by detailed data from Rosstat, the split is visible not merely at sectoral level but down to sub-sectors and individual product categories. Whereas in 2024 a broad front of public demand still generated spillover effects into adjacent industries, the picture in 2025 is different. Amid selective fiscal restraint, the government has curtailed funding for parts of the civilian economy while simultaneously reallocating resources towards military production.

For example, the 32% annual increase in ‘other transport equipment’ reflects a combination of rapid growth in aircraft production, up 56%, and a sharp contraction in railway engineering, down 22%. On the one hand, the government has generously financed the production of unmanned aerial vehicles. On the other hand, cuts to the investment programme of the Russian Railways investment programme have reduced locomotive procurement by almost 30%. Output of fabricated metal products rose by 18% overall. Yet this aggregate figure conceals strong growth in military related items, specifically ‘fabricated metal products not elsewhere classified’, up 31%, alongside contraction in civilian segments. Production of structural metal products for construction fell by 6%, metal tanks and reservoirs by 16%, and metalworking services by 11%.

A third leading sector closely associated with the defence industry, computers, electronic and optical products, expanded by 12%. Within this category, however, the production of computers and components declined by 14%, while output of semiconductor devices more than doubled and that of radar and radionavigation equipment increased by 59%. Beyond these three predominantly military driven sectors, robust growth was recorded in pharmaceuticals and medical materials, up 15%, with output of pharmaceutical substances more than doubling. It is difficult to disentangle purely civilian demand here, given the scale of military related medical needs – the number of wounded on the Ukrainian front is estimated at hundreds of thousands of people per year.

By contrast, several large-scale manufacturing branches are either stagnating at a symbolic level or experiencing mounting decline. Food processing and refined petroleum products stood at 99.6% of their 2024 level, chemicals at 99.2%, metallurgy at 97.9%, and machinery and equipment at 93%. Thus, it can be argued that, in economic terms, that industry appears to be on a trajectory of near broad-based but sluggish decline, which is quantitatively offset by rising output in a narrow segment oriented towards military demand. Under such conditions of structural bifurcation, the final assessment of aggregate growth rates will depend to a significant extent on the deflators used to estimate real output across industrial sectors.

Table 1. Industries and sub-industries with the highest growth and decline rates, 2025, % of 2024 level

Sources of financing and the growth dilemma

2025 was not only a year of quantitative slowdown or stalled growth, but also a pronounced structural shift with direct implications for the economy’s growth potential in 2026. Rosstat's breakdown of GDP by income components reveals a sharp rise in the share of labour compensation and a corresponding decline in the share of gross profits. Between 2021 and 2024, labour compensation accounted for around 41% of GDP, while profits exceeded 50%. In 2023 and 2024 the labour share edged up slightly, yet profits still stood at approximately 49%. In 2025, however, the profit share fell to 44%, while labour compensation rose to 48%. This means that the profits available to enterprises and their financial results deteriorated last year.

Figure 3. GDP structure by source of income, 2019–2025, %

Meanwhile, the underdevelopment of the Russian capital market means that enterprises' own funds are becoming the principal source of investment (the high refinancing rate further exacerbates this effect).On average over the past twenty years, internal funds have accounted for around 50% of total investment and in recent years for about 55%, according to Rosstat. As we have noted previously, strong corporate financial results in 2021 and 2023–2024, combined with rising budgetary and quasi state investment in 2022–2024, produced a form of investment boom in 2021–2024 (→ Re:Russia: After The Boom). Thus, the share of the budget in total investment rose from 16.6% in the pre-pandemic period to 19.4% in the pandemic and wartime period. As a result, average annual investment growth increased from 4.1% in 2017–2019 to 8.4% in 2021–2024. The highest rates of investment growth in the Russian economy have tended to occur when strong corporate financial performance coincides with an expanding fiscal stimulus. This was precisely the situation in 2023–2024.

In 2025 the trend began to reverse. Corporate financial results deteriorated for a second consecutive year and the fiscal impulse contracted sharply. The government cut investment programmes and capital spending, in practice concentrating resources largely on the military sector. In 2026 these trends are set to continue and are likely to intensify.

Industries without budgetary support are experiencing a decline in output, which will lead to a decrease in turnover and pre-tax profits. An additional burden on corporate finances will come from the increase in the VAT rate. At the same time, the draft budget for 2026 envisages growth in expenditure of 2.9%, while the latest Central Bank forecast places expected inflation in the range of 4.5–5.5%. In other words, even the planned increase in spending will be one and a half to two times lower than inflation, implying a reduction in real terms. In practice, the execution of the budget parameters is subject to considerable uncertainty. The actual oil price in 2026 could be 20–30% below the level assumed in the budget. As a result, the fiscal investment impulse is likely to weaken this year, especially if military operations continue. In that case, the government will be forced to reallocate resources even more actively from the civilian to the military sector.

At the same time, the Central Bank's rate cut, although significant in nominal terms from a peak of 21% to a projected average of 14% in 2026, will prove far more modest in terms of the effective cost of money. The rate cut is occurring in parallel with declining inflation. As a result, the real rate, defined as the nominal rate minus inflation, will fall more slowly, from 13.6% in 2025 to around 10% in 2026 if the Central Bank’s forecast materialises. This will not allow companies to expand borrowing substantially.

Thus, behind the 1% GDP growth lies a balance of opposing dynamics between expanding and contracting segments of the Russian economy. The factors driving contraction in the sectors already on a downward trajectory are likely to strengthen further in 2026. The slowdown in 2025 does not, in any case, create the conditions for a return to natural growth in 2026. The Russian economy appears to lack the resources to sustain military spending and production at their current level while simultaneously preserving growth incentives in the civilian sector.