A pre-crisis atmosphere: Four Russian economic sectors set to buckle first under high interest rates and falling demand

The boost from defense spending is no longer enough to prop up Russian industry. Economists are observing stagnation in the country’s overall economy, while non-military sectors are actively shrinking. Soon, the consequences of the war won't just be visible in dry statistics, but will be felt in everyday life. Car manufacturing, railway and farm equipment production, construction, and steelmaking are the first in line to take the hit from high interest rates and dwindling consumer demand. In turn, trouble in these key areas threatens to freeze wages and push unemployment higher.

• 1.Cars hitting the brakes
• 2.Machine tools, railroad cars, and combines feeling the heat from high interest rates
• 3.Construction stalled without subsidized loans
• 4.A bleak year for steelmakers
• 5.Not all industries are created equal

RU

The surge in Russian industry, fueled by government contracts for the military-industrial complex, is running out of steam. February's statistics paint a stark picture: according to Rosstat, production barely moved, inching up just 0.2% compared to February 2024 and 0.4% compared to January 2025 (even accounting for fewer days and seasonal effects).

This is a dramatic slowdown from January's 2.2% growth (year-on-year) and a far cry from the notable 5.9% seen in the last quarter of 2023. Put simply, the pace of Russian economic growth has slowed dramatically over the past year.

Furthermore, even the meager growth seen in February relied on just two things. First, the typical February cold snap across Russia boosted heat and power generation, as noted by the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). Second, growth continued in sectors dominated by defense contractors. Economists estimate that without these factors, industrial output would have actually fallen by 0.4-0.5% in February compared to January. In other words, the increased production of «finished metal products» (often defense-related) can no longer mask the decline in everyday goods like yogurt and shoes.

Growth in military-related goods no longer compensates for falling yogurt production

Industry overall has been stagnant for months, with civilian sectors showing weakness since mid-2023. The critical question now is: will this stagnation turn into a prolonged slump, and if so, where will it hit hardest?

The outlook for consumer goods and several key non-military industries looks grim. Clothing and footwear factories, once tipped to lead import substitution after Western brands’ departure, saw production shrink by 0.5% in February and 1.8% over the first two months of the year. Food production dipped by 3%, while beverage output collapsed by a staggering 11.3%.

At the same time, mandated OPEC production cuts and the halt of gas exports via Ukraine led to a nearly 5% drop in mining and resource extraction compared to the previous year.

Cars hitting the brakes

The automotive industry, a cornerstone of the civilian economy, is bracing for a downturn. Russian car production was devastated in 2022 after the full-scale invasion triggered a mass exodus of foreign companies. Output crashed by almost 70%, with only 450,000 passenger cars being made that year.

While establishing supply chains for necessary components allowed for a partial recovery (up 19% in 2023 and showing strong early 2024 growth), the picture is darkening again. In the first two months of 2025, passenger car output was up 13%, but truck production fell 20%, and bus production plummeted 42%. Overall, vehicle manufacturing showed a decline in early 2025 — -8.3% in January, followed by -7.5% in February.

Production follows demand, and sales are struggling. The market seemed to recover in 2024, reaching 1.57 million cars sold — up 48% from the 2022 low. Back then, rising incomes and a surge in car loans — fueled by subsidies and special programs despite the high key interest rate — created a temporary boost. However, analysts at CMASF note that the decline actually began setting in towards the end of 2024.

Consultancy Oks Labs offers bleak forecasts for 2025: new car sales are projected to fall 11% in a baseline scenario (to 1.39 million units) and potentially plunge 22% in a more pessimistic case (to 1.23 million). Even the most optimistic outlook predicts a 1% drop (to 1.55 million cars).

First-quarter sales already dropped 25%, according to AvtoVAZ — the maker of LADA, whose own sales fell a less severe 17%. Company president Maxim Sokolov described the March market decline as «dramatic,» confirming expectations of a significant market contraction for the full year.

Passenger car sales slumped 25% in the first quarter

The reasons for this downturn are systemic. Inventory Glut, mean dealerships are overflowing, with an estimated 700,000 unsold cars sitting on lots. Rising prices due to an expected increase in the vehicle utilization fee are putting cars further out of reach. And higher interest rates resulting from the Central Bank's policies continue to stifle demand, making loans and leasing prohibitively expensive.

As CMASF economists noted in March, consumer spending dipped in January, potentially signaling «a direct risk of market contraction due to the crisis in consumer lending.» Notably, this dip was largely driven by the slump in car sales.

Adding to the pressure, Russian automakers face intense competition from Chinese brands, which are hesitant to invest in local production, preferring to avoid risk while ramping up imports. Falling freight volumes are hurting demand for trucks, and reported issues with the quality of some Chinese-made models further complicate matters.

A Chinese truck

Commercial vehicle manufacturers report sales drops averaging 70%, with warehouses full of unsold stock sitting idle due to decreased shipping demand, market insiders reveal.

A downturn in the auto industry creates a domino effect, pulling down related sectors from component suppliers to service centers. The shrinking market inevitably hits dealerships (some in Moscow are already bracing for closures) and threatens the livelihoods of industry workers through pay cuts or job losses.

Machine tools, railroad cars, and combines feeling the heat from high interest rates

Crisis signs are spreading to other areas of civilian engineering. Production of electrical equipment dropped by 2.6% in February after falling 9.1% in January, and machine tools fell by 9.2% in February following a 2.3% decline in January. The Rollingstock Agency (RSA) predicts a 25% cut in freight wagon production in 2025, down to 55,400 units. This downward trend began in late 2024, and analysts believe the sector could shrink by 3-5% overall, primarily because high interest rates have killed demand for wagon leasing.

Agricultural machinery producers face the same headwinds. Shipments are falling, and 2025 could be the worst sales year since 2022. The combination of the Central Bank's punishingly high rates, low farming profits, inadequate government support, and rapidly rising production costs is choking off investment in new equipment — a point on which manufacturers, farmers, and industry experts unanimously agree.

There is also widespread concern that higher utilization fees will make imported machinery even more expensive, further depressing demand across the agricultural sector. Sales are forecast to drop 10-15% this year, and the Rosspetsmash association sees no signs of improvement. For tractor and combine dealers, 2025 is shaping up to be the toughest year in a decade.

For tractor and combine dealers, 2025 risks being the toughest year in a decade

Construction equipment manufacturing might also decline. As infrastructure projects are put on hold, the need for road-building machinery decreases, explained Alla Elizarova, director of the «Rosspetsmash» association.

Construction stalled without subsidized loans

The construction sector, long a driving force of the Russian economy — by boosting macroeconomic figures, attracting investment, and creating jobs both directly and indirectly — is also grappling with the unfavorable economic environment. With mortgage rates soaring in 2024 and popular subsidized loan programs curtailed, a large chunk of potential homebuyers can simply no longer afford housing. This has inevitably slowed down new construction and, consequently, reduced demand for building materials, a trend already being felt by producers.

Experts anticipate a 3-5% drop in construction material production in 2025. If interest rates stay high, developers could slash new project starts by a drastic 30-35%. This would lead to a sharp fall in completed apartment buildings by 2027, with material producers feeling the pain as early as 2026, according to Alexey Zimin of Knauf Gips.

A bleak year for steelmakers

This year looks set to be particularly tough for the ferrous metallurgy sector, which relies heavily on the construction industry — its single biggest customer, surpassing even the defense industry's demand for steel.The slowdown in housing growth has already dampened demand and reduced steel output in 2024.

External factors are also biting. Russian steel production far exceeds domestic needs, making exports crucial. After the EU, a key market, banned imports of Russian steel products in 2022, companies scrambled to find new buyers, but this attempted reorientation hasn't fully compensated for the lost European market share. Furthermore, demand from Asian economies, the new focus for exports, has also weakened. The result: Russian steel exports fell 8% in 2024, and production dropped 7%.

In the first two months of 2025, steel mills produced less than they did a year ago, reports the TsNIIchermet Analytical Center, which forecasts a 2% overall decline for this year.

Industry insiders describe the situation as tense. One tactic to mask the problem is scheduling extended maintenance shutdowns, hoping market conditions improve. Yet few experts expect a quick recovery. While large-scale closures aren't anticipated, companies burdened with high debt, like Chelyabinsk Metallurgical Combine, are most vulnerable, though they will likely find ways to adapt, suggests economist Natalya Zubarevich.

Not all industries are created equal

The stagnation gripping Russian industry is no longer just an abstract macroeconomic issue. While the decline extends beyond the sectors highlighted here by The Insider, these areas represent the core of non-military production — vital contributors to the growth of GDP, jobs, and innovation.

Mechanical engineering, for instance, acts as a catalyst for other sectors — including transport, energy, and agriculture. Its health is a barometer for the economy's overall resilience.

Historically, Russian engineering faced major downturns only twice in the past decade — in 2015 and 2022, and both instances were largely tied to geopolitical tensions and the exit of Western firms. Each time, the sector bounced back relatively quickly.

Indeed, after the 2022 corporate exodus slashed production by 5.9%, output surged 25% in 2023 and grew another 19.5% in early 2024 (Ministry of Economic Development estimate). This nearly 50% increase over two years fully offset the 2022 losses.

However, this recovery has been lopsided and is heavily skewed by the «budget impulse» — preferential treatment for defense contractors. Tax breaks, subsidies, and direct orders allowed the military-industrial complex to ramp up production despite headwinds like high interest rates and labor shortages. Statistics show significant jumps in «finished metal products» (up 22.5% year-on-year) and «other transport equipment» (up 33.6%) — clear indicators of the «everything for the front, everything for victory» focus.

But even the defense industry's resources aren't limitless. Production levels and growth rates are already stretched thin, and given the existing strained capacity and persistent labor shortages, the potential for further expansion appears uncertain at best.