Russia’s economy is cooling down

Hello! Welcome to your weekly guide to the Russian economy — written by Alexandra Prokopenko and Alexander Kolyandr and brought to you by The Bell. This week we look at Russia’s slowing economy, and why it isn’t causing headaches for Vladimir Putin. We also cover Moscow’s plans to curb the parallel import program, which has provided an abundance of consumer goods despite sanctions.

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Russia’s war-fuelled growth running out of steam

Russia’s economy is no longer overheating. Inflation and economic growth are slowing, and the labor market is not as tight as last year. The growth that remains in the Russian economy is concentrated in manufacturing — specifically the defense sector and related industries — and is being fueled by state spending. But for Vladimir Putin, who is consumed by the offensive in Ukraine, growth is not an end in itself. At least on a political level, a gentle slowdown will not be a big problem.

Que se passe-t-il ?

The overheating of Russia’s economy is coming to an end. Data for January and February, as well as consumer surveys for March and April, indicate economic activity is expanding — but at a slower rate than in previous quarters. Central Bank economists wrote about this in their latest analytical bulletin. Growth for the first quarter of the year is likely to be slower than it was during the final three months of 2024, when Rosstat reported year-on-year expansion of 4.5%.

There are several signs of a slowdown in Russia’s economy:

• Seasonally-adjusted inflation (SAAR) came in at 7.1% in March, while the three-month average was 8.3%, against 12.9% in the fourth quarter of 2024. Though it is true that the strengthening ruble has had a greater impact here than the fall in demand. Without the rising ruble, inflation in March and in the first quarter would have been closer to 10% SAAR, the Central Bank calculated. But there is still some visible cooling of demand in certain retail sectors, primarily consumer durables.
• Weekly inflation points to a steady slowdown. In the second week of April prices rose 0.11%, bringing total inflation so far in April to 0.27%. At the same time, we saw the biggest weekly decline in price indices for non-food goods over the past year.
• Credit dynamics are significantly down on levels seen in the first three quarters of 2024, due to higher interest rates hitting borrowing and the planned withdrawal of macroprudential benefits for banks. Part of the slowdown can also be explained by the traditional high budget spending on advance payments for state contracts at the start of the year. Central Bank analysts see that recipients are using these budget funds to pay back loans. In March, the federal budget ended with a positive balance of 530 billion rubles, while the rate of growth in the corporate loan portfolio shot up from 0.1% in February to 0.9% in March. The Central Bank explained these figures were due to the need for companies to pay taxes at the end of the first quarter. Accelerating corporate credit could be a pro-inflationary factor.
• The sell-off on global financial markets in March and April had a cooling influence on investment in Russian assets.
• The ruble is up almost 20% against the U.S. dollar since the start of the year. In March, the average dollar rate was 86.1 rubles, while the Chinese yuan was at 11.8 (February’s rates were 92.8 and 12.6 respectively). The ruble’s strength was powered by the thaw in U.S.-Russia relations, a weaker dollar in the face of a tariff war, the finance ministry’s currency sales under the budget rule, and a decline in imports. 
• The first quarter saw productive capacity utilization fall across the whole economy from 81% to 79%, with the greatest declines in construction, trade and logistics.
• There was a brief surge in demand in January, but by Feb-Mar growth in consumer spending was already heading down. The slowdown in consumption helped to reduce inflation in the first quarter. Businesses do not have high expectations: companies are cautious in their estimates of demand for the rest of the year. The preference for savings remains and wage increases are expected to moderate, all of which suggests that while demand will still increase in 2025, it will be sluggish.

What the figures say

In both the last quarter of 2024 and the first quarter of 2025, the main support for demand came from the state via contracts and increased advances. Now budget spending has normalized and its influence is weaker.

Dynamics in industry also point to a cooling of the economy. After a jump in output of 8.2% in Dec. 2024, linked to a sharp increase in state contracts, growth in industrial production slowed to 2.2% in January and 0.2% in February (though February’s figure is also a symptom of the calendar effect, as 2024 was a leap year).

The slowdown in output is largely due to a decline in extractive industries, which dropped 4.9% in February. The manufacturing sector was up 3.2%, with more than 60% of that growth coming from machine building. Overall, industry continues to stagnate, experts from the Center for Macroeconomic Analysis and Forecasting said in their latest report.

In the manufacturing sector there’s an ever greater gap between industries tied to the military-industrial complex and those that are not. Increased costs for parts and raw materials, the cooling of domestic demand and a labor shortage are holding back any increase in output, according to a Central Bank study.

Businesses are also getting more cautious. In the first quarter, Russian investment activity was notably lower than at the end of 2024, according to the Central Bank. The reasons were heightened uncertainty and a general slowdown in business activity. One of the biggest metals enterprises in the Far East said that due to falling domestic demand it would have to postpone part of its modernization program. 

Some companies explained weak investment trends by pointing to abnormally high levels in 2024. State defense orders and import substitution remain the key drivers of investment. In the Central Bank’s survey, a railcar construction plant in central Russia reported an increase in investment due to additional state demand, and a shipbuilding company in the south spoke of the need to increase capacity to meet the growing need for civilian vessels.

According to official forecasts, economic growth should slow this year from 4.1% to 2.5%. Late last year Vladimir Putin indicated that this is not a big concern for him. “As strange as it might sound, given the current macroeconomic realities, we don’t need this growth yet,” he said.

Pourquoi le monde doit-il s'en préoccuper ?

After three years of militarizing its economy, Russia is facing a slowdown. It’s currently looking like a soft slowdown, with no crash landing and a smooth moderation in the pace of growth. But we’re not talking about a transition to a prosperous peacetime economy. Russia’s economic model is not being rebuilt, it’s simply running out of steam. This delicate balance could be swiftly overturned. For example, inflation could surge again if government spending increases or corporate loans accelerate. External factors can also play an unpredictable role, particularly a global economic slowdown due to a US-China trade war.

Russia to target ‘parallel imports’

To support Russian manufacturers, the Russian authorities are preparing to significantly reduce opportunities for “parallel imports,” a process by which Russian retailers have been able to obtain Western goods, such as iPhones and Coca-Cola, even as the companies themselves have stopped shipping directly to Russia. Izvestia reported that the Trade and Industry Ministry is developing an order to limit parallel imports. At present, entire categories of goods — particularly consumer goods — can be imported through the scheme, but the new rules would tighten up categories and allow only specified brands.

What are ‘parallel imports’?

The system allows Russian companies to import foreign products without obtaining the permission of the license or rights holder. It was first developed in the final years of the Soviet Union. After foreign trade was liberalized, this was how critical flows of products found their way into the country. In effect, anyone could buy goods abroad and bring them into the country to sell on.

Gradually, this unregulated system became more orderly. Foreign producers began to sell their goods in Russia through approved partners, which reduced prices and helped combat smuggling and counterfeiting. When foreign companies left the Russian market en masse in 2022, that system of licensed franchises, local partners and direct sales came to an end. Facing the possibility of being cut off from various Western consumer goods — a move that threatened to spark popular discontent and surging inflation — Russian authorities turned once again to parallel imports. The trade ministry updates its list of permitted products and brands for importation without the foreign rights holder's permission quarterly. Now, for the first time, it’s about to cut that list significantly.

Why now?

The main reason Russia is targeting the scheme is to protect and stimulate domestic production, which faces competition from imports. This is increasingly important as the economy and demand slow. Another possible reason is to reduce capital outflows by cutting the overall level of imports. This could become necessary to support Russia’s balance of payments if oil prices enter a prolonged slump and the ruble weakens again. In that scenario, the existence of home-grown alternatives would limit inflation. A third reason could be a desire to civilize the Russian market and make it more attractive for the possible return of foreign companies.

Pourquoi le monde doit-il s'en préoccuper ?

Cracking down on parallel imports is largely a response to the economic slowdown and declining demand. But in the short term, it could lead to another rise in inflation. Due to sanctions and the war, Western brands are not rushing back to Russia. And even though the economy is cooling, it still faces a shortage of labor and capacity.

Protected from competition by a relatively strong ruble and ongoing stable consumption, local companies will find it hard to resist the temptation to raise prices. A similar situation occurred in 2014, when prices rose after Russia banned European imports. These are roughly the same reasons why economists expect inflation to go up in the United States as a result of President Donald Trump’s tariff war. In Russia’s case, the barrier is not a tariff, but bureaucratic prohibitions.

Chiffres de la semaine

The public’s inflation expectations in April climbed to 13.1% from 12.9% in March, but were still below the level of 13.7% recorded in February. At the same time, individuals’ estimates of the current level of inflation fell from 16.5% to 15.8%. The inflation expectations of businesses and the wider population are among the key factors that the Central Bank considers when deciding on interest rates. The next rate-setting meeting is scheduled for April 25.

The average term of mortgages has increased significantly. According to the Central Bank, in Feb 2025 the average duration of mortgages were up by five months to 209.8 months — almost 26 years. This is one of the highest levels ever observed. The rise of long-term borrowing is linked to rising real estate prices and high interest rates. To maintain a sustainable monthly payment, banks and borrowers are extending the term of the loan.

Between April 8-14, weekly inflation slowed from 0.16% to 0.11%. Annual inflation increased to 10.38% from 10.28%. Food inflation is still fuelled by fruit and veg while non-food prices are falling, perhaps as a reflection of reduced demand.

Pour en savoir plus

The Russia That Putin Made. Moscow, the West, and Coexistence Without Illusion

Where Is Ukraine’s Pro-Trump Camp?

Lukashenko Seeks to Piggyback on U.S.-Russia Rapprochement