Russia's economy is facing increasing pressure, with recent data revealing a concerning contraction in GDP. While the Bank of Russia recently lowered its benchmark interest rate to 17%, its third reduction since June, the move comes against a backdrop of shrinking GDP in the first and second quarters of the year – meeting the technical definition of a recession. Despite the central bank governor denying a recession, citing positive indicators such as employment and industrial production, the economic slowdown is undeniable.
The Kremlin's substantial investment in its war in Ukraine, coupled with the need to maintain weapons production and incentivize military recruitment, has led to labor shortages and exacerbated inflation. This prompted aggressive interest rate hikes last year, reaching as high as 21%, but the resulting economic strain has led to warnings of a potential debt crisis and growing concerns from leading economists and banking officials.
Even before the most recent data, prominent figures like Economy Minister Maxim Reshetnikov had voiced alarm, stating that Russia was on the brink of recession. This sentiment was echoed by Oxford Economics and Sberbank CEO German Gref, who described the situation as 'technical stagnation.' Adding to the economic woes is a disastrous harvest, further impacting Russia's agricultural sector and the overall economy.
Russia's reliance on oil and gas revenue is also significantly challenged by lower crude prices and intensified Western sanctions. The resulting budget deficits are forcing Moscow to deplete its reserve funds, raising concerns about their sustainability. Adding to geopolitical complexities, President Donald Trump recently advocated for stronger action against Russia's energy exports, urging NATO countries to cease Russian oil purchases and proposing substantial tariffs on China for continuing to purchase Russian crude.
This confluence of factors paints a grim picture for the Russian economy. The ongoing conflict, coupled with the cascading effects of sanctions and internal economic challenges, indicates a significant and ongoing strain on the nation's financial stability.
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Originally published at: https://fortune.com/2025/09/13/russia-economy-recession-gdp-q2-q1-central-bank-rate-cut/
