GDP Growth Falls Amid Manufacturing and Car Sales Decline

After two years of expansion propelled by record military spending and redirected oil exports, Russia’s once-resilient wartime economy is beginning to show signs of strain. While manufacturing activity shrank at its fastest rate in more than three years, GDP growth fell to 1.4% in the first quarter of 2025 from 4.5% in the previous quarter. June saw a nearly 30% decline in car sales year over year, a sign of declining consumer demand. With the finance minister referring to the current state of affairs as a “perfect storm” and the economy minister calling it a “verge moment,” Russian officials are now warning of a possible recession.

Inflation, High Interest Rates Strain Businesses and Households

Even though the sanctions were lifted early, Russia’s economy is suffering. The central bank recently started to lower interest rates after raising them to 21% due to the persistently high rate of inflation. Economic difficulties are being made worse by these high rates, which are harming household demand and business investment. Although the central bank is considering additional rate cuts to alleviate the pressure, worries about the stability of the banking system continue as preferential loans related to the war raise credit risks.

Declining Oil Revenues and Widening Deficit

Oil and gas income in June fell to its lowest level since January 2023, and oil prices, which are essential to Russia’s revenue, have continued to fall short of budget projections. Spending on the military and security now makes up 40% of the government budget, but the deficit keeps growing. Russia has less financial wiggle room as sanctions tighten and pressure mounts on energy revenues.

Civilian Sectors Struggle, Raising Sustainability Concerns

Russia’s current growth model is no longer viable, according to analysts. Important civilian industries are shrinking; Russia’s leading producer of agricultural equipment is reducing production, and power provider Waseti Cibir is in danger of going bankrupt. The data points to growing vulnerabilities, despite President Putin’s insistence that the economy is stable. Russia’s war economy may be in more serious trouble if sanctions are tightened further or if oil prices decline.

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