Russia’s economy slowed much more sharply in the first quarter than anticipated – and it was expected to slow, according to a paper from Liam Peach, a senior emerging market economist, and Nicholas Farr, an emerging Europe economist with Capital Economics.

Russia’s economy appears to be entering a more acute phase of contraction, with early 2025 data pointing to a sudden loss of momentum and a possible technical recession in the first half of the year.

The slowdown was supposed to be part of the plan. Russia’s economy has been overheating, driven by war-related fiscal stimulus and industrial output expansion that has sent inflation soaring and, despite extreme rate hikes to the current 21%, the Central Bank of Russia (CBR) was unable to bring inflation down or cool the economy thanks to the military Keynesianism boost. So CBR Governor Elvia Nabiullina adopted more extreme non-monetary policy methods, cancelling a generous mortgage subsidy programme and stamping on both corporate and retail lending. The idea was to deflate the balloon and bring inflation down, at the cost of putting the brakes on growth. A lively debate has raged ever since, where some argue the slowdown will end in a wave of bankruptcies later this year, while others say the economy is more robust than it appears and growth will continue.

“GDP looks to have contracted outright in quarter-on-quarter terms in the first quarter,” said Peach. “We had expected a slowdown to materialise after the recent period of overheating, but it appears to be more pronounced and happening more quickly than we had thought likely.”

Russia's business leaders are worried and Russian President Vladimir Putin tried to assure them last week that the current fall to 1.9% annualised growth for January-February, down from 4.3% last year, is a “planned corrective” to curb inflation. But some analysts worry that rather than coming in for a soft landing, the economy is coming in for a crash landing.

Industrial production rose just 1.1% year on year in the first quarter, sharply down from 5.6% in the previous quarter, reports Capital Economics. The decline is consistent with a 2% seasonally adjusted quarterly contraction, with nearly all industrial sub-sectors weakening. Basic sector output – a proxy for activity in Russia’s core industries – fell significantly, suggesting GDP growth dropped to below 2.0% y/y in the first quarter, from 4.5% in the fourth quarter.

Adding to the gloomy outlook, the Ministry of Economic Development’s monthly GDP estimate for March showed y/y growth of just 1.4%. Economists now warn that Russia may already be in the early stages of a recession.

“A technical recession over the first half of this year is a clear possibility,” said Farr.

The artificially imposed slowdown comes on top of a dramatic fall in oil prices, following OPEC+'s announcement to increase production by 411,000 barrels per day starting in June, at a time when prices are already weak. Brent oil fell to just over $60 per barrel and the Ministry of Finance (MinFin) has sharply reduced its forecast for oil and gas revenues in 2025 by 24%, tripling its forecast for the budget deficit in the process to 1.7% of GDP. Under the new scenarios, Russia’s economic growth is expected to slow to 1.8% in 2025, down from the base-case forecast of 2.5% and oil prices revised down from $69.70 per barrel to $56.

A combination of monetary tightening and fading fiscal stimulus appears to be behind the sharper slowdown. Russia’s central bank has raised interest rates multiple times since 2023 in an attempt to curb inflation and stabilise the ruble. The result has been a sharp increase in debt servicing costs for the private sector and a cooling in bank credit growth.

“The effects of monetary tightening are biting,” said Peach. “Meanwhile, the boost from increases in military spending in recent years is probably no longer providing the same support to growth.”

The outlook is further complicated by the limited room for fiscal easing. Siluanov has said military spending will not be changed and is due to increase by a quarter this year compared to last. That means if there are to be cuts they will come at the expense of the social sphere that will eat into consumption.

“Further headwinds could be on the horizon if the US gets more frustrated with the pace of talks to end the war,” said Farr. “US Senator Lindsey Graham’s ‘Sanctioning Russia Act of 2025’ appears to be gaining support and would impose a 500% tariff on imports from any country that purchases Russian energy.”