The Russian economy could stagnate due to wartime pressures, the Central Bank of Russia (CBR) warned in its latest issue of Talking Trends, released on December 6.

The famously cautious central bank has issued a cautious assessment of the country’s current economic trajectory. After two years of strong growth thanks to a military Keynesianism bump caused by heavy defence spending, growth has fallen to next to nothing this year as soaring inflation and sky high interest rates bring the party to an end.

Speaking at the annual “Russia Calling” investment conference on December 5, Russian President Vladimir Putin warned that growth in 2025 will come in at between 0.5% and 1%, although growth in the third quarter was almost zero and fell below zero in the first quarter in adjusted terms.

Putin tried to put a brave face on the growing economic problems but acknowledged that there are serious problems.

He described the swelling budget deficit for the next three years as “moderate.” The budget has been designed to mitigate external risks and increase the share of non-oil and gas revenues, he said. Russia's public finances are stable. Social obligations, defence, and development are fully funded, he added. And thanks to the CBR’s unorthodox experiment, inflation is falling faster than expected. By the end of December, inflation in Russia should reach approximately 6%, below government and Central Bank forecasts, according to Putin -- a significant achievement for 2025. "We expect this trend to continue," Putin added.

However, the CBR warned that the surge in wartime activity may soon give way to stagnation without structural reform or a redirection of resources away from the defence sector.

The central bank notes that while Russia’s economy has been “growing faster than expected,” this expansion is driven by unsustainable factors: high military spending, constrained labour supply, and growing capacity utilisation. These conditions, it said, could push the economy towards overheating rather than genuine long-term development.

“Growth in 2023 has relied heavily on demand for military goods and fiscal stimulus,” the CBR stated. But this pace, it cautioned, “cannot be maintained indefinitely without increasing the risk of macroeconomic imbalances.”

The bulletin identifies a number of medium-term risks, most notably that the Russian economy is close to exhausting its spare capacity. “Capacity utilisation in many sectors is approaching its limit,” the central bank said, adding that “labour shortages and elevated inflation expectations” are compounding constraints on output.

The CBR’s analysis suggests that the mobilisation of what idle production capacity and labour is left — spurred by state orders and conscription-linked demographic shifts — masks underlying weaknesses. “In the absence of productivity gains and private investment, the current model of growth may lead to stagnation,” the bank wrote.

Wages have continued to rise, but productivity growth remains limited, raising concerns about inflation. As of late 2025, Russia’s productivity gains over the past three years have been limited and uneven, with official data and central bank analysis pointing to minimal or even negative labour productivity growth in certain sectors.

Official estimates suggested a drop of around 1–2% in overall labour productivity in 2022, though exact figures vary by source. Productivity rebounded modestly in 2023 as Putin put the economy on a war footing, due to increased output from the defence sector and state-supported industries. However, this growth was not matched by efficiency gains; it was largely driven by labour input and capacity use, not innovation or capital deepening. The CBR called this a "quantitative expansion" rather than qualitative improvement at the time.

Over the last two years, productivity has stagnated or grew at a slow pace, particularly as capacity constraints and labour shortages worsened. The bulletin warns that wage growth is now outpacing productivity, increasing inflationary risks, as highlighted in the latest Borscht Index, which measures incomes against the cost of a bowl of soup. The economy continues to rely heavily on manual expansion of inputs — labour and state funding — rather than efficiency improvements, the CBR says.

“Productivity growth remains limited... In the absence of productivity gains and private investment, the current model of growth may lead to stagnation,” the CBR reports.

The central bank also said it expects inflationary pressures to remain elevated, despite this year’s progress, requiring a continued tight monetary policy stance. “Further strengthening of the disinflationary trend will take time,” it warned.

Inflation has fallen from over 10% at the start of this year to around 7% now, allowing the regulator to put in 450bp of rate cuts. But with a 200bp hike in VAT coming into effect in January, inflationary pressures will grow again and the CBR may be forced to hike rates again from its current 16.5%.

The bank also highlighted the risk of “budgetary crowding-out,” in which large-scale defence spending and state support for certain sectors diverts resources from other parts of the economy. “If government demand remains high while private sector investment is weak, the imbalance may worsen,” the report said.

The CBR questioned the sustainability of Russia’s current fiscal trajectory. Although high oil prices and import substitution have supported revenues and local production, the bank noted that “the structure of the economy is shifting towards lower competition and innovation.”

“Over time, without measures to improve productivity and labour efficiency, this will limit the economy’s potential,” it said. Fixed investment has been high, but almost all of it has gone into non-productive military industrial production.

While the central bank stopped short of calling for cuts in defence spending, it stressed the need for more balanced growth. “Investment in productive sectors and modernisation of civilian infrastructure is essential to avoid a stagnation trap,” it said.

Putin is aware of the imbalances and called on defence officials to make sure their investments into the defence sector was balanced with investments into the civilian sector in his “guns and butter” speech last year.