The slowdown in GDP growth in Russia to 1.1% year on year in the second quarter suggests the economy may have narrowly avoided a technical recession, but “the economy is clearly struggling amidst imbalances that have built up due to the war effort,” said Liam Peach, Senior Emerging Markets Economist at Capital Economics in a note on August 13. “We expect growth to slow further over the coming quarters.”

The figure was down from 1.4% of nominal growth in the first quarter and came in slightly above Capital Economics’ forecast of 1.0% but below the Bloomberg consensus of 1.5%. However, economists said that Russia’s economy contracted in the first quarter of this year in real terms for the first time as the military Keynesianism boost from heavy war spending has now worn off.

“The latest data on industrial production had been a bit more positive (1.8% y/y over Q2 as a whole), which likely offset weakness in other sectors,” Peach said. Rosstat does not publish seasonally-adjusted GDP data, but he estimated that the year-on-year figure was “consistent with slight growth of 0.3% quarter on quarter (following our estimate of a 1.5% q/q contraction in Q1).”

The slowdown was expected and predicted by a pessimistic macroeconomic forecast issued by the Central Bank of Russia (CBR) last August. CBR governor Elvia Nabiullina has been trying to bring down sticky inflation by artificially cooling the economy using non-monetary policy methods that have successfully taken the edge of inflation. The CBR has already put in 300bp of rate cuts in the last two months and hopes to put in another 300bp before the end of the year. But the slowdown has been so sharp that it has sparked a debate on if the economy is entering a recession or merely cooling.

“The big picture, though, is that Russia’s economy is struggling under the weight of high interest rates and the ongoing war effort. A prolonged period of weak growth lies in store,” Peach said. He noted that surveys of business sentiment and investment intentions “have fallen to multi-year lows.”

The labour market is cooling, and weaker demand is expected to help ease inflation pressures which has dropped from over 10% in December and continues to fall faster than expected, according to Nabiullina. “The headline rate dropped from 9.4% y/y in June to 8.8% in July according to data released today,” Peach said.

Capital Economics forecasts GDP growth of 0.8% for 2025, with “a recession this year still a very high risk.”

“This sets a fairly weak backdrop heading into the Trump-Putin summit in Alaska later this week,” Peach added. “Still, we don’t think Russia’s economic problems will have much bearing on Putin’s war aims and think that a peace deal remains unlikely for some time.”