Russia's economy bounced back to 1.3% growth in the second quarter, beating official forecasts after a rare contraction at the start of the year.

Preliminary data from Rosstat, the state statistics service, put second-quarter GDP up 1.3% y/y, above the 0.8% the central bank had forecast and the 0.9% the economy ministry expected, and a reversal of the 0.2% contraction recorded in 1the second quarter6. The independent outlet The Bell said the print beat every official estimate. Retail turnover jumped 7.2% y/y and household consumption rose about 7%, the main engines of the rebound, Rosstat reported on August 12.

Yet the bounce looks brittle. A mid-year assessment from the KSE Institute, the analytical arm of the Kyiv School of Economics, argues that a windfall from higher oil prices during the Iran war has lifted the economy “from outright decline to stagnation” while leaving the deeper problems – a ballooning deficit, failing bond auctions and a fuel crisis triggered by Ukrainian drone strikes – unresolved.

“The stronger-than-expected pick-up in Russian GDP growth to 1.3% y/y in the second quarter is unlikely to be sustained,” wrote Liam Peach, senior emerging markets economist at Capital Economics, who expects the economy to “broadly stagnate for the foreseeable future,” with growth of around 1% or lower in the coming quarters.

A rebound built on the state

The recovery owes much to the Kremlin's own chequebook. Government procurement reached RUB8.44 trillion ($108bn) in the first seven months of the year, up 39% y/y and already 80% of the full-year target, Bloomberg reported, citing finance ministry documents – spending that flows through wages and bonuses into consumer demand. Manufacturing rose 2% y/y in the quarter and catering 6.2%, but mining fell 1.9%, construction 1.6% and agriculture 1.5%.

“The economy is recovering from the momentum seen at the beginning of the year,” Economy Minister Maxim Reshetnikov said, a view Bloomberg reported him confirming. Over the first half the ministry revised growth up to 0.6% y/y, from a preliminary 0.3%. Even so, industrial output was soft and the drivers were narrow: Capital Economics estimated retail sales, not industry, carried the quarter.

Russia's economy resumed growth in the second quarter but the recovery looks fragile. Chart: Bloomberg, Rosstat

The deficit keeps widening

Behind the growth figure, the public finances are deteriorating. The federal budget ran a deficit of RUB5.7 trillion ($74bn), or 2.7% of GDP, in the first half – 51% above the original plan for the year and already wider than the 2.6% gap booked for the whole of 2025, according to the KSE Institute. By the end of July the shortfall had widened to RUB6.46 trillion, or 2.8% of GDP.

The problem is revenue. Oil and gas receipts, which fund roughly a third of the budget, fell 16.8% over the seven months to RUB4.6 trillion, even with Urals crude trading above the budget's $59-a-barrel assumption for much of the period. Export earnings from oil slid to $15.8bn in June from $20.8bn in May as Ukrainian strikes forced a shift from higher-value fuels to cheaper crude cargoes.

Moscow has plugged part of the hole by squeezing everyone else. Non-oil revenue and VAT receipts have jumped, and tax collection rose about 8% in 1H26 – defying Western forecasts of fiscal collapse – even as the state spent RUB622bn ($8.4bn) between April and June on “damper” subsidies to hold down domestic fuel prices.

Running out of ways to borrow

The sharpest constraint is financing. New Russian Finance Ministry’s OFZ treasury bills issuance reached RUB2.9 trillion ($37.4bn) in the first half, just 52% of the annual borrowing plan, and the finance ministry has since suspended its weekly bond auctions altogether after a run of failed and undersubscribed sales – a step last taken during the 2020 pandemic. On July 1 it raised just RUB9.1bn ($117mn) against a RUB110bn ($1.4bn) offering before pulling back.

Domestic banks are now almost the only buyers of OFZs, whose outstanding stock has climbed to RUB32.7 trillion ($420bn), about 15% of GDP. To bridge the gap the Treasury has drawn its cash balances at commercial banks down by RUB3.6 trillion since December and dipped into the National Wealth Fund, whose liquid assets fell to RUB3.6 trillion from RUB4.1 trillion. International reserves slipped to $720bn at the end of June from $754bn at the close of 2025.

The KSE Institute sees mounting signs of “fiscal dominance,” with a June law letting the government spend and borrow beyond the limits set in the budget law. That has put the central bank in a bind: it cut its key rate to 14% in late July even as prices were accelerating, part of a wider shift as President Vladimir Putin leans on the bank to ease policy. Debt servicing is now the fifth-largest line in the budget, at roughly 9% of spending, and rising.

Drones, fuel and inflation

Ukraine's long-range strike campaign has turned Russia's refineries into an economic pressure point. At the peak, around 40% of refining capacity was knocked out or running under constraints, forcing one of the world's largest fuel exporters into the unusual step of importing gasoline from India, Morocco and Kazakhstan and imposing export bans through the end of the year. However, the peak of the fuel crisis seems to have passed now as some refineries come back online and imported petrol is starting to reach the market.

The shock has reversed a year of disinflation. Headline inflation climbed back to about 6% y/y in June and July, up from 5.3% in May, as fuel shortages fed through to transport and food costs. The campaign against the civilian economy has also hit e-commerce and logistics, damaging warehousing at Wildberries, the country's largest online retailer.

The KSE Institute concludes that Russia's “structural vulnerabilities stemming from the invasion of Ukraine and sanctions imposed in response to it are too deep to be offset by the Iran war's temporary effects,” and urges the Western coalition, which has already watered down parts of its latest sanctions package, to ready fresh energy and financial measures once global oil markets calm. The IMF still sees Russian growth at a meagre 1% this year; the central bank's own range has slipped to 0-1%.