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Russia’s economy recorded a marginal contraction of 0.3% in the first quarter of 2026, marking its first quarterly decline in three years. The slowdown was driven by high interest rates, labour shortages, and the ongoing impact of the Ukraine war and Western sanctions. While March showed some recovery, sectors such as mining, manufacturing, construction, and retail faced pressure. Corporate profits dropped sharply, and borrowing remained limited due to elevated rates. Despite near-term challenges, higher oil prices and supply disruptions linked to geopolitical tensions may provide some support in the coming months.
Russia’s economy saw a contraction of 0.3% in the first quarter of 2026, its first quarterly decline since early 2023, according to preliminary data released recently. The slowdown reflects the combined impact of the ongoing Ukraine conflict, Western sanctions, and tight monetary conditions. Advertisement
The country’s economy, valued at around USD 3.1 trillion and heavily dependent on exports such as oil, metals, fertilisers, and grain, is expected to find some support in the coming months due to rising oil prices and global supply disruptions linked to tensions in the Middle East.
Official data showed mixed trends within the quarter. Gross domestic product grew by 1.8% in March, following declines of 1.1% in February and 1.8% in January. This comes after moderate growth in previous periods, with the economy expanding by 1.0% in the last quarter of 2025 and 1.3% in the first quarter of that year.
Ahead of the data release, the country’s largest lender, Sberbank, revised its full-year 2026 growth forecast downward to a range of 0.5% to 1%, from an earlier estimate of 1% to 1.5%. Its Deputy CEO Taras Skvortsov indicated that the first quarter had been difficult due to tight monetary conditions.
The central bank had also noted after its recent policy meeting that the contraction was influenced by one-off factors, including an increase in value-added tax at the start of the year and heavy snowfall that disrupted construction activity.
Other officials and business leaders pointed to structural challenges such as labour shortages, slow adoption of new technologies, and a strong rouble. The downturn appeared to catch policymakers off guard, prompting President Vladimir Putin to criticise senior officials earlier this month and direct them to develop measures to revive economic growth.
The broader trend shows a shift from the growth momentum seen over the past two years. After contracting by 1.4% in 2022, the Russian economy rebounded with growth of 4.1% in 2023 and 4.9% in 2024, supported largely by defence-related spending. Growth slowed to 1% in 2025 as the central bank raised interest rates to control inflation. The official growth forecast for 2026 currently stands at 1.3%, though revisions are expected in May.
Sector-wise, mining and manufacturing were among the worst affected during the first quarter. Consumer demand also weakened, impacting retail trade, while the construction sector remained largely stagnant.
Some economists noted that stronger-than-expected data for March could indicate that the contraction may be temporary, with the possibility of weak growth returning in the second quarter.
However, business conditions remain under pressure. Elevated borrowing costs, with the key interest rate at 14.5%, have made debt financing difficult. At the same time, reduced foreign investment has limited expansion opportunities. Data also showed that corporate profits fell by 33% in the first two months of the year. Companies have indicated that a rate closer to 12% would be more conducive for resuming investments.
Source Reuters
5th Jun, 2025
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