Russia’s economy contracts for first time since 2023

As experts have been predicting for months, Russia’s economy has entered a contraction. On Wednesday, the Economic Development Ministry published the first official GDP figures for the first quarter of 2026, showing that the economy shrank by 0.3% year-on-year. It was the first quarterly fall since early 2023.

• The monthly dynamics are uneven. GDP dropped by 1.8% in January, then 1.1% in February, before climbing back by 1.8% in March — smoothing the overall picture but not enough to bring it into positive territory.
• In January, the government blamed the calendar — in particular an unusually long New Year holiday. But that’s only part of the story. Business activity is declining: the Central Bank’s business climate indicator dropped into negative territory in February for the first time since 2022, and Sberindex recorded a 2.2% drop in business turnover, also the first since 2022. Sberbank itself has lowered its GDP growth forecast for 2026 to 0.5-1%.
• The economy is contracting after two years of serious overheating. The increase in real cash incomes has slowed to 2.6% from 6.6%. Inflation remains moderate at an annual rate of 5.7% as of April 27. But the slowdown in incomes means consumer demand, which had been the main driver of growth, is running out of steam.
• Unemployment remains near a historic low of 2.2%, but this is not a sign of a healthy economy. It’s a consequence of a labor shortage, which stifles potential for growth and simultaneously drives up wages. But even on this front, the wage race typical of overheating economies is also fading away. 
• The Central Bank is sticking with its forecast for growth of between 0.5-1.5% this year, while the Economic Development Ministry is officially predicting 1.3%. But we already know that this will be reduced in May.

Why the world should care

A 0.3% drop in the first quarter is no catastrophe. But it is an important indicator: years of fiscal stimulation, fuelled by military spending, have finally stopped driving growth. It seems that the economy is reaching a nadir after overheating. Military demand is still generating output in the defense sector, but civil industries are stagnating, consumer demand is slowing and investment is evaporating. Putin ordered officials to bring the economy back to growth, but his government has no tools to make this happen without loosening fiscal or budgetary policy, which would unleash the inflation it has so carefully suppressed.