The Hangover

Following the recent Duma elections, economic forecasts provide insights into the potential end of the ongoing recession. The Ministry of Economic Development has reduced its 2027 baseline forecast, expecting a mere 0.2% increase in investment next year after a projected 5.4% decline in 2026. This shift reflects a loss of confidence in a post-election economic rebound. The Bank of Russia has also lowered its 2026 GDP growth forecast to 0-1%, from 0.5-1.5%.

MinEkonomiki's forecast for an investment recovery appears overly optimistic, considering that 86% of business leaders polled by RUIE reported having cut spending. The primary reason for this investment slowdown is attributed to a lack of confidence, stemming from the expansion of business nationalizations and the state's willingness to accommodate the war. As a result, businesses are hesitant to invest in uncertain economic conditions, and many question the state's protection of their assets amidst the ongoing conflict.

The Kremlin's insistence on shifting the social costs of aggression onto the private sector has had severe consequences. Businesses are now questioning the feasibility of investing in new assets when the state may target their success. This uncertainty has led to a decline in consumer spending, with consumers drawing down savings or holding more cash due to the disruptions caused by Ukrainian strikes and Russian policy responses.

The only buffer sustaining consumption is deficit spending, which may further accelerate the shift towards cash.

With weak business sentiment and growing consumer pessimism, the Kremlin has limited means to alter the economic trajectory without implementing large-scale mobilization. The initial reason businesses halted investment in 2023-2024 was wartime payouts driving real wage growth and increased spending power for lower-income households.

Unlike urban middle-class households, these lower-income groups spent less on imports, leading to attractive investment conditions. However, with inflation persistently above target and real interest rates significantly higher than before, businesses now face a lack of strong nominal growth and favorable conditions for investment.

State spending no longer contributes to demand growth, as wartime deficits no longer drive growth. Instead, they continue to put upward pressure on wages and prices, exacerbating the economic situation. The economy now appears more vulnerable to external shocks, with a weakened effect of fiscal policy on the ruble and prices. Prime Minister Mishustin's hope that higher export prices will support consumption remains misplaced due to the effectiveness of Ukrainian strikes on refineries and the risk of global diesel shortages.

The "hangover" from the wartime boom continues to burden policymakers who cannot easily alter macroeconomic conditions. State expansion appears to have lost its ability to stimulate demand, and over the past three months, 1,454 construction companies have declared bankruptcy, a 41% increase compared to the previous year. As housing declines, so does the broader consumer economy. The Kremlin faces a longer trough ahead, without apparent mechanisms to reverse course in the foreseeable future.