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Russia  ·  Chronicles · Klaus Dormann

The growth outlook for the Russian economy is dimming

August 31, 2026  ·  15 min read  ·  By Klaus Dormann  ·  Original (German)
The growth outlook for the Russian economy is dimming

Author: Klaus Dormann

Although Russia’s total economic output rose by 1.3% year-over-year in the second quarter of 2026, annual GDP growth for the first half of the year as a whole was only 0.6% due to the decline in real gross domestic product in the first quarter.

In its latest weekly report, “BOFIT Weekly,” the BOFIT research institute of the Bank of Finland states that, following a “weak first half of the year,” the outlook for the Russian economy has dimmed in light of falling oil prices and Ukraine’s drone attacks.

The trends in public finances and inflation are also contributing to this. BOFIT states:

“Economic imbalances have continued to worsen, and risks have increased. The rapid growth in government spending and skyrocketing deficits have made it more difficult to manage public finances and have fueled inflation. Rising fuel prices have also accelerated inflation, as Ukrainian drone attacks have reduced Russian production capacity.”

Retail and services are performing relatively well

Regarding the trend in fixed investment, BOFIT cites the Russian Central Bank’s latest economic survey. It showed a slight recovery in fixed investment from the low point at the beginning of the year. The most positive investment figures were recorded in the retail and services sectors, as well as in the consumer goods industry. Investment in the construction industry, on the other hand, continued to decline in the second quarter. The raw materials industry also saw weak growth in fixed investment, although there was a slight improvement compared to the low point at the beginning of the year.

According to BOFIT, similar differences between sectors are evident in production trends:

“According to preliminary figures, growth in the second quarter was largely driven by higher retail sales and increased service sector output, while production in the raw materials mining and construction sectors declined by nearly 2% compared with the previous year.”

Industrial production was only 0.1% higher in the first 7 months than in the previous year

The Russian Federal State Statistics Service (Rosstat) released its first data on the Russian economy’s production trends for the second half of the year last week in its report on industrial production trends in July. Key findings (Finmarket.ru):

Annual growth in industrial production slowed to 0.4% in July 2026, after reaching 0.7% in June according to revised data. The increase in industrial production in July was thus slightly better than analysts had expected in a consensus forecast compiled by Interfax in early August (0.3%).

The following interactive chart from the Barcelona-based research firm “FocusEconomics” shows, with the blue dots, the decline in the annual growth rate of industrial production from 0.7% in June to 0.4% in July 2026 (scale on the left side of the figure).

However, when comparing the first seven months of 2026 as a whole with the same period in the previous year (January through July 2025), industrial production was only 0.1% higher.

Monthly Trends in Industrial Production
: Year-over-Year Changes in Percent

FocusEconomics-Grafik: monatliche Entwicklung der russischen Industrieproduktion, Veränderung gegenüber Vorjahr in Prozent

Black bars: Annual change over the last 12 months in %; right scale

Blue dots on a blue line: Change from the same month of the previous year in %; left scale

FocusEconomics: Russia Industrial Production July 2026, August 26, 2026

The black bars in the figure show the average annual increase in production over the previous twelve months. At the end of 2025, in December, industrial production had still risen by 1.1% compared with the same period a year earlier. However, from August 2025 to July 2026, industrial production rose by only 0.5% compared to the period from August 2024 to July 2025.

Growth in the “manufacturing sector” has so far prevented a recession

Within the industrial sector, production in the “manufacturing sector” was 0.5% higher in the January–July 2026 period than in the same period of the previous year. In contrast, production in the “mining and extraction of raw materials” sector fell by 0.9% during the same period.

In July, growth in the “manufacturing sector” stood at 2.4% year-over-year, following growth of 2.8% in June (blue line in the following chart from PSB Bank).

The “Mining and Extraction of Raw Materials” sector, on the other hand, recorded a 2.6% decline in production in July 2026, following a decline of 2.6% in June (red line).

Total industrial production (white bars),
“Mining” (red line), and “Manufacturing” (blue line);

Year-over-year changes in percent

PSB-Analytics-Grafik: Produktion in der russischen Industrie insgesamt, im Bergbau und im Verarbeitenden Gewerbe, Veränderung zum Vorjahr in Prozent

PSB Analytics: Industrial Production in July, August 27, 26

According to Rosstat estimates, industrial production in July 2026, adjusted for seasonal and calendar factors, grew by 0.1% overall compared with the previous month (following a 0.2% increase in June).

Overall economic growth is likely to remain weak

BOFIT concludes regarding the trend in industrial production in July: The latest industrial production figures indicate that growth in overall economic output remained “subdued” in July. Compared to previous months, the seasonally adjusted production volume remained essentially unchanged.

PSB Bank also notes on its Telegram channel:

“Given the high importance of industry to the Russian economy, real GDP growth in July will be quite weak, although moderate economic growth is likely to continue given the high and stable level of consumer spending. We maintain our forecast of real GDP growth near zero (in the range of 0–0.5%) through the end of 2026.

The Central Bank will take the weak economic performance into account when setting the key interest rate, so a scenario of further moderate monetary easing in September cannot be entirely ruled out. Next Wednesday (September 2), Rosstat will publish the complete statistical data for July, and the Ministry of Economic Development will provide an assessment of real GDP growth.”

Production outside the defense industry is lower than at the beginning of 2022

The Finnish Central Bank’s research institute once again draws attention to the highly divergent performance of sectors within the “manufacturing industry” since the start of the war in Ukraine in 2022 with the following chart. BOFIT emphasizes:

“As in previous years, growth in ‘manufacturing’ was largely driven by war-related sectors (red line), while production in most other sectors continued to decline (blue line). Seasonally adjusted production volumes in sectors not directly linked to war-related spending were lower this summer than in early 2022.”

The “manufacturing sector” continues to
follow two diverging paths

red line: war-related sectors; blue line: rest of the manufacturing sector

BOFIT-Grafik: Das russische Verarbeitende Gewerbe entwickelt sich auf zwei divergierenden Pfaden – kriegsnahe Branchen gegen übriges Verarbeitendes Gewerbe

BOFIT, Bank of Finland Weekly Review 35/2026: Russia’s diverging economic trends continue, Aug. 28, 26

“Defense production” has continued to grow strongly so far in 2026 as well

The economic sectors classified by BOFIT in the figure above as “war-related industries” recorded the following growth rates in the period January–July 2026 compared to the period January–July 2025 (Finmarket.ru):

  • Production of other transportation vehicles and equipment (including aircraft, shipbuilding, etc.): +22.9%.
  • Production of metal products (excluding machinery and equipment): +10.9%;
  • Production of computers, electronic, and optical products: +4.2%.

At the same time, production of pharmaceuticals and materials for medical and veterinary use rose by 13.9%.

Slump in Production at Refineries

The sharpest decline in January–July 2026, compared with the same period in 2025, was in the “coke and petroleum products” sector. Due to Ukrainian attacks on Russian refineries, it was 9.2% lower than in the first seven months of the previous year. According to Meza Net, production of petroleum products and coke fell by 19.3% year-over-year in July (see the following figure from Raiffeisenbank).

Production of petroleum products, % year-over-year

Raiffeisenbank-Grafik: Produktion von Erdölprodukten in Russland, Veränderung im Jahresvergleich in Prozent

Raiffeisenbank: RAIF Daily Focus, August 27, 2026

Janis Kluge, a Russia expert at the German Institute for International and Security Affairs (SWP), stated in a Deutsche Welle podcast at the end of August that he could no longer rule out the possibility that the Russian economy might slip into a recession this year due to the consequences of Ukraine’s attacks (minute 18).

The Minister of Industry and Trade, Anton Alikhanov, however, reported to President Putin in a video released on August 27 by russland.RU, that in recent years there has been an increase in industrial production, investment, and the scale of new capacity coming online (see also: en.Kremlin.ru: Meeting with Minister of Industry and Trade Anton Alikhanov; August 26, 2026).

BOFIT: Production has varied significantly by region since 2021

In its weekly report, the Bank of Finland’s Institute highlights that the war in Ukraine has had a major impact on the regional development of production in Russia.

In a regional comparison of the eight Russian “federal districts,” the production indicator calculated by Rosstat for the five “core sectors” of the Russian economy (agriculture, industry, construction, trade, and transportation) has evolved very differently following Russia’s invasion of Ukraine. When comparing production in the first half of 2026 with production levels in the first half of 2021, BOFIT notes:

Four federal districts recorded growth in production, namely “Central Russia,” “Northwest Russia,” “Volga,” and “Far East.”

In the remaining federal districts (Southern Russia, North Caucasus, Urals, and Siberia), the level of production in the first half of 2026 was lower than that of the first half of 2021.

Federal Districts of the Russian Federation

Karte der acht Föderationskreise der Russischen Föderation

Wikipedia: Federal District

BOFIT illustrates the impact of the war in Ukraine on production trends since 2021 by comparing production trends in individual “regions” within the “federal districts” (see the figure below).

The strongest growth in production was recorded in regions that benefited from the expansion of the “military-industrial complex” (e.g., in Udmurtia and Tatarstan), in Russia’s major cities (Moscow and St. Petersburg), as well as in regions in the Far East that are carrying out large-scale projects to develop natural resources (Magadan and the Jewish Autonomous Region).

Production in the “core sectors” of the Russian economy by region

Real change from first half of 2026 to first half of 2021, in percent

BOFIT-Grafik: Reale Veränderung der Produktion in den Kernbereichen der russischen Wirtschaft nach Regionen, erstes Halbjahr 2026 gegenüber erstem Halbjahr 2021

BOFIT, Bank of Finland Weekly Review 35/2026: Russia’s diverging economic trends continue, August 28, 2026

The weakest growth was observed in regions bordering Ukraine (e.g., Bryansk and Krasnodar), in the impoverished regions of southern Russia (Ingushetia, Karachay-Cherkessia), as well as in resource-producing regions heavily affected by Western sanctions against Russian exports (e.g., Komi, Kemerovo, and the Khanty-Mansi Autonomous Okrug).

Recommended Reading

German-Russian Chamber of Foreign Trade:

Podcasts

  • Janis Kluge, German Institute for International and Security Affairs (SWP), on the Deutsche Welle podcast with Thomas Kohlmann: “Russia’s leadership has a real problem with the costs of the war,” columns of smoke rising from refineries, burning warehouses, and long lines at gas stations in many parts of Russia—how severe are the economic consequences? Audio, 25 min., August 28, 2026
  • Andrey Gurkov, journalist, on the “Ronzheimer” podcast: Putin’s most important conquest is collapsing. With Andrey Gurkov. Paul Ronzheimer speaks with Andrey Gurkov about the consequences of the Ukrainian attacks. Is a banking crisis looming? How is the budget deficit evolving? What did Klepach predict? Is the Russian economy reaching a critical point? 44 min., Aug. 21, 26

Weekly and Monthly Reports from Research Institutes

Industrial Production in July

Overall Economic Development

Wildberries, Ozon; “Warehouse War”

Fuel Supply, Energy Sector

Warnings of a banking crisis and high corporate debt

Fiscal Policy; National Budget

Foreign Trade, Sanctions

Political Landscape; BR24: Russia-Ukraine War in the News Ticker

Dismissal of VEB Chief Economist Andrey Klepach:

Translated from the German original published on ostwirtschaft.de, August 31, 2026.