Russia's economy is showing mounting signs of slipping into stagflation, as a deepening fuel crisis drives up inflation while growth grinds to a near halt, leaving policymakers caught between competing and increasingly painful policy tradeoffs, according to economists, analysts and recent business surveys cited by The Moscow Times. The disruption, triggered by the loss of a significant share of Russia's refining capacity, has pushed up business costs, weakened industrial output and raised the risk of a prolonged recession. The latest concrete signs of deterioration emerged in June, when the Central Bank of Russia's monthly survey of thousands of businesses showed a sharp drop in business activity.
The survey's business climate indicator fell deep into negative territory, a level that investment banker Yevgeny Kogan said has historically coincided with economic crises. "It appears the fuel crisis has pushed the economy into recession," analysts at the Moscow-based MMI research group wrote in a commentary, reflecting the growing consensus among Russia-focused economists. The slowdown comes after Russia's economy had already lost considerable momentum.
The Economic Development Ministry estimates gross domestic product grew just 0.2% year-on-year in the January-May period, suggesting that June may have marked the onset of an outright contraction. At the same time, consumer prices rose 0.87% in June and a further 0.43% in the first two weeks of July alone, according to The Moscow Times. Kogan warned that the Central Bank's business survey pointed to a surge in companies' costs and inflation expectations, increasing the risk of stagflation — the economically damaging combination of weak growth and persistent inflation.
That scenario leaves policymakers facing an acute dilemma: raising interest rates to curb inflation risks further weakening an already faltering economy, while cutting rates to support growth could allow inflation to accelerate further. The prolonged war in Ukraine has made those policy choices even more difficult, according to the Bank of Finland's BOFIT research institute in a recent analysis. BOFIT noted that the Russian government has again been forced to increase spending and widen the budget deficit, adding inflationary pressure and limiting the scope for interest-rate cuts.
High borrowing costs, in turn, continue to weigh on investment, particularly for companies without access to subsidized state lending. The Washington-based Center for Strategic and International Studies (CSIS) said in a recent report that the costs of the war were rising rapidly and that military spending could become increasingly unsustainable. Separately, participants in a discussion organized by the Centre for Economic Policy Research (CEPR) argued that Russia's economic growth had stalled, reserves were being depleted and the country's dependence on China was increasing.
The pro-government Center for Macroeconomic Analysis and Short-Term Forecasting (CMAKP) concluded earlier this year that Russia was already experiencing stagflation. Its leading indicators pointed to a high probability that the economy would enter recession — defined as GDP over the previous 12 months falling below the corresponding period a year earlier — no later than July, with the downturn likely to last more than a year. Analysts at Promsvyazbank have abandoned their previous forecast for 0.6% GDP growth this year and now expect the economy to stagnate.
They also cut their 2027 growth forecast to 0.5% from 2%, citing growing risks that Russia could become trapped in a prolonged period of stagnation. They warned that economists may still be underestimating the inflationary impact of the fuel crisis, while shortages could worsen further. The disruption has already taken a measurable toll on industrial production.
According to state statistics agency Rosstat, refined petroleum output fell 13.5% year-on-year in May, while overall industrial production declined 0.7%. Over the first five months of the year, refined petroleum production was down 4.9% and industrial output grew just 0.4%. The Central Bank has previously noted that refinery outages had also reduced crude oil production, as exporters struggled to redirect supplies overseas, while weighing on wholesale trade and freight transportation.
Even if Ukraine refrains from launching further attacks on Russian refineries, it is unlikely that Russia can restore the roughly 40% of refining capacity that has been knocked offline within two months, Reuters reported on Wednesday, citing a source familiar with the industry's recovery efforts. The Central Bank of Russia expects the government to bring the situation under control and views the resulting stagflationary pressures as temporary. Kogan questioned that assumption, asking whether the slowdown would prove temporary if fuel shortages persist.
Economists also warn that inflationary pressures could intensify again later this year. The government is due to unveil the main parameters of the 2027 federal budget at the end of September, while regulated household utility tariffs are set to rise from October. Average utility bills are set to increase by 11.9% this year, adding another source of upward pressure on consumer prices.
Source: themoscowtimes.com