russia’s Economy Stuck Between Stagnation and Inflation

russia’s economic indicators are increasingly signaling a slide into stagflation. russia’s central bank’s tight monetary policy has effectively stifled business activity and exacerbated stagnation, which has already become systemic.

In 2025, economic growth almost came to a halt: GDP hovered around zero (-0.3% in the first quarter, 0% – in the second, +0.1%  – in the third). Even the slight recovery in the middle of the year was limited to the military-industrial complex and certain segments of the raw materials industries and did not create any momentum for the civilian economy. After a brief upturn at the beginning of the year, investment activity declined sharply: in the second and third quarters, investment in fixed capital fell by 3.7% and 1.7%, respectively. Businesses gave up modernization, cut back on purchases of equipment and investment goods, while the shortage of financial resources will persist even if monetary policy is eased.

The budgetary sphere is creating additional pressure. The state reduced incentives through tax changes, and in 2025, maintaining high expenditures amid falling revenues led to an increase in the deficit. In 2026–2028, fiscal policy will become a restraining factor due to spending cuts and increased tax burdens, cementing a scenario of prolonged stagnation with increased risks of stagflation.

Domestic demand remains the most vulnerable. The retail business confidence index remained consistently negative in 2025, having fallen to -6 in the fourth quarter – its worst level since 2022. Against this background, 44% of retailers expect a decline in profits and profitability in 2026, while only 29% expect sales to grow – the lowest figure in a decade.

Consumer sentiment is deteriorating rapidly: since June 2025, sales have declined in most product categories, and during the 2026 New Year holidays, shopping center traffic fell by almost 20% year-on-year. High interest rates have sharply increased costs and borrowing costs for small and medium-sized businesses, limiting working capital financing.

The russian retail sector shows weak adaptability and structural fragility. Business pessimism, expectations of falling profitability, and reduced investment are increasingly becoming a self-perpetuating factor in the downturn.