The State of the Russian Economy in 2025-2026
According to Ukraine's Foreign Intelligence Service, the Russian economy entered a state of stagflation by the end of 2025 and the beginning of 2026. This economic condition, characterized by stagnant growth and high inflation, is evidenced by a decline in Gross Domestic Product (GDP), falling investment, shrinking domestic demand, a widening budget deficit, and a liquidity crisis in the banking sector.
Throughout 2025, Russia's GDP growth showed a marked slowdown. By the third quarter of 2025, GDP growth had decelerated to a mere +0.1%, and by November of that year, it had effectively stalled. Investment in fixed capital also contracted significantly:
- A decrease of 3.7% in the second quarter of 2025
- A further decrease of 1.7% in the third quarter
This drop in revenue occurred alongside sustained high government spending, which drove the budget deficit higher.
Forecasts and Challenges
Analysts anticipate that fiscal policy will act as a drag on the economy from 2026 to 2028, due to planned spending cuts and increased tax burdens. The business confidence index for the retail sector plummeted to –6 in the fourth quarter of 2025. Looking ahead to 2026, 44% of retailers forecast declining profits and profitability, while only 29% expect sales to grow. Since June 2025, sales have been falling across most product categories.
During the 2026 New Year holidays, foot traffic in shopping malls dropped by nearly 20% compared to the previous year. As of January 1, 2026, the volume of cash in circulation within the Russian Federation reached $253 billion USD. Furthermore, the net outflow of funds from the Russian banking sector totaled $12.8 billion USD for 2025. These figures point to the severe structural problems confronting the Russian economy under stagflationary pressures. Stagflation poses a particularly difficult policy challenge, as measures to combat inflation can worsen a recession, and vice versa.
The stagflation gripping Russia's economy reflects the complex challenges the country faces, including dwindling investment and weakening domestic demand.
Amid a growing budget deficit and a banking liquidity crisis, future fiscal tightening measures risk exacerbating the situation, potentially leading to a deeper economic downturn. The trajectory of these factors is significant, as they have implications not only for Russia's internal stability but also for its economic relations on the global stage.