By Sultan Musayev | 2026-01-23

Russian industry entered the new year in what economists describe as a deep and broad-based crisis. A late-2025 survey by the Institute of Economic Forecasting of the Russian Academy of Sciences found demand and sales at their worst levels since 1998, surpassing the severity of the 2008 financial crash and the 2020 pandemic downturn.

Official statistics show the scale of the decline. Rosstat reported that in November 2025 output in mechanical engineering fell 5.4% year over year, while metallurgy dropped 4.1%. In several manufacturing segments, the collapse proved far sharper: tractor production plunged more than 60%; bulldozers and railroad passenger cars fell by about half; elevator production slid 37%; and car manufacturing declined 34%. Even food production, long considered a pillar of stability, contracted for the first time in 15 years.

Manufacturers nationwide cut output plans to their lowest level in 16 years. The overall industrial confidence indicator fell to its weakest point since 2009, according to the same survey.

Alexandra Prokopenko, an economist and former adviser to the Russian Central Bank, told The Washington Post in December that the economy is stalled and fragile. She compared it to "a car idling in neutral, its engine overheating," warning that while the vehicle does not move, damage continues to build beneath the hood.

Cooling turns dangerous

Despite the data, Russian officials have stuck to a message of calm. Speaking to a Federation Council committee in February 2025, Deputy Prime Minister Alexander Novak said the economy was undergoing "managed cooling" designed to balance slower lending and GDP growth with easing inflation. Inflation stood at nearly 10% in 2024.

On the ground, businesses tell a different story. By spring 2025, demand for domestic goods had dropped sharply, while imports increased. Sergey Tsukhlo, who authored a study for the Institute of Economic Forecasting, warned in May that industrial "cooling" risked turning into something more severe. At the time, he argued the economy still had "a long way to go" before hitting the crisis lows of 2020, 2008, or the 1990s.

Since then, many analysts say those lows have effectively arrived. Western sanctions have tightened, borrowing costs have soared, and the post-invasion wartime production surge has faded. The Central Bank's decision in 2024 to raise its key interest rate to a record 21% dealt what economists describe as a final blow to many civilian industries.

Ermek Syzdykov, a member of Kazakhstan's National Chamber of Entrepreneurs, said high borrowing costs have made survival increasingly difficult for most businesses.

"These days in Russia only defense factories that are generously funded by the state feel good," he told Kontur. "But the civilian sector, which feeds the country and creates jobs, has to literally survive."

Analysts at the Jamestown Foundation argue that Russia's war economy has triggered reverse deindustrialization. High-tech industries have ceded ground to labor-intensive, low-productivity sectors, they wrote in May, as civilian manufacturing stagnates and defense production takes priority.

War budget pressures

The Kremlin, however, continues to frame the slowdown as intentional. During his December call-in press conference, President Vladimir Putin dismissed talk of crisis, describing weaker growth as the result of "deliberate actions" to preserve "the quality of the economy."

Budget policy tells a clearer story about priorities. The federal budget law for 2026–2028, signed by Putin, remains heavily militarized. Defense and national security spending will account for about 38% of total expenditures in 2026, down slightly from 40% last year. The Finance Ministry expects a budget deficit of 3.8 trillion RUB ($42 billion), or 1.6% of GDP, and Putin has instructed the government to significantly boost tax collection in 2026.

Looking ahead, economists see few signs of relief. The Ministry of Economic Development forecasts GDP growth of just 1.3% in 2026, sharply below the 2.4% projected last spring. Much depends on whether higher taxes and stricter collection can restrain inflation. If inflation fails to fall quickly, interest rates could rise further.

Oleg Shibanov, a professor at the New Economic School, warned that another rate hike would hit already weakened sectors.

"This will be a serious problem for some industries in the Russian economy, and it could lead to a surge in business restructuring or even bankruptcies," he told Forbes.

Vladimir Eremkin, a senior researcher at the Russian Presidential Academy of National Economy and Public Administration, expects deterioration on several fronts at once: weaker investment, heavier tax and tariff burdens, falling profits amid slowing demand, and limited access to credit. Together, he said, those pressures will undermine company finances and push more firms into the shadow economy.

Elmira Suranchiyeva, an economist based in Bishkek, told Kontur that the outlook for civilian manufacturing will remain bleak as long as the war in Ukraine continues.

"The Russian economy is ceasing to be a market economy and turning into a war machine," she said. "Such a complete militarization, which is killing peaceful business, carries huge risks for the country's future."