The Bank of Russia has implemented another reduction in benchmark interest rates, lowering them by 1 percentage point to 17%. This marks the third time since June that rates have been cut. Despite these adjustments aimed at controlling inflation—which had been exacerbated by elevated borrowing costs—the central bank has firmly rejected any claims that the Russian economy is in a recession, even as its own data indicates a contraction in GDP this year.
Recent reports from the central bank show that the economy has faced more significant setbacks than previously recognized. A chart within its analysis revealed that the GDP experienced a sequential decline in both the first and second quarters of the year. This decline fits the definition of a “technical recession.” Nonetheless, Elvira Nabiullina, the governor of the central bank, maintained that the economy is not in a recession. She referred to positive trends in various indicators, such as employment, real income, consumer demand, and industrial production. Nabiullina acknowledged a cooling economy but framed it as a natural adjustment following a period of overheating, stating that production capacity is attempting to catch up with demand.
The Kremlin has been heavily investing in its ongoing military operations in Ukraine, leading to factories operating at full capacity to produce more arms and offering significant financial incentives to recruit military personnel. This focus on defense has contributed to labor shortages and heightened inflation.
In response to economic pressures, the central bank previously raised interest rates to a peak of 21% last year. Since then, the effects of high borrowing costs have started to reveal potential issues within the economy. Major Russian banks have sounded alarms regarding a possible debt crisis, as the elevated interest rates burden borrowers with the challenge of servicing their loans.
Economy Minister Maxim Reshetnikov warned earlier in June that Russia was on the brink of recession. Similarly, Oxford Economics expressed concerns last month that the nation appeared to be teetering on the edge of economic downturn. Recently, Sberbank CEO German Gref characterized the economy as being in “technical stagnation,” echoing previous warnings of near-zero growth.
Adding to the economic troubles, Russia is also facing a problematic harvest, which threatens its status as an agricultural powerhouse and exacerbates financial pressures on the Kremlin. The country’s reliance on oil and gas revenues—its primary source of funding—has taken a severe hit this year due to falling crude prices and tightening Western sanctions. To address growing budget deficits, Moscow has been depleting its reserve funds, which are projected to run dry later this year.
Amidst this backdrop, former President Donald Trump recently urged NATO countries to halt purchases of Russian oil and impose significant secondary tariffs on China, a key customer for Russian crude. He argued that such actions could help bring an end to the conflict in Ukraine. This call followed a meeting with President Putin in Alaska, which had not yielded any progress in ceasefire negotiations. Tensions with NATO escalated this past week as Russia reportedly sent drones into Poland, prompting NATO fighter jets to intercept them. Further, Trump remarked on China’s substantial control over Russia, asserting that imposing tariffs could effectively sever that control.
