Russian Economy Contracts for 1st Time Since 2023

The economy of Russia contracted during the first quarter of 2026 for the first time since early 2023, marking a setback for President Vladimir Putin as Moscow continues to grapple with the economic consequences of the war in Ukraine and persistently high borrowing costs.

According to data released by Federal State Statistics Service, Russia’s gross domestic product declined by 0.2% in the first three months of the year compared with the same period in 2025.

The contraction is expected to intensify concerns that Russia’s war-driven economy may be sliding toward stagnation under the pressure of elevated interest rates and weakening domestic demand, despite officials insisting that temporary factors contributed to the slowdown.

Speaking during a televised government meeting earlier Thursday, Putin said the economy rebounded by 1.8% in March after shrinking in February, attributing the recovery to measures implemented by the government.

However, analysts and policymakers suggested that part of both the decline and subsequent rebound was linked to calendar-related effects. The Central Bank of Russia estimated that the lower number of working days in January and February reduced annual GDP growth in the first quarter by as much as half a percentage point.

Russian policymakers believe the economy has become increasingly vulnerable to calendar fluctuations in recent years as fewer businesses continue operating under uninterrupted production cycles. Officials expect this effect to reverse in the coming months, potentially supporting future annual growth figures.

Severe weather conditions also weighed heavily on economic activity. Heavy snowfall and extreme frost earlier this year disrupted the construction sector, one of the country’s largest contributors to GDP. By contrast, weather conditions during the same period last year were significantly milder, offering stronger support to economic output.

Despite the first-quarter contraction, the central bank argued that the decline does not necessarily indicate a broader deterioration in the economy. Still, it warned that the recovery recorded in March likely reflected the easing of temporary pressures rather than a genuine improvement in overall economic momentum.

Deputy Prime Minister Alexander Novak acknowledged earlier this week that Russia continues to face “multiple economic challenges.”

The Russian Economy Ministry this week revised down its growth forecast for 2026 to just 0.4%, compared with a previous projection of 1.3%. Meanwhile, the country’s budget deficit widened to a record level in April despite a jump in oil revenues driven by rising geopolitical tensions in the Middle East.

Russia’s economy slowed sharply last year after the central bank raised its benchmark interest rate to a record 21% in October 2024 in an effort to curb inflation fueled by wartime spending. Although policymakers have gradually eased monetary policy since June, the benchmark rate remains high at 14.5%, continuing to place pressure on businesses and households.

Higher taxes introduced this year may have also undermined growth. Many households accelerated major purchases toward the end of 2025 before the new tax measures came into effect, contributing to weaker consumption at the start of 2026.

Nevertheless, retail sales growth recovered to more than 6% in March, compared with around 2% recorded in January and February.

The Kremlin, which relies on the oil and gas sector for roughly one-fifth of state revenues, welcomed higher oil prices and stronger demand for Russian crude following supply disruptions linked to tensions involving Iran and shipping routes through the Strait of Hormuz.

Still, economists say the recent gains in oil revenues are unlikely, at least for now, to significantly revive Russia’s slowing economy.