The economy appears to be slowing down

RUSSIA ECONOMICS - In Brief 05 Sep 2025 by Evgeny Gavrilenkov

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Russia's recent w-o-w inflation data showed a continuously deflationary trend, with consumer prices falling by 0.08% in the week ending September 1. Combining this with prior weekly inflation data suggests that August experienced around 0.25% m-o-m deflation, potentially lowering y-o-y inflation to near 8.0%. The CBR’s key rate of 18% seems high for an economy struggling to grow. Rosstat reported that basic sector output, a proxy for economic activity, grew by 0.2% y-o-y in 7M25 and 0.9% in July and 7M25. In 1H25, GDP was up by a mere 1.2% y-o-y. The growth model driven by heavy budgetary spending and rapid household credit expansion appears to have reached its limit. Budget revenues are not rising fast enough as the ruble remains too strong at around USD/RUB 80, and oil-and-gas revenues (O&G) fall short of expectations. Additionally, rapid m-o-m disinflation (that briefly turned into deflation in August) and slowing growth momentum are straining non-O&G government revenues, limiting expenditure growth compared to 2022-2024. Domestic borrowing remains costly and challenging, increasing the likelihood of a more decisive CBR move in September, with the key rate decision due next Friday. Nonetheless, a quick economic rebound is unlikely. Consumer credit remains expensive, with average short-term interest rates in June at 27.8% and long-term rates (over one year) at 18.7%, according to the CBR. As a result, household credit growth has stalled after years of expansion, with no growth recorded since the start of this year (they have even contracted by 0.2% YTD as of August 1). Compared to their peak on November 1, 2024, the contraction stands at about 3.0%. Slowing nominal w...