Russia’s economy is growing faster than expected. It probably won’t last.

Last week, Rosstat published seemingly encouraging news about the state of the economy: Russia’s GDP grew by 1.3% year-over-year in the second quarter, after shrinking by 0.2% in the first three months of 2026. This result even exceeded the expectations of the Central Bank of Russia and the Economic Development Ministry. But it’s too early to talk about the economy’s recovery: the quarterly growth was driven by temporary factors. Why is there little reason to expect the rebound to become a long-term trend? How did a sober analysis of Russia’s prospects lead to the dismissal of one of the country’s most respected economists? And what risks does the growing budget hole pose?

Why the economy grew in the second quarter — and what obvious problems remain

As noted above, temporary factors were largely behind the 1.3% GDP growth recorded in April–June 2026.

• The calendar. The second quarter had 5% more working days than the same period in 2025 — 62 compared with 59.
• Higher military and government spending. The federal budget spent 11.5 trillion rubles over those three months, up from about 10 trillion rubles in the second quarter of 2025, a roughly 13% increase. Government procurement, which includes the state defense order, jumped 38.5% compared with April–June of last year.
• Several sectors saw gains. Construction, for instance, narrowed its year-over-year decline to 1.6%, after plunging 10% in the first quarter. Growth in retail trade turnover doubled. Wholesale trade turnover returned to growth, up 2.4%, after falling 0.5% in January–March. The same held true for freight turnover.

Industrial output growth also accelerated in the second quarter, rising to 0.6% from 0.3% in the first. A military-industrial complex flush with orders is keeping the sector from contracting, while the decline in oil production and a slump in civilian industries are dragging it down. Those civilian sectors continue to struggle under the Russian central bank’s double-digit key rate of 14%, which the regulator can’t cut faster because inflation remains near 6% annually. Civilian manufacturing output excluding the oil industry fell 2.1% in June and remains nearly 4% below the 2024 monthly average, according to calculations by TsMAKP.

It’s worth noting that the effects of Ukrainian drone strikes on Russian oil refineries — which caused a gasoline shortage nationwide — and on warehouses belonging to Wildberries will likely only show up in third-quarter 2026 data.

After Rosstat published its data, the Economic Development Ministry raised its first-half GDP growth estimate from 0.3% to 0.6%. But it’s too early to draw broader conclusions from the trend: growth is likely to moderate in the second half of the year, since the rebound appears temporary, analysts at Raiffeisenbank believe.

In May, the Economic Development Ministry cut its 2026 GDP growth forecast threefold, from 1.3% to 0.4%. Russia’s central bank, in July, projected growth of 0-1%. That means the economy is unlikely to outperform 2025, when growth was limited to 1% after two consecutive years of growth above 4%, fueled by extraordinary military spending.

How talk of the economy’s problems became taboo — illustrated by the firing of Andrei Klepach as chief economist of the Russian state corporation VEB.RF

Andrei Klepach, a former deputy head of the Economic Development Ministry, was fired from his post as chief economist at VEB.RF after media outlets drew attention to remarks he made in May at a meeting of the Nikitsky Club at the Moscow Exchange. The dismissal underscored both the relevance of the economy’s current problems and the authorities’ reluctance to acknowledge the war as the main cause.

Klepach didn’t say anything radical — he simply stated the obvious. Half of the slowdown in economic growth, he said, stems from an extremely tight monetary policy that led to a decline in investment and, combined with reduced subsidized lending, slowed overall consumer demand:

Klepach listed a string of sector-specific problems: technological and design flaws in the new lineup of domestic planes in civilian aircraft manufacturing; weak demand in construction materials production and metallurgy; and shortages of raw materials alongside import dominance in light industry. And he warned: “Not all the barriers and costs are caused by the policy of Russia’s central bank; even with a substantial rate cut, there will be no rapid growth.”

Klepach forecast that the continuing war, persistent sanctions, and tight monetary and fiscal policy would keep the economy from growing faster than 2-2.5% a year. Russia won’t survive the competition in a protracted standoff with the West amid the risk of a social crisis at home, he concluded — and it cost him his job.

The deficit in the federal budget remains a problem for the authorities — and they have effectively run out of tools to fill state coffers

The rebound in GDP growth and the crackdown on public discussion of the economy’s problems can’t hide another problem: the federal budget deficit grew by 724 billion rubles in July, reaching 6.455 trillion rubles — 2.8% of GDP — since the start of the year. The cause is unchecked growth in military spending. Government procurement, which includes the state defense order, rose nearly 40% year-over-year from January through July, to 8.44 trillion rubles, already 80% of the annual plan.

Oil and gas revenues, meanwhile, fell almost 16.8%, to 4.6 trillion rubles. The damper mechanism “ate up” most of Russia’s “profit” from the war in the Middle East and the closure of the Strait of Hormuz, while export infrastructure continues to suffer from Ukrainian military strikes.

The government is partly offsetting the shortfall with taxes on businesses and citizens: VAT revenue, boosted by a rate hike to 22%, jumped 25%, to 9.8 trillion rubles.

Economist Sergei Aleksashenko, a former deputy chair of Russia’s central bank and deputy finance minister, believes the total federal budget deficit for 2026 could reach 7–7.5 trillion rubles. That estimate matches the expectations of the chief economist at a Russian analytical center who spoke with Meduza.

The question is how to close that hole, equivalent to about 3% of GDP. The Finance Ministry doesn’t have many tools left. From January through July, it raised 2.3 trillion rubles by borrowing on the domestic debt market through OFZ bonds, which state banks buy up — but was forced to halt bond placements because of high rates of around 16%. Servicing domestic debt, in other words, has become very costly for the budget: it’s already the fifth-largest line item in planned federal spending, almost 9% of GDP.

The Finance Ministry also took nearly 460 billion rubles from the National Wealth Fund, received about 200 billion rubles from the sale of nationalized assets, and financed another 3.5 trillion rubles by drawing down Treasury funds held in bank accounts and other monetary instruments.

Foreign capital markets remain closed to Russia, so there are effectively no tools left to finance the deficit: borrowing even more domestically or draining the National Wealth Fund further means a risk of inflation in an economy already overheated by the fuel crisis. “The most unlikely scenario is that the Finance Ministry agrees to cut the pool of free Treasury funds even further (a little more than 4.5 trillion rubles remain),” Aleksashenko said.

All these economic and budgetary problems will ultimately hit ordinary Russians, as Andrei Klepach warned in his now-famous remarks. Growth in real disposable income could amount to a mere 0.6% in 2026, and inequality has stopped declining: pensions are falling further behind wages, while tax increases are squeezing small and medium-sized businesses, the economist said.