Russia’s Economy Contracts 0.2% in First Quarter

Russia’s economy contracted in the first quarter for the first time since the start of 2023, according to official data released Friday. Gross domestic product shrank 0.2% in the first three months of the year from the same period a year earlier, the Federal Statistics Service reported.

The contraction occurred as President Vladimir Putin has called for continued growth while the country pursues the war in Ukraine. The downturn is likely to add to concerns that the war-driven economy is moving toward recession under elevated borrowing costs.

Officials sought explanations for slowing activity last month and requested a response from government agencies. During a televised meeting earlier Friday, Putin said that the economy rebounded 1.8% in March after contracting in February. He stated that the resurgence reflected the impact of steps taken by the government.

The central bank estimates that fewer working days in January and February shaved as much as half a percentage point off annual GDP growth in the quarter. Policymakers believe Russia’s economy may have become more sensitive to the calendar in recent years as fewer companies operate continuous production cycles.

In the coming months, the working-day effect is expected to swing in the opposite direction, providing a boost to annual growth figures. Heavy snowfalls and extreme frost earlier this year disrupted construction, one of the largest contributors to GDP.

Conditions in the same period last year had been milder, providing a more favorable period for the sector.

The central bank has said the first-quarter contraction doesn’t signal a broader deterioration. It cautioned that the March rebound likely reflected fading headwinds rather than a genuine pickup in activity. The Economy Ministry this week slashed its growth forecast for 2026 to 0.4% from 1.3%.

Russia’s budget gap widened to a record in April despite a jump in oil revenue amid heightened tensions in the Middle East, with the deficit for the first four months of the year far exceeding the full-year plan. Russia’s economy slowed sharply last year after the central bank hiked the key interest rate to a record 21% in October 2024 and kept it there for months to curb accelerating inflation amid massive spending on the war.

While the bank has slowly eased monetary policy since last June, the key rate at 14.5% remains high for many businesses and households. Higher taxes introduced this year also may have weighed on growth. Households shifted major purchases to the end of last year ahead of the tax changes, contributing to a sharp slowdown in consumption at the start of 2026.

Still, retail sales growth recovered to more than 6% in March from 2% in January and February. The Kremlin has welcomed higher oil prices and stronger demand for Russian barrels since the Iran war disrupted supplies from the Persian Gulf through the Strait of Hormuz.

The oil windfall is unlikely to significantly revive Russia’s sluggish economy so far.