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Russia's war economy finally showing signs of slowdown: Good news or bad for Ukraine peace?
Russia's economy, long propped up by heavy military spending, is starting to show cracks under the weight of sanctions and inflation.
While wartime government expenditure has kept economic activity afloat, recent data suggests that without this crutch, the country could slide into stagnation.
The nation's economic outlook is growing increasingly uncertain as it grapples with manufacturing declines and inflationary pressures.
Signs of slowdown in Russia's economy
In June, Russia's manufacturing sector took a sharp hit. The Purchasing Managers' Index (PMI), a key gauge of manufacturing health, plummeted to 47.5, marking the steepest contraction since March 2022, according to S&P Global.
This was a stark reversal from May's PMI of 50.2, when manufacturing had shown modest growth.
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The downturn stemmed from a drop in new orders, driven by weak client demand and a strong ruble that has made Russian exports pricier on the global market.
As a result, factories were forced to cut jobs at the fastest rate since April 2022 and scale back purchasing activity at a pace not seen in over three years.
The broader economy is also showing signs of strain.
Russia's economy is overheating, with rising wages and a shrinking workforce fueling inflation that has proven difficult to tame, even with high borrowing costs.
In June, Economy Minister Maxim Reshetnikov warned that the country was 'on the brink' of a recession, a sobering acknowledgement of the challenges ahead.
Inflation, which spiked to around 10 per cent earlier in 2025, has eased somewhat but remains above the Central Bank's target.
In response, the Central Bank of Russia made a notable policy shift, cutting interest rates twice in 2025—first by 100 basis points in June to 20 per cent, and then by 200 basis points in July, bringing the rate to 18 per cent. These cuts reflect growing concerns about an economic cooldown and a need to stimulate lending to bolster activity.
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Business sentiment is souring as inflationary pressures squeeze consumers and the government signals tougher times ahead.
Spending cuts are on the horizon, though slashing defence budgets seems unlikely given the military-industrial complex's role as the economy's backbone.
This sector, heavily reliant on opaque financing and state support, faces its own risks. Reduced arms exports, sanctions blocking access to high-tech components, and a growing dependence on costly Chinese substitutes are all taking a toll.
Beneath the surface, structural vulnerabilities are becoming harder to ignore.
Adding to these pressures is external scrutiny, with figures like US President Donald Trump pushing for peace and threatening even more sanctions, which could further complicate Russia's economic and geopolitical calculations.
As Russia stands at this crossroads, the question looms: Will President Vladimir Putin accept a slowdown and focus on stabilising the economy, or will he double down on war efforts to maintain momentum?
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