Stagnation on the threshold: the Russian economy is one step away from stagflation
The Russian economy is on the verge of stagflation, a state where rising prices are combined with stagnant GDP, experts from the Center for Macroeconomic Analysis and Short—term Forecasting (CIACP) warn. Inflation has slowed slightly, but it still remains high, and the economy began to decline in early 2026. To curb the rise in prices of goods, the Central Bank has been keeping the key rate at a double-digit level for a long time. The regulator is confident that inflation will reach the target of 4% this year, and GDP will go up. However, analysts doubt that expensive loans slow down investments and can drag the economy into stagnation. What rate can boost business activity is in the Izvestia article.
Why is inflation rising and GDP falling in Russia
The economic situation in Russia remains tense: after a brief spike in early January, inflation began to slow down again. Then the price increase accelerated due to the transfer of VAT and the increase in tariffs. According to the Ministry of Economic Development, in early March the annual rate was about 5.7%.
Weak demand and the strengthening of the ruble help to restrain prices. A strong currency reduces budget revenues and exporters, but at the same time cools the cost of goods, according to the latest analysis of macroeconomic trends by the Center for Macroeconomic Analysis and Short-term Forecasting (CMAKP). A new round of price reductions is also being recorded in the industrial product markets. This is due to the impact of the strong ruble on imports, the sanctions discount and difficulties with sales, the authors of the review note.
At the same time, economic dynamics remains weak: stagnation is observed in most civilian industries, and the profitability of enterprises is rapidly declining, the center's analysts emphasized. At the same time, the gap between business profitability and interest rates is growing, and investment activity is declining, primarily in the machinery and equipment segment.
According to the Ministry of Economic Development, in January 2026, GDP decreased by 2.1% year-on-year after rising by 1.9% in December. At the end of 2025, the economy temporarily accelerated due to a surge in demand for goods before the increase in recycling and VAT. However, this effect turned out to be a one-time event and was reversed at the beginning of the year. Izvestia sent a request to the ministry.
At the same time, the macro-financial policy remains tight: the budget withdraws funds from the economy (in particular, through tax changes), and interest rates remain high. According to the CMACP, such a combination may increase the risk of prolonged stagnation. At the same time, the strengthening of the ruble helps to contain inflation, but at the same time weakens investment incentives and limits the long-term growth potential of the economy.
The Central Bank, however, considers the stagflation scenario unlikely. They told Izvestia that the economy will grow, and inflation will gradually decrease to the target level of 4%. In 2026, GDP may increase by 0.5-1.5%, and in 2027 and beyond – by 1.5-2.5% per year, the Bank of Russia expects. At the same time, stable inflation, according to the regulator, will be close to 4% in the second half of 2026.
However, some experts consider the risks to be more serious. Fears of stagflation are justified, says Olga Belenkaya, head of the Macroeconomic Analysis Department at Finam. According to Rosstat data for January, only five of the 28 main types of industrial activity showed growth. After a temporary surge in demand at the end of 2025, consumption began to slow down, she noted.
There are indeed some prerequisites for such a scenario, agrees Natalia Milchakova, a leading analyst at Freedom Finance Global. Among them are the high key interest rate, unstable oil prices, a strong ruble and weak industry results at the beginning of the year.
However, it is premature to talk about the imminent onset of stagflation, says Vladimir Eremkin, a senior researcher at the Presidential Academy. According to him, the economy is rather undergoing a controlled cooling phase after a period of overheating and continues to adapt to new conditions.
What is the optimal size of the key rate
It is the key trajectory included in the Central Bank's forecast that should ensure the return of inflation to the target and the transition of the economy to a more balanced growth rate from 2027. The regulator clarified that the average rate is expected to be 13.5–14.5% in 2026 and 8-9% in 2027. Tighter fiscal policy, including reducing the structural deficit, reduces aggregate demand and helps slow price growth. In such circumstances, the Bank of Russia will be able to ease monetary policy faster, they stressed.
However, the high cost of borrowing is already seriously affecting the economy. Investments are practically paralyzed, Vladimir Salnikov, one of the authors of the review and Deputy General Director of CMAKP, told Izvestia. According to him, in a normal situation, the rate should only slightly exceed inflation by about a few percentage points. But it cannot be sharply reduced now: it is rather about the level that could have been possible with a softer trajectory in the past.
The optimal key range now may be 11-12%, according to Natalia Milchakova from Freedom Finance Global. According to her, a lower level would stimulate investment and become the basis for sustainable economic growth.
Yulia Kovalenko, Deputy Head of the Higher School of Economics of Moscow Plekhanov Russian University of Economics, gives a similar assessment. In her opinion, a balance between preserving citizens' savings and supporting investments would be provided by a rate of about 8-10%.
The decline has already begun: the Central Bank reduced the key rate from 21% in the first half of 2025 to 15.5% in February 2026. However, in real terms, it remains high — about 9.5%, and the impact on the economy is manifested with a lag of several quarters, said Olga Belenkaya from Finam.
At the same time, it is not only the cost of loans that holds back investments. Under the conditions of sanctions and economic restructuring, businesses often postpone major projects regardless of the stakes, added Vladimir Eremkin from the Presidential Academy. According to him, the combination of a high rate and a strong ruble is a temporary payment for macroeconomic stability.
What will happen to inflation and GDP in 2026
In a favorable scenario, inflation will start to slow down, says Olga Belenkaya from Finam. The price increase accelerated due to the increase in VAT, recycling, excise taxes and adjustments to utility tariffs. However, tight monetary policy and a reduction in fiscal momentum are limiting demand, which will allow the Central Bank to continue reducing the key interest rate. According to her, by the end of the year and in 2027, this may lead to a revival of business activity.
At the same time, there are risks that inflation will remain elevated and the rate cut will slow down, the expert continued. The Central Bank previously noted that if a change in the budget rule leads only to an increase in borrowing without cutting costs, the regulator will have to keep the rate high for longer. In this case, the risks of stagflation may increase.
The threat of a gradual decline in economic activity also remains, according to Vladimir Salnikov from CMAKP. According to him, the key problem is the weak link "efficiency growth — resource redistribution — investment." A high rate prevents the launch of this mechanism, although a sharp policy easing can also be dangerous.
A strong ruble is more likely a plus for the population, as it increases purchasing power, said Natalia Milchakova from Freedom Finance Global. However, the high interest rate makes loans expensive and constrains consumption. Until it drops to at least 12%, retail sales growth in 2026 is unlikely to exceed 3-4%, she predicts.
In general, the economy remains stable, added Yulia Kovalenko from Plekhanov Russian University of Economics. However, according to her, the sanctions pressure continues to complicate the work of companies and requires constant adaptation.
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