Russia's Economy Cools as Strikes Disrupt Industry and Inflation Stays Hot

A smaller bump in growth, and why

Russia's economy expanded 1% in July to September, down from 1.3% in the prior quarter, according to the Federal Statistics Service. That marginally beat the 0.9% economist consensus from Bloomberg, but the under-the-hood picture is softer.

The central bank has cautioned that drone strikes are eroding productive capacity across multiple sectors. Deep into its fifth year, the war is piling on strain even as President Vladimir Putin insists growth must be maintained. Consumer demand cooled to 4.2% year over year in Q3 from 7.2% in Q2, prices accelerated, wage gains moderated, and firms reported rising input costs and steep borrowing rates. Output in several consumer goods categories also fell.

How strikes hit supply and trade

Attacks on oil refineries triggered shutdowns that resulted in an 18% annual drop in Q3 refining volumes - the sharpest quarterly decline in comparable data since 2020, per the statistics agency. With less fuel coming out of plants, the mining sector's contraction deepened and wholesale trade slipped into the red. Damage to loading terminals and port infrastructure added pressure on exports.

The fiscal and monetary squeeze

After first planning cuts, the government boosted defense spending sharply again this year, even as the budget deficit widens. Manufacturing kept growing, powered by double-digit gains in sectors filling state orders, and military outlays are on track to set a record this year. The distance between war-linked production and the civilian economy keeps widening, according to a Bank of Russia chart.

Higher fuel costs have lifted prices across many goods, pushing inflation further above the central bank's 4% goal, which Russia is on course to miss for the seventh year in a row. A Bloomberg survey points to October inflation running at 7.07%, up from 6.35% in September. The central bank says earlier cuts are constrained by inflationary effects from the strikes and expects policy to stay on the tight side for longer.

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Business stress and data hiccups

Russia's biggest lender is seeing the strain. "A growing number of industries are not doing particularly well," Sberbank CFO Taras Skvortsov said on an October investor call, adding that corporate loan quality is a rising concern.

Corporate surveys echo that pressure. In the third quarter, the Russian Union of Industrialists and Entrepreneurs found weak demand, scarce working capital and late payments to be the top constraints. Next on the list were limited access to credit and a mounting debt burden, each mentioned by roughly one in five respondents - with the share citing rising debt at a record high.

Russia's statistics agency, Rosstat, was hit by a cyberattack from Oct. 29 to Nov. 1 that delayed several releases. GDP still came out, but October CPI, originally due Friday, was pushed to later this month.

What this means for your portfolio Growth is leaning on state-driven manufacturing while strikes, higher fuel costs and tighter policy lean on consumers, trade and credit. That mix tends to keep inflation sticky and rates higher for longer, which feeds through to funding costs, equity valuation multiples and commodity sensitivity across your portfolio.

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