Russia may be heading into a recession, Economy Minister Maxim Reshetnikov admitted during the St. Petersburg International Economic Forum - marking the first such public acknowledgment by a senior official since the beginning of the war in Ukraine over three years ago. Citing current business sentiment, Reshetnikov remarked that the country is "practically already on the brink of recession," even if existing economic data, which he likened to a rear-view mirror, still reflects momentum from prior months.

The war has driven a surge in military spending, fueling GDP growth of over 4% in both 2023 and 2024, following a contraction in 2022. This growth was largely underpinned by what many call the Kremlin’s version of "military Keynesianism" - a heavy infusion of defense-related expenditures that pushed wages higher and drove employment to near-full capacity. However, signs of strain are emerging. Demand appears to have peaked, and the stimulus effect from war-driven spending is beginning to wane.

Reshetnikov pointed to the Bank of Russia’s tight monetary policy and persistently high interest rates as key factors holding back investment and economic activity. The ministry had forecast 2.5% GDP growth for 2025, but that estimate could be revised in August depending on how the central bank adjusts its policy in the coming months. In contrast, the central bank’s own projection remains more modest, ranging between 1% and 2%.

The current dynamic highlights a broader divide between fiscal and monetary policymakers. Business leaders and some government figures have called on the central bank’s governor, Elvira Nabiullina, to loosen borrowing conditions. Even sectors benefitting from military contracts are reportedly struggling under the weight of high interest rates.

Earlier in June, the central bank cut its key rate by one percentage point to 20%, citing falling inflation - down to 9.8% annually after a period of double-digit spikes. Nevertheless, the bank remains committed to its long-term 4% inflation target and has signaled it will continue to prioritize price stability over short-term growth concerns.

Reshetnikov acknowledged the importance of curbing inflation but urged a more nuanced approach that also considers economic growth. “I just want to show a little love for the economy - just a little - along with the belief in 4 percent,” he said, in a pointed appeal for balance.

Nabiullina, who shared the forum stage with Reshetnikov, defended the bank’s stance, arguing that the Russian economy had been overheated due to excessive demand outpacing supply, a mismatch that drove inflation. She reiterated that the 4% inflation goal remains unchanged.

Despite mounting pressure from industrial and political circles, President Vladimir Putin has publicly supported Nabiullina’s conservative monetary approach. However, there are signs that even the Kremlin may be seeking middle ground. In a recent meeting with top economic advisers, Putin called for "balanced growth" and a focus on the economy’s "structural transformation" - an indication that a more flexible stance may emerge in the near future.