Investment Has Entered a Crisis: The first-quarter downturn cannot be considered a correction or a pause

Correction or recession?

In the first quarter of 2026, fixed capital investment in the Russian economy plummeted by 14.3%, according to data published by Rosstat in early June. These figures are so striking that Russian economic authorities have been forced to issue a range of reassuring statements. Alexey Zabotkin, Deputy Chairman of the Central Bank, stated that these figures did not ‘alarm’ him, citing the high base effect, noting that in the first quarter of 2025, investment had risen by 6.5%. A similar line is being taken by the Ministry of Economic Development, which described the situation as an ‘expected correction’ following the ‘investment boom’ of 2021–2024, during which cumulative investment growth amounted to 38%. The ministry also added that first-quarter data is not particularly indicative, as this period typically accounts for only around 15% of annual investment.

The latter argument appears weak: annual indices exist precisely to allow comparison of dynamics and trends across comparable periods. The question of the investment boom warrants separate discussion, but a correction can be understood as a pause in growth or a modest decline, such as that observed throughout 2025, when investment fell by 2.3%. Notably, the Ministry of Economic Development, itself had recently forecast a ‘correction’ in 2026, citing a ‘high base’ and an investment boom, and estimated its likely decline within this adjustment at 0.5%. The Chairman of the Russian Union of Industrialists and Entrepreneurs (RSPP), Alexander Shokhin, also suggested as early as April that the correction could reach –1.5%. The first-quarter figures therefore represent a fundamentally new development that does not fit within these expectations. If first-quarter investment accounts for 15% of the annual total, then the reported contraction already implies a –2.3% decline in annual investment terms, even if the remaining three quarters remain at last year’s level.

The alarmed tone of the government’s comments is, therefore, entirely justified: a nearly 15% fall in comparable terms points to a crisis in the economy, regardless of base effects. Figure 1, showing a long-term series, clearly illustrates both episodes of ‘correction’ following investment surges (for example, in 2013 and 2019) and the fact that comparable quarterly declines have not been observed over the past 15 years. In 2015, during the crisis triggered by falling oil prices and exacerbated by Western sanctions, the maximum quarterly decline reached 8.5% and was accompanied by a 3–4% contraction in GDP. In the first half of the pandemic year 2020, the decline reached 5%, alongside a similar fall in GDP in the second and third quarters. Over the past 30 years, comparable episodes of investment contraction have been seen only in 1998 (default) and 2009, when Russia’s GDP contracted by almost 8%. Crisis-level investment dynamics inevitably feed through into output and value added.

Figure 1. Dynamics of fixed capital investment and GDP, 2011–2026

In effect, the Russian economic authorities themselves acknowledge this logic when they shift from reassurance to economic analysis. For instance, speaking at the St Petersburg Economic Forum, Economy Minister Maxim Reshetnikov acknowledged that the figures showing a 14.3% decline in investment and only a 0.2% contraction in GDP in the first quarter ‘do not really align’. However, he immediately expressed hope that in the second quarter ‘we will see some synchronisation’ and that the situation with investment ‘should even out’. Quarterly investment and GDP trends are indeed, as the minister noted, calculated using different methods (the income method and the production method, respectively). However, the results of these calculations should converge, albeit with some margin of error. Such convergence is precisely what indicates the reliability of statistical data. The minister was hinting at either a measurement error or a statistical artefact in the investment figures, implicitly suggesting that he places greater trust in the investment data than in the GDP estimate.

Quarterly indicators of investment activity are indeed not considered particularly reliable. Rosstat first receives reports from large companies and compiles an initial estimate based on these, before extrapolating the data to cover the full range of enterprises. However, the gap between preliminary estimates and final data in recent years has averaged around 1.5 percentage points in either direction. Thus, even under a very favourable adjustment scenario, the decline in investment in the first quarter of 2026 would still be in double-digit territory.

Table 1. Discrepancy between preliminary and final estimates of investment trends, 2024–2025

That said, Reshetnikov’s assumption that the statistical deviation lies on the side of the investment calculations does not appear either obvious, or even particularly plausible. If, following the minister’s own logic and setting aside the limitations of official statistics, we turn to an alternative source, namely the business surveys conducted by the Central Bank, we also find a sharp and distinctly crisis-like decline in investment activity in the first quarter of 2026 (Figure 2). In 2025, the average value of the investment decision index stood at 3.1 points, but at the beginning of 2026 it fell to –4.8. Similar index values were previously observed during the well-known crisis episodes of 2015, 2020 and 2022, when survey-based and statistical indicators of declining investment were broadly consistent with each other.

At the same time, the decline in investment activity in manufacturing is somewhat less pronounced than in the three previous crisis episodes; by contrast, the current collapse in the extractive sector is comparable in scale only to the deep crisis of 2009. The same pattern is also evident in sectoral indicators within manufacturing: in consumer goods production, the investment plans index fell to zero, while in capital goods it reached crisis-level values similar to those seen in 2015, 2020 and 2022 (Figure 3).

This data allows us to state with considerable confidence that, in the first quarter of 2026, the Russian economy is not experiencing a correction but rather an acceleration in the decline in investment (following declines of 4.3% in the third quarter of 2025, and 5.3% in the fourth), broadly in line with previous crisis episodes. All the same, unlike those episodes, household consumption has so far not entered a crisis dynamic and is partially offsetting the collapse in production and investment.

Figures 2–3. Enterprises’ investment plans, 2006–2026, balance of estimates

Boom or bubble?

A further argument put forward by the Russian economic authorities, namely that the decline in investment represents an expected and natural turn following an investment boom in previous years, also appears unconvincing. This is not only a question of the scale of the observed contraction, but also of the fact that the boom itself is largely a myth, as has repeatedly been noted by economic analysts.

First, as previously highlighted by experts from the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) and more recently in a report by the Institute for Comprehensive and Strategic Studies (ICSS), the illusion of an investment boom is, to a certain extent, linked to the failure to take into account the real rise in prices for investment goods. The real (deflated) volumes of investment were, in all likelihood, lower than the statistics suggest. Furthermore, two-thirds of total investment growth between 2021 and 2025 was concentrated in buildings and structures, while the reported scale of investment in this category is inconsistent with both the growth of construction activity and the output dynamics of construction materials. At the same time, investment in machinery and equipment remained relatively subdued, according to CMASF analysis. It is also notable that the commissioning of fixed assets amounted to 11.8% over the last five years, which is three times lower than the growth rates of investment in fixed capital recorded by Rosstat, whereas such a divergence had not been observed previously, as noted in the ICSS report. Finally, a significant proportion of the investment over the last four years was of a forced or replacement nature, meaning it did not create new production capacity but rather replaced old or withdrawn assets (→ Re:Russia: After the Boom). This includes compensation for capital outflows associated with the exit of foreign investors, estimated at around $200 billion. A significant portion of investment was also directed towards the expansion of military production.

Therefore, the argument about a ‘post-boom lull’, which implies that excessive capacity was created in previous years relative to current demand, appears unfounded. On the contrary, investment in industries oriented towards domestically driven non-state demand was insufficient to match its growth, which itself became one of the drivers of inflation.

When broken down by economic sector, what is observed is not so much broad-based investment growth as an intense structural reallocation of funds. For example, in 2025 investment in the manufacturing sector as a whole increased by 49% compared with 2021, according to Rosstat data. However, within this aggregate figure, investment in food production rose by 11%, in motor vehicles by 5%, while investment in clothing production fell by 18%, in coke and petroleum products by 13%, in wood processing by 38%, and in furniture manufacturing by 29%. By contrast, investment in chemicals increased by 215%, in electrical equipment by 109%, in fabricated metal products by 98%, and in other transport equipment by 106%. This extraordinary growth is largely associated with military production. In wholesale and retail trade, investment rose by 2%, in education by 6%, in human health and social work activities it fell by 11%, and in agriculture by 7%. Meanwhile, investment in software development increased by 213%, and in ‘Public administration and defence; compulsory social security’ by 45%.

Thus, what is observed is not an investment boom in the economic sense of the term, but rather a process of structural transformation or, more precisely, deformation of the economy. Moreover, investment has been channelled predominantly into sectors with low multiplier effects, that is, limited spillover into the wider economy, while sectors with higher multipliers have remained underinvested.

A triple blow

It is nevertheless clear that the slump in investment is in fact a matter of serious concern for the Russian authorities. This is evidenced by the meeting held by Putin on 10 June specifically dedicated to this issue. At the same time, public discourse among senior officials has become a contest in the use of euphemisms to soften the perception of the decline. For example, at the St Petersburg Economic Forum, Putin spoke of ‘launching a new investment cycle’ (from which one might conclude that the previous cycle has ended). And, at the ‘investment’ meeting on 10 June, he corrected the head of the Russian Union of Industrialists and Entrepreneurs (RSPP), Alexander Shokhin, noting that the situation should not even be described as an ‘investment pause’, but rather as ‘investment restraint’. Deputy Prime Minister Alexander Novak also sought to downplay the severity of the issue by presenting the contraction in nominal terms (without adjusting for inflation), thereby making it appear less severe: in this framing, the decline amounts to only around 4%.

The proposals put forward at the meeting to remedy the situation do not appear particularly serious and, at times, seem downright farcical. The first category includes suggestions to expand existing preferential regimes for investors, introduce deferred tax deductions that firms would only receive five years after making investments, and minor amendments to the Labour Code. Also included are the much-discussed amendments to the limitation periods for challenging privatisation deals, which have been under consideration throughout the Kremlin-initiated cycle of asset redistribution in 2024–2025 (a recent prominent example being the expropriation of the Rusagro holding from its founder, Vadim Moshkovich). Finally, rhetoric about improving the ‘predictability of the business environment and confidence in the prospects for serious investment’ sounds frankly implausible in the context of the aforementioned asset seizures and the annual increase in taxes, various levies, and compulsory contributions imposed on businesses.

Perhaps the only substantive signal was Putin’s expressed confidence that the Central Bank would continue its cycle of interest rate cuts (despite the fact that neither Elvira Nabiullina nor any of her deputies attended the meeting). The policy rate undoubtedly has a significant impact on investment activity, although mainly in large corporations. However, the main driver of investment activity in recent years has been the public sector, and it is precisely the emerging crisis in public finances and the reduction of the fiscal investment impulse that constitute the most important factors behind the slowdown.

In fact, the investment downturn is the result of three forces: a contraction in budgetary financing, a high policy rate increasing the cost of investment resources, and a deterioration in firms’ financial positions. Corporate own funds are traditionally the main source of investment, accounting for almost two-thirds of total capital expenditure. Yet according to Rosstat, the balance of profits and losses of companies in January–March 2026 amounted to only 74% of the level recorded in the same period a year earlier. Profits in manufacturing fell by 40% in the first quarter of 2026, while losses increased by 10%. Overall, across all sectors of economic activity, profits declined by 19%.

As a result of this triple blow, the fall in investment is broad-based, affecting virtually all sectors and industries. At the same time, the contraction in fiscal support for investment partly reproduces the distorted structure of investment seen in 2022–2025. Growth in investment relative to the first quarter is now observed only in ‘public administration and defence; compulsory social security’ (+25%) and in finance and insurance (+8.7%). By contrast, the sharpest declines (–35% to –40%) are recorded in healthcare, scientific and technical activities, education, and trade. In industry, the steepest contraction is in manufacturing, where investment fell by 22%, while in extractive industries the decline is smaller at 12%, including a 10% drop in oil and gas extraction. Within manufacturing, investment fell both in predominantly civilian industries (for example, metallurgy –31%, food production –11%) and in military and dual-use sectors: chemicals and chemical products (–9%), ‘other transport equipment’ (–33%, including UAVs), computer, electronic and optical products (–36%), and fabricated metal products (–20%, including heavy military equipment).

Against a backdrop of reduced budgetary expenditure, the Central Bank will indeed be able to continue its cycle of rate cuts. However, monetary easing will not compensate the economy for the contraction in public investment and the deterioration in the financial health of enterprises, driven both by stagnating growth and rising tax burdens. Over the past 30 years, three distinct phases can be identified in investment dynamics (Figure 4). The rapid growth of the 2000s was followed by the weak growth of the 2010s, while the acceleration in the first half of the 2020s was driven by the intensive deployment of budgetary resources and the National Wealth Fund. It is therefore highly likely that in the coming years investment dynamics will revert to the long-term trajectory of weak growth. This would not even be the worst-case scenario, given sanctions, higher tax burdens, another round of asset redistribution, and the increasingly distorted structure of the economy.

Figure 4. Fixed capital investment in constant prices, 1998–2027