European Commission upgrades Russia's 2026 GDP growth forecast to 1.3%

MOSCOW. May 21 (Interfax) - The Russian economy will grow 1.3% in 2026, the European Commission said its Spring 2026 European Economic Forecast.

The previous European Commission forecast envisaged an increase in Russian GDP of 1.1% this year.

The forecast for 2027 has been downgraded to 1.1% from 1.2%.

Russian economic growth slowed to 1% in 2025, from 4.9% in 2024, the EC said.

"Relatively resilient private consumption in particular was key in preventing an even more marked deceleration in economic activity in 2025, as a persistently tight labour market continued to drive real wage increases," the EC said.

But the "macroeconomic imbalances that built over the last years have widened, exacerbated by sanctions from the EU and its allies, as reflected in particular by the deteriorating fiscal situation and rising private debt levels," it said.

The surge of hydrocarbon prices caused by the conflict in the Middle East is set to support Russian GDP through different channels, however, much of the effect of the windfall gains is expected to be muted as structural weaknesses persist, the EC said. Investment is forecast to start growing slowly again due to improved monetary conditions and the hydrocarbon windfall gains, although most of the latter is expected to be used to meet the established federal budget deficit targets and to reduce the corporate debt burden.

Private consumption growth is forecast to moderate further, as wage growth is set to slow.

Only a slight increase in export volumes is forecast, as oil production is close to potential and limited by OPEC+ quotas, the EC said.

"Continued military spending, paired with the projected limited pickup in economic activity due to the increase in oil and gas prices, is set to exert further upward price pressures," it said.

Analysts believe that at the first stage, the broader consequences of the price shock in the energy sector will be contained by subsidizing the fuel industry. The Central Bank of Russia therefore made a cautious key rate cut at its last meeting, and the level of real rates in the economy remains high.

The European Commission forecasts that inflation in Russia will be 5.7% in 2026 before falling to 4.8% in 2027.

The budget deficit is expected to be 2.2% in 2026 and 2.8% in 2027. As a result, the ratio of public debt to GDP will rise to 18.9% and 21.2%, respectively.

The Commission points to the presence of significant risks for the Russian economy. The main upward risk is the prolongation of the conflict in the Middle East, which will lead to additional windfall revenues due to rising oil and gas prices. Downward risks include increased Ukrainian attacks on Russia's energy infrastructure, rising public debt due to high interest rates and tighter sanctions, and the possibility of monetary policy tightening if inflation turns out to be more persistent than expected.