Central Bank of the Russian Federation

“…in the third quarter growth was slowing down… There are sectors where a reduction of production is occurring… We see a deterioration of the situation of small and medium business…”

                                                                   — Bank of Russia, 24 October 2025

On 24 October 2025 the Bank of Russia reported a slowing of economic dynamics in the third quarter, noting a reduction of production in a number of sectors and a worsening of conditions for small and medium business. Against the background of these data the rate of interest was reduced to 16.5%.

RBC in its expert note adds: “…the economy is cooling faster… activity is falling, the labour market is experiencing pressure…”.

Such indicators are often interpreted as a sign of a “contraction of the domestic market.” However, this definition reflects only a part of the changes taking place. The current processes indicate not the disappearance of demand, but its redistribution: the structure of the domestic market shifts in favour of large corporate segments, state orders, and highly concentrated industries.

Practically this means:
• demand for mass goods in lower and middle income groups has indeed weakened;
• pressure on small and medium business is intensifying;
• the monetary turnover in the economy is preserved, but moves into other channels — infrastructural sectors, the defence-industrial complex, state projects, AI and technologies;
• traditional indicators of consumption (retail, household credits) cease to reflect the real structure of demand.

Demand does not disappear — it shifts. It ceases to correspond to the traditional mass format “retail + consumer crediting.” From 2023–2025 the structure of demand more and more shifts toward:
• state orders,
• large corporate projects,
• the segment of high-margin services,
• infrastructural markets with a high degree of concentration,
• digital ecosystems and services with a stable client base.

Therefore when in the assessments of the Bank of Russia and experts “compression of domestic demand” or “weakening of small business” is mentioned, these conclusions reflect only one layer of the economic process. In parallel there is a redistribution of demand inside the economy, which makes the overall picture more complex than it may seem from the indicators of retail or consumer loans.

These tendencies imply the necessity of a more complex assessment of the domestic market: besides the data on retail trade and crediting, it is required to take into account the redistribution of resources, the features of the corporate sector, and the role of state programs in the formation of aggregate demand.

THE RATE OF INTEREST AND THE STRUCTURE OF THE ECONOMY

The rate of interest of the Bank of Russia traditionally attracts the attention of economists, analysts, and a broad audience. Its changes are often perceived as an indicator of the condition of the economy, however the rate itself reflects not only the current market conditions, but also the deep structural processes inside the financial system.

In public discussions the rate of interest of the Bank of Russia is often interpreted as an independent instrument capable of “stopping” or “launching” the economy. However, the rate of interest does not exist in a vacuum. Its movement reflects an entire complex of structural processes inside the economic system.

For analysis let us consider the dynamics of the rate of interest of the Bank of Russia for a certain period:

• July 2024 — October 2024: an increase from 16% to 21%.
• October 2024 — May 2025: the rate is held at the level of 21%.
• June 2025: a decrease to 20%.
• August 2025: 18%.
• September — October 2025: 17%.
• November 2025: fixation at 16.5%.

[Source: https://www.cbr.ru/hd_base/keyrate/]

In total: over five months — a stable decrease by almost a quarter.

The rate of interest is not an autonomous instrument of “stabilisation,” it reflects changes in the distribution of monetary resources and in the conditions of crediting.

It is important to remember and not to allow confusion: if a producer buys raw materials on credit, then the difference between the price for cash payment and the price on credit, at the moment of expiration of the term, will be the measure of interest.

It is widespread an opinion that the economy enters a crisis exclusively when the supply of credits is reduced and the rate sharply grows. And, on the contrary — that the decrease of the rate means an easing of conditions and the restoration of normal dynamics. However, this is not a universal rule. In periods when monetary resources are actively directed into separate sectors — for example, into large state orders or defence programmes — the decrease or increase of the rate reflects the peculiarities of the redistribution of liquidity inside the economy, and not an automatic transition from crisis to growth.

Let us examine step by step.

1. THE INCREASE OF THE RATE OF INTEREST.

Thus, in the first half of the period a permanent growth of the rate of interest is observed, which reflects the redistribution of resources into military state orders, import substitution, infrastructure projects.

According to the data of international research institutes, in 2024 the production in the defence-industrial complex of Russia significantly increased:
• the production of tanks — more than twice compared with 2022,
• the output of unmanned systems — multiple growth,
• the expansion of the production of means of communication and reconnaissance.

In 2024 the Russian defence-industrial complex demonstrated significant growth, especially in the production of ammunition, missiles and unmanned aircraft, fulfilling the state order.
According to the data of the report of the Kiel Institute of World Economy, the production of tanks increased by 215%, and the UAV “Lancet” — by 475% compared with 2022. Besides that, the production of means of destruction, communication systems, reconnaissance and electronic warfare grew two times. And this is not all.
In this period the demand for credit of state enterprises showed records. This strengthened the tension in the civil credit segment: access to financing formally remained, but its cost remained high.

IT IS IMPORTANT TO REMEMBER:
The defence industry produces goods which are used once and do not return into the economic turnover. In contrast to goods of long-term or productive designation, the result of the work of the defence-industrial complex does not create further streams of income and does not form future revenue. After the application of such goods the economic cycle ends at that point.

Monetary means directed into the defence sector behave otherwise than in civil branches:
• they cease to participate in usual хозяйственные operations;
• do not ensure repeated turnover;
• do not generate return flows;
• and do not support the expansion of civil production.

In fact this means that a part of financial resources goes into a sector with a one-time use of the produced goods. Such a mechanism creates a load on the general monetary contour of the economy: there become fewer means in the civil turnover, their availability decreases, and the competition for monetary resources strengthens.

When large state orders shift the monetary flows toward the defence-industrial complex, this leads to a deficit of financial resources in the civil sector. The deficit, in its turn, strengthens the demand for borrowed means — and this increases the pressure on the rate of interest.

Therefore, with the growth of defence orders in the future one can expect also a repeated growth of the rate of interest: the increase of demand for financial resources at a limited supply naturally leads to its increase.

When a significant part of state expenditures is directed into the defence sector, financial resources begin to concentrate in the budget and in the branches connected with it. Such concentration inevitably reduces the volume of means available for civil crediting — both consumer and productive. This creates a deficit of financial resources on the market, strengthens the competition for borrowed means and forms pressure upon the rate of interest.

In this period state programs, the banking sector and the defence industry formed a stable contour in which financial flows are redistributed in favour of large projects. For civil branches this means the decrease of availability of credits, the outflow of monetary means and the reduction of possibilities for the expansion of production.

Monetary means which are directed into defence programs, in fact drop out of the usual economic turnover — they do not create new cycles of sales and do not form return flows supporting the broad internal market. This influences not only the consumer sector, but also small and medium entrepreneurship, which depends most of all on crediting.

Exactly therefore the increase of the rate of interest in the given period reflects not the strengthening of market activity, but the redistribution of financial flows in favour of large state and quasi-state projects. For the civil segment such conditions mean the decrease of credit availability, and for separate branches — limitation in investments.

2. HOLDING A HIGH RATE OF INTEREST.

The question arises: why from October 2024 to May 2025 the rate of interest was held at the level of 21 %, remaining one of the highest in the last years?

Such fixation means that the Bank of Russia strives to limit the general volume of crediting, preserving the priority financing for defence state orders, large state and corporate projects. At such a rate it is difficult for the wide productive sector to take credits: the average profitability of industry is considerably lower than the cost of borrowed means.

As a result:
• small and medium business, oriented toward internal production and services, encounters limited access to credits;
• large contractors, defence enterprises and state corporations continue to receive financing in the established order.

Thus a situation is formed in which credit resources are distributed not by the mechanism of ordinary market competition, but in accordance with the priorities of large state programs. Thus a monopoly on credit is created, which strengthens the domination of large players in the financial system and decreases the possibilities for the more small participants of the economy.

For the understanding of the rate of interest as an indicator of the economy, reflecting the movement of capital (circulation), we shall divide the participants of the economic process into subdivisions. For the clarity of the redistribution of monetary flows we consider only the productive and consumer contours of the economy. The financial sector — banks and credit organisations — is consciously left outside the limits of the table. They act as conductors of flows, and not as independent bearers of demand, and their inclusion would distort the picture of redistribution inside the real sector.

PARTICIPANTS OF THE ECONOMIC TURNOVER AND THE DIRECTION OF MOVEMENT OF MONETARY MEANS

Note: The state budget is included as a participant in the redistribution of monetary flows, although it does not itself produce value. It determines the direction and volume of movement of means between the sectors.

To be continued…