More details are available in the September issue of the report Regional Economy: Commentaries by Bank of Russia Main Branches（In Russian）.

Executive Summary:

A recent regional economic review from the Bank of Russia indicates that while the national economy continues to expand, the growth dynamics are increasingly uneven across sectors and regions. The primary constraints on output are shifting from final demand to supply-side limitations, most acutely felt in the labour market. This is fuelling sustained wage pressure, which is intricately linked to persistent services inflation, presenting a continued challenge for monetary policymakers.

1. Economic Activity: Expansion Amidst Growing Constraints

In the third quarter of 2025, economic activity across Russian regions maintained its growth trajectory. However, the drivers and intensity of this growth are diversifying. The expansion remains broad-based but is now more frequently constrained by capacity limits rather than a lack of demand.

Businesses across numerous sectors report that production growth is being hampered not by insufficient orders, but by mounting difficulties in recruiting qualified personnel. This labour shortage is the most significant supply-side constraint, affecting everything from manufacturing and construction to services. The tightness of the labour market is the dominant theme shaping current economic conditions.

2. Labour Market: Extreme Tightness and Wage Inflation

The Russian labour market remains exceptionally tight, with unemployment hovering near historical lows. This imbalance between labour demand and supply continues to be the primary engine of rapid wage growth.

• Wage Growth: Nominal wage growth remains elevated across most regions and sectors. This is not merely a catch-up effect but a reflection of intense competition for workers. Businesses are compelled to offer higher wages and signing bonuses to both attract new employees and retain existing ones.
• Sectoral Differences: The pressure is most pronounced in sectors with a high physical presence and specific skill requirements, such as construction, manufacturing, logistics, and IT.
• Implications: This sustained acceleration in wages is translating into robust growth in household nominal incomes. While this supports consumer demand, it also creates a fundamental cost-push inflationary impulse, particularly in the services sector, where labour costs constitute a significant portion of the final price.

3. Inflation and Consumer Demand

The interplay between wage growth, inflation, and consumer behaviour is complex and critical for monetary policy.

• Inflation Dynamics: Price growth for goods has shown signs of moderation, aided by the stability of the Rouble and generally robust supply chains. However, services inflation remains stubbornly high. This stickiness is a direct consequence of rising labour costs. Prices for non-food services, including repairs, hospitality, and healthcare, continue to rise at a brisk pace, underpinning overall inflationary pressures.
• Consumer Behaviour: High nominal wage growth is supporting household purchasing power. However, there are indications that consumers are becoming more discerning. Faced with elevated price levels, households are increasingly focusing on essential goods and seeking out promotions, suggesting a cautious and value-oriented approach rather than exuberant spending. Real wage growth (wages adjusted for inflation) is a key metric to watch, as its sustainability is crucial for long-term consumption growth.

4. Regional Divergences

The Bank’s review highlights that economic conditions are not uniform across Russia’s vast geography.

• Industrial Hubs: Regions with a high concentration of manufacturing and large-scale infrastructure projects are experiencing the most acute labour shortages and, consequently, the strongest wage pressures.
• Agricultural Centers: Regions focused on agriculture are also reporting solid economic activity, though they are more susceptible to seasonal variations and climate factors.
• Consumer-Centered Regions: Major metropolitan and consumer-centric regions show robust demand for services, directly feeding into the high services inflation narrative.

This geographic disparity complicates a one-size-fits-all assessment of the economy and underscores the importance of the Bank of Russia's data-driven, regional approach to analysis.

Investment and Policy Implications

For investors and policymakers, the regional review offers several key takeaways:

1. Supply-Led Growth Cap: The era of easy, demand-driven output expansion is fading. Future growth will be increasingly capped by labour supply and productivity, not just capital investment.
2. Inflation Persistence: The battle against inflation is not over. The stickiness of services inflation, rooted in the tight labour market, suggests that maintaining a tight monetary policy stance (i.e., a restrictive key rate) will be necessary for an extended period to anchor inflation expectations and return inflation sustainably to the 4% target.
3. Sectoral Winners and Challenges: Companies in sectors able to pass on higher labour costs through price increases (e.g., certain services) may maintain margins. In contrast, competitive industries with limited pricing power will face profitability squeezes, forcing efficiency gains and investment in automation.
4. Currency and Rates: The focus on controlling inflation supports a scenario of sustained higher interest rates, which can be supportive of the currency (Rouble) by attracting capital flows, all else being equal.

Conclusion

The Bank of Russia's regional economic survey for Q3 2025 paints a picture of an economy hitting capacity constraints. The primary bottleneck is the extremely tight labour market, which is driving strong wage growth and perpetuating high services inflation. While consumer demand remains resilient, it is becoming more selective.

For the Central Bank, this reinforces the necessity of a hawkish and patient monetary policy. The key challenge will be to keep monetary conditions sufficiently restrictive to cool inflationary pressures without triggering a sharp economic downturn. The path to sustainably achieving the 4% inflation target appears to be longer and more dependent on labour market normalization than previously anticipated. Investors should monitor wage data and services inflation as the primary indicators for future shifts in monetary policy.