Russia’s economy has entered a period of stagnation. However, very few observers truly know its current condition. The economic boom that followed the outbreak of the war has been replaced by zero or negative real returns. Russia is unlikely to be on the brink of an outright economic collapse in the next few years, but it is clearly facing a deeper and more persistent erosion of its economic base.
This is the third article in a four-part series on the impact of the war in Ukraine on Russia:
- What Is a War Economy
- How the war calculus has evolved
- The current state of the economy
- The long-term outlook
Russia’s economy is likely under strain …
In reality, no one outside Russia knows the true state of the economy. There is also a risk that Putin himself lacks a comprehensive overview, as discussed earlier. As early as the second quarter of 2022, Russia stopped publishing key economic data, including money supply figures, inflation components, and sector-specific growth statistics. As a result, official headline figures cannot be independently verified and must be treated with great caution. Growth and inflation data published by the IMF and the World Bank are, for example, largely direct reproductions of figures submitted by Russia’s statistical office, Rosstat.
… but the magnitude remains unclear
What is clear is that the numbers do not add up.
- Since the start of the war, Russia’s official military spending has exceeded one third of the state budget and now amounts to more than USD 146 billion (around 40%). In 2025, military expenditure reached approximately 8% of GDP. The true figure may be even higher, given that for four consecutive years Russia has deployed a force comparable in size to the peak of US troop deployment in Vietnam in spring 1969. At that time, the Vietnam War was close to breaking the US federal budget. Despite this, Russia reported a budget surplus in 2022 and 2023, only a modest deficit in 2024, and “just” around 4% of GDP in 2025.
- Part of this apparent resilience is explained by a likely 40–50% decline in the real rouble exchange rate against the US dollar since the start of the war. While the official rouble rate has remained close to its 2022 level, Russia has imposed extensive capital controls throughout the war. In addition, oil exports to India and China are now settled in rupees and renminbi. As a result, the official exchange rate is based on extremely thin trading volumes and is, in practice, largely fictitious and cosmetic.
What is certain is that Russia’s revenues are falling …
At a fundamental level, Russia does not lack oil exports, it lacks prices that make those exports profitable. Russia’s extraction costs are estimated at USD 35–45 per barrel. To this must be added transport costs of USD 8–9 per barrel when shipping oil from the Baltic Sea to destinations such as India or China. At the same time, Russia’s “Urals” blend is sold to both India and China at a discount of roughly 23% to Brent crude. This means that at a Brent price of USD 61 per barrel, Russian oil production operates at a loss. Production is maintained primarily to avoid permanent damage to oil fields. Capital expenditure is therefore frequently postponed, particularly for fields located far from export terminals.
In volume terms, more than 80% of the EU’s gas imports came from Russia in January 2022. Today, the figure is below 10%, and the trend continues downward. Russia’s main bottleneck is its lack of gasification capacity, facilities that convert natural gas into LNG, which typically take at least five years to build.
… and the outlook is deteriorating further
Russia’s economic outlook continues to weaken. Both the United States and the EU have shown increased willingness to apply secondary sanctions—financial penalties imposed on buyers of Russian oil. So far, this has led both India and China to demand larger discounts on Urals crude. Under pressure primarily from the United States, India is also reducing its oil purchases from Russia in favour of suppliers such as the UAE and Saudi Arabia. In mid-2025, India was importing around 1.8 million barrels per day from Russia; by early 2026, this figure is expected to fall below 700,000 barrels per day. This increases the risk of a downward price spiral for Urals crude.
- In December, energy-related state revenues fell to approximately 410 billion roubles, almost half the level recorded a year earlier and the lowest since 2020.
- Russia’s 2025 budget was originally based on an oil price assumption of USD 70 per barrel. In reality, 2025 has delivered closer to USD 50 per barrel once Urals discounts are taken into account. This points to a full-year budget deficit of 4–6% of GDP for 2025, with current monthly deficits reaching as high as 10%.
- For the Russian state, this means that while military expenditure continues to rise, state revenues are simultaneously declining.
Russia is therefore drawing on its financial reserves
Since the start of the war, Russia has sold approximately half of the gold holdings in its National Wealth Fund.
At the same time, pressure has mounted on the Russian central bank, which has lowered its policy rate to 16% from above 20%. This move is controversial from a monetary policy perspective, as official inflation remains around 6%, while unofficial estimates place it closer to 12–15%. The rate cut was intended to stimulate economic growth, which in 2025 is estimated at just 0–0.5%.
Russia’s war economy thus appears financially strained and increasingly dependent on rising energy prices, an outcome that looks highly unlikely. Taken together, there appears to be no soft landing for the economy.
But Russia is unlikely to face an immediate collapse
A sudden economic collapse is probably still several years away. Putin has progressively centralised power as financial and economic risks have increased, thereby extending the system’s lifespan. As a result, the economy faces a prolonged period of gradual erosion if the war continues. Sanctions continue to undermine export revenues, investment is drying up, the state budget is being drained, and political room for manoeuvre is narrowing sharply.
A classic financial collapse nevertheless remains unlikely. Historically, there are four main pathways to such a collapse:
- Currency collapse via capital flight, which is effectively blocked by Russia’s capital controls.
- Cut-off from vital imports, which is unlikely given Russia’s high level of self-sufficiency and the stabilisation of trade with China and India. China needs Russian oil in the event of a conflict over Taiwan. India could source oil from Arab countries, but is unlikely to accept the loss of consumer goods exports or insider access to military electronics. India is acutely aware of the need to upgrade its army’s technological capabilities as China modernises Pakistan’s forces. Moreover, India’s Cold War history is marked by repeated and deep trust deficits vis-à-vis the United States.
- A debt-driven financial crisis, which remains unlikely as both sovereign and household debt levels are relatively low.
- Social collapse, driven by internal political opposition, which is possible but would unfold slowly in a highly authoritarian system such as Russia’s, including in Siberia.
Moreover, Russia has not yet implemented the most intrusive historical measures associated with a full war economy, such as price and wage controls, compulsory reallocation of all civilian sectors towards military production, or a further drastic curtailment of private consumption and personal freedoms. There are, for example, no direct rationing systems and no pervasive daily censorship of military bloggers. Public support for the Kremlin’s narrative remains broadly intact.
The economy can likely survive for several more years …
The economy should therefore be able to endure for a number of years yet. Two external factors will be particularly decisive:
- The extent to which India continues trading with Russia (oil and military insight in exchange for consumer goods and IT).
- Since 20 January this year, the degree to which President Trump chooses to pursue a decoupling of the United States from Europe. Ukraine’s resilience depends on continued financial and military support from the EU. The new US National Security Strategy (NSS), for example, explicitly frames European democracies as a security threat. The NSS therefore implies active support for right-wing populist governments such as Hungary and Slovakia—a classic “divide and conquer” approach. The MAGA movement also advocates a full decoupling from the EU, and JD Vance has, among other things, proposed the de facto annulment of US Treasury bonds held by the EU (cf. the Mar-a-Lago Accords). In this context, Trump himself remains more moderate than much of his Republican base.
… but economic and political options continue to narrow
Economically, Putin’s remaining options are slowly shrinking and largely limited to:
- Higher taxes, which risk deepening the production downturn
- Increased domestic borrowing, which risks fuelling inflation and eroding the state budget
- Further depletion of reserves, which have already been declining for several years
The system is therefore coming under increasing pressure, economically, financially, and eventually politically.
In 2025, Putin was offered a generous opportunity to end the war. He rejected it on the assumption that Trump would divide the West, pressure Ukraine into concessions, and increase Russia’s territorial gains. So far, the opposite has occurred. Ukrainian and European positions have been further consolidated, and the United States has reaffirmed its commitment to NATO (and Ukraine), not least through the 5% spending target agreed in The Hague. A Ukrainian surrender therefore appears unlikely, for now at least. At present, it would require a profound political shift within Ukraine itself.