The Russian economy is finally stagnating. What does it mean for the war – and for Putin? | Russia

Russia’s Economic Crossroads: From Wartime Boom to Stagnation

Western predictions of a Russian economic collapse following the 2022 invasion of Ukraine proved remarkably off-target. Initial sanctions, while disruptive, didn’t trigger the anticipated implosion. Instead, a surge in military spending fueled a temporary economic boom, allowing Russia to not only weather the storm but even climb the ranks of the world’s largest economies. However, the tide is turning. As 2026 unfolds, clear signs indicate Russia’s economy is running aground, facing its most precarious position since the conflict began.

The Illusion of Resilience: How Military Spending Masked Underlying Weaknesses

The initial resilience stemmed largely from a massive redirection of resources towards the military-industrial complex. This created artificial demand and masked deeper structural problems. While GDP figures initially appeared robust, this growth wasn’t sustainable. As Dr. Marek Dabrowski of Bruegel notes, the long-term demographic challenges – a shrinking and aging population – were simply overshadowed by wartime spending. Russia’s population has consistently declined since 2019, falling from 145.5 million to 143.5 million in 2024, a trend exacerbated by war casualties and emigration.

Did you know? Russia’s military expenditure now accounts for over 7% of its GDP, exceeding that of most NATO members and representing a doubling since before the invasion.

The Cracks Begin to Show: Falling Oil Prices and Diminishing Revenue

The economic foundation supporting this wartime effort – oil and gas revenues – is now crumbling. In 2022, fossil fuel taxes comprised roughly 40% of the Russian federal budget. Preliminary estimates for the first three quarters of 2025 reveal this share has plummeted to 25%. This decline isn’t solely due to Western sanctions. A global glut of oil, pushing prices down from around $90 a barrel in early 2022 to $50 by late 2025, is a significant factor.

While Russia has successfully diverted some exports to countries like China and India, these sales haven’t fully compensated for the loss of European markets. Recent threats of tariffs from the US, particularly targeting India’s purchases of Russian oil, add another layer of uncertainty. Isaac Levi, a policy analyst at the Centre for Research on Energy and Clean Air, emphasizes the need for continued pressure, stating that targeting Russia’s “shadow fleet” of oil tankers is crucial to further constrain its revenue streams.

Tax Hikes and a State Rewired for War: The Cost to Ordinary Russians

To bridge the widening fiscal gap, the Kremlin is increasingly relying on measures that directly impact its citizens. Corporation tax has risen from 20% to 25%, and higher income tax brackets have been introduced. A VAT increase to 22% in early 2026, exceeding rates in the US, UK, France, and Germany, further squeezes household budgets. These measures, coupled with persistent inflation – significantly higher and more prolonged in Russia than in Western economies – are eroding living standards.

Pro Tip: Keep an eye on Russia’s unemployment rate. Currently at a low 2%, this is largely a consequence of severe labour shortages, indicating a fundamental imbalance in the economy.

The Impact on the Conflict in Ukraine: A Question of Endurance

The central question for Ukraine and its allies is whether Russia can sustain its military spending in the face of these economic headwinds. While a complete collapse is unlikely, the slowdown in growth and dwindling oil revenues will inevitably create constraints. The Kremlin is likely to resort to increasingly desperate measures – printing money, raising taxes, and nationalizing businesses – to maintain its war effort, as predicted by economist Vladislav Inozemtsev.

Recent developments, including Russia’s willingness to engage in peace talks – the first in months – suggest a potential shift in strategy, possibly driven by these economic realities. For Ukraine, this represents a crucial opportunity to negotiate from a position of relative strength.

Looking Ahead: Long-Term Pressures and Uncertainties

Beyond the immediate challenges of oil prices and sanctions, Russia faces deeply ingrained structural problems. The demographic crisis, coupled with a lack of diversification and a stifling business climate, will continue to hinder long-term growth. While oil prices could rebound, providing temporary relief, the underlying issues remain unresolved.

The IMF’s downgraded growth forecasts – just 0.6% for 2025 and 0.8% for 2026 – are the lowest outside of the pandemic years since the 2014 annexation of Crimea, highlighting the severity of the situation. These figures also lag behind growth rates in Western economies, signaling a widening economic gap.

Frequently Asked Questions (FAQ)

• Will Russia’s economy collapse? A complete collapse is unlikely, but significant stagnation and hardship are increasingly probable.
• How effective have Western sanctions been? Sanctions have been disruptive, but Russia has adapted by finding new markets and prioritizing military spending. Further tightening of sanctions is needed.
• What is the biggest threat to Russia’s economy? Falling oil prices and long-term demographic challenges pose the most significant threats.
• Will this economic pressure affect the war in Ukraine? Yes, it will likely constrain Russia’s ability to sustain its military effort over the long term.

Explore further: Read our in-depth analysis of the impact of sanctions on the Russian energy sector and the demographic challenges facing Russia.

What are your thoughts on the future of the Russian economy? Share your insights in the comments below!