Russia's Wartime Economy: The Fragile Stability Behind the Kremlin's Election Facade

As Russians cast ballots in a stage-managed parliamentary election, the Kremlin projects an image of stability. Yet beneath the surface, mounting defence expenditure, slowing growth, and a widening budget deficit are steadily eroding the structural foundations of Russia's wartime economy. While a near-term collapse remains unlikely, experts warn that the current trajectory is unsustainable, and the risks are accumulating in ways that could eventually precipitate a genuine crisis.

The economic picture is one of paradox. High global oil prices, driven by the ongoing Iran war, continue to provide essential export revenues, allowing the state to fund its four-and-a-half-year invasion of Ukraine. Low unemployment and generous government spending in poorer regions help suppress domestic discontent. However, these buffers mask deeper vulnerabilities that Western policymakers and analysts must understand if they are to craft effective responses.

What are the key indicators of economic strain in Russia?

The most telling signs are found in consumer sentiment and growth figures. The Levada Centre, an independent Russian pollster, reports its consumer sentiment index fell to 94 over the summer, down from 116 in spring and summer of 2025. Readings under 100 indicate that negative sentiment outweighs positive. This decline reflects the impact of higher fuel prices, shortages caused by Ukrainian drone strikes on refineries, and disruptions to major online retailers like Wildberries and Ozon, which have affected many small businesses.

Economic growth has slowed dramatically from a peak of over 4 per cent annual expansion in 2023-24. The government now forecasts just 0.6 per cent growth this year. The economy actually shrank in the first quarter before a modest rebound in the second. For ordinary Russians, these macroeconomic trends translate into immediate concerns about daily life.

In Moscow, voters interviewed by reporters expressed worries that were strikingly mundane. Alexander Vertukhin, a 72-year-old retired military prosecutor, said the government should focus on a decent standard of living for pensioners. Dmitry Kirillin, 26, echoed these sentiments, saying, I'd like prices to rise more slowly, if that's possible in the current situation. These voices suggest a public more preoccupied with pocketbook issues than with geopolitical ambitions.

How is Russia's budget deficit affecting the war effort?

The most critical stress point is fiscal. By the end of July, budget data revealed a deficit of 2.8 per cent of annual economic output, nearly double the original annual target. Available resources in Russia's reserve fund have dwindled to just 1.6 per cent of GDP, forcing the Kremlin to borrow from domestic banks at exorbitant interest rates, with yields on Russian bonds reaching as high as 17 per cent, according to Janis Kluge of the German Institute for International and Security Affairs.

This budget stress is adding to doubts about how long Russia can sustain the war, Kluge wrote in a recent report. To close the gap, President Vladimir Putin has resorted to increasing value-added tax, raising various fees, and tightening taxation on small businesses. The central bank has kept interest rates high to contain war-driven inflation, which in turn stresses civilian companies that lack the privileged access to credit afforded to defence firms. Additionally, Russia's compliant banks have increased private lending to defence-related companies, a move that effectively hides these debts from the official deficit figures.

Why hasn't Russia's economy collapsed despite sanctions?

The resilience, such as it is, stems largely from external factors. Oil export earnings, which had fallen below US$10 billion per month before the Iran war, rebounded to $15.8 billion by June and $13.8 billion in July. As Torbjörn Becker of the Stockholm School of Economics noted, Russia's budget constraints may effectively disappear for as long as elevated energy prices persist. This windfall, combined with low unemployment at 2.2 per cent and military-driven industrial activity, creates a semblance of normalcy.

The defence industry has become a significant employer in Russia's poorer provinces. The Uralvagonzavod tank factory in Nizhny Tagil has increased its workforce from about 20,000 to more than 38,000 since the invasion began, operating 24-hour production. Similarly, Kupol, a manufacturer of drones and surface-to-air missiles in Udmurtia, more than doubled its output in 2025. These factories, running at full blast, provide wages and a sense of purpose that help mitigate discontent in regions far from Moscow's elite circles.

Chris Weafer, CEO of the Macro-Advisory consultancy, describes the economy as being in a state of tolerable stability with a public mood of grumbling rather than protesting. The economy is under strain, it's stagnant to the effect that it's stable but not growing, he said. But it's not facing recession either. Most people, he argues, are not that affected by Ukrainian strikes on infrastructure, and just because your shopping habits are disrupted, that's not going to change the public support for the Kremlin.

What are the long-term risks to Russia's economic stability?

Despite the short-term stability, the long-term outlook is dire. Western sanctions deprive Russia of the foreign investment needed to modernize its economy and improve productivity. The emigration of several hundred thousand mostly younger people, driven by fears of conscription and political repression, has created acute shortages of skilled labour, restraining production across both defence and civilian sectors.

Andrei Klepach, chief economist of Russia's state-owned VEB.RF development bank, offered a stark warning in a recent speech. Due to sanctions and economic isolation, we're falling behind in the technological and economic competition in the world, he said, adding that we can't win the competition in this war of attrition. This admission from a senior state economist underscores the depth of the structural challenges.

The Kremlin, for its part, dismisses concerns. Spokesperson Dmitry Peskov said month-to-month deficit figures were volatile and this is not a figure that should be cause for concern. Macroeconomic stability is absolutely ensured. Yet the combination of high spending, low growth, rising debt, and elevated borrowing costs leads many economists to conclude that the current path is unsustainable, as Becker put it, even if the timing of a crisis remains highly uncertain.

What should Western policymakers do in response?

For those in the West seeking to hasten the end of Russia's aggression, the analysis points to a clear priority: targeting the revenue streams that keep the war economy afloat. Tougher measures against Russia's sanctions-evading oil tanker fleet must be a priority, Becker argued. If elevated energy prices are the primary buffer preventing a fiscal crisis, then closing the loopholes that allow Russia to profit from oil sales is the most effective lever available.

The Russian economy is not on the brink of collapse, and it would be a strategic error to assume otherwise. However, it is a system under profound and accumulating strain. The erosion of its technological base, the flight of its human capital, and the distortion of its financial markets are long-term wounds that will not heal quickly, even if the war were to end tomorrow. For liberal democracies committed to upholding the rules-based international order, the challenge is to maintain pressure with patience and precision, recognizing that the Kremlin's current stability is a fragile construct built on volatile oil prices and the quiet endurance of its citizens.

Frequently Asked Questions

Is Russia's economy on the verge of collapse?

No, experts do not foresee an immediate financial meltdown. High oil prices and low unemployment provide a buffer. However, the structural foundations are eroding, and the long-term trajectory is considered unsustainable.

How is Russia funding its war in Ukraine?

Russia relies on oil export revenues, which have rebounded due to the Iran war, and domestic borrowing from banks at high interest rates. It has also increased taxes on consumers and small businesses and used compliant banks to lend to defence companies off the official books.

What is the main economic risk for Russia?

The primary risks are the widening budget deficit, high borrowing costs, low growth, and the long-term effects of sanctions, including technological isolation and skilled labour shortages due to emigration.

What can the West do to increase economic pressure on Russia?

Analysts suggest that tougher enforcement of sanctions on Russia's oil tanker fleet is crucial. Closing loopholes that allow Russia to profit from energy exports would remove a key financial buffer for the war effort.