The Russian economy is finally stagnating. What does it mean for the war – and for Putin? | Russia
Western leaders were optimistic when imposing sanctions on Russia following the invasion of Ukraine in 2022.
“Russian economy is on the way to shrink by half” in question then US president Joe Biden in March, a month after the war began.
“It was the 11th largest economy in the world before this invasion, and soon it won’t even be in the top 20.”
His guess was inaccurate. After the sanctions shock in 2022, Russia’s military spending increased and the economy boomed.
Instead of falling out of the top 20 by 2025, Russia has surpassed Canada and Brazil to become the world’s ninth largest economy, just behind Italy, France and the United Kingdom.
However, further escalation now seems unlikely. There are clear signs that the Russian economy will finally run aground in 2026.
While the dramatic collapse predicted by the West is unlikely, the Kremlin faces its most precarious economic situation since its tanks first entered Ukraine.
Protector graphic. Source: Russian Federal State Statistics Service
Growth has slowed due to falling oil prices, a key source of government revenue, and long-term demographic pressures previously masked by higher defense spending.
To close the fiscal gap, ordinary Russians face tax increases and a war-ready state that excludes funds for welfare, education and healthcare.
Guardian graphic. Source: 2025 figures taken from How resilient is Russia’s economy after four years of war?, Marek Dabrowski, Dec 2025. 2021 figures taken from Russan ministry of finance. Figures for both years represent planned spending
Meanwhile, trade with key allies has become quieter, corporate bankruptcies are on the rise, and labor shortages are becoming severe.
How the disturbance will affect the conflict in Ukraine depends on Russia’s latest macroeconomic maneuvers and whether global events continue to depress oil prices, experts say.
Growth declines as oil revenues dry up
The current outlook is negative. In January, the International Monetary Fund (IMF) reduced its growth forecasts for Russia to just 0.6 percent for 2025 and 0.8 percent for 2026.
These are the lowest annual growth rates since the recession caused by sanctions over Russia’s annexation of Crimea in 2014, except for the 2020-22 pandemic years.
These estimates are also lower than the IMF’s estimates for western economies.
This loss of economic momentum coincides with declining oil and gas revenues, a mainstay of Russia’s war machine.
In 2022, the tax on fossil fuels accounted for about 40% of the financing in the Russian federal budget; This was more than enough to cover the costs of the war.
However, preliminary estimates for the first three quarters of 2025 show this share falling to 25%.
This is partly due to falling prices; The price of Urals oil has fallen from around $90 (£66) per barrel in early 2022 to $50 per barrel by the end of 2025, amid a global oil supply glut.
However, despite Russia’s efforts to find new buyers, Western sanctions also play a role.
China, India and, to a lesser extent, Türkiye increased their purchases as exports to Europe fell sharply following the invasion.
But by 2026, their total business pales in comparison to how much the sanctioning countries bought on the eve of war.
India, in particular, has reduced purchases in recent months due to trade tariff threats from US President Donald Trump.
Isaac Levi, a policy analyst at the Center for Research on Energy and Clean Air, said: “Russia’s fossil fuel export earnings in 2025 were 13% below pre-war levels, pressured by tougher sanctions, drone attacks on Ukraine’s energy infrastructure, the struggle to find new markets for gas exports and falling global oil prices.
“These crackdowns are steadily draining the revenues Moscow uses to finance the war, but Ukraine’s allies must go further to fully constrain the Kremlin’s war chest.
“Targeting Russia’s shadow fleet, including detaining flagless ships, will severely restrict Russia’s oil export volumes and earnings.”
Long-term pressures still unresolved
Vladimir Putin’s oil troubles may only be a temporary setback, especially if oil prices begin to recover in 2026.
But there are also long-term demographic pressures that are currently hitting the Russian economy hard.
Russia’s population has fallen steadily since 2019, from 145.5 million to 143.5 million in 2024.
A combination of falling fertility rates, casualties from war and migration are responsible for this situation.
Although Western countries experienced similar declines in fertility rates, these declines were not as large, and immigration helped maintain population growth.
Guardian graphic. Source: World Bank except Germany, which is taken from Our World in Data
Dr. from Brussels-based think tank Bruegel. “Russia has no potential for rapid growth,” said Marek Dabrowski.
“The war-related business environment is part of the story, of course, but the real story here is long-term demographics. It hasn’t changed.”
This means that labor shortages are now commonplace in Russia; experts say this can be seen in the unusually low unemployment rate of just 2%.
The Kremlin has tried to shore up its fiscal position with a variety of hefty tax increases.
It increased corporation tax from 20% to 25% in 2025 and introduced higher income tax bands.
Additionally, an increase in VAT from 20% to 22% comes into force at the beginning of 2026; this rate is higher than in the USA, UK, France or Germany.
Although the Russian government has exempted some essential goods, the VAT increase comes on top of persistent inflation that has increased prices of basic needs in Russia.
While much has been made in the West about the impact of war on inflation, Russia has been experiencing much higher inflation for longer.
These disinflation efforts further exacerbated the slowdown.
Economist and co-founder of the European Center for Analysis and Strategies think tank, Dr. Vladislav Inozemtsev said: “The central bank and the finance ministry have an irresponsible policy that will start ‘cooling the economy’ in 2023 to combat inflation.
“So the central bank raised the interest rate to 21 percent, the government abandoned its subsidized mortgage program, and banks began cutting loans and increasing interest rates, most of which were floating rather than fixed.
“It’s kind of a mystery to me why the Kremlin supports such a policy.”
Optimism weakens as military spending slows
There are signs that this economic hardship is negatively affecting the morale of ordinary Russians.
Accordingly Survey conducted by Gallup in RussiaThe invasion of Ukraine initially increased optimism about the economy in Russia amid a wartime boom.
In July 2021, most Russians believed that the economy was worsening, but in November 2022 this situation reversed and many believed that conditions were improving.
However, by August 2025, this optimism had softened; The percentage of Russians who say economic conditions are worsening increased from 29% in 2022 to 39%.
Jul 2021
Russia invades Ukraine in Feb 2022
Protector graphic. Source: Gallup. ‘Do you think that economic conditions in the city or region where you currently live are generally improving or worsening?’ Answers to the question. ‘I don’t know’ is represented by a blank.
The real question for Ukraine is whether Russia can sustain the increase in its military spending.
During the war, Russia’s military expenditures as a share of GDP doubled to over 7%.
This is twice the spending of the United States, which is equivalent to 3.4% of GDP, and higher than that of any other member of NATO.
But in the first few years of the war, the growth in spending now slowed; There was only a 0.1 percentage point increase between 2024 and 2025.
But Russia is in a unique position when it comes to options for protecting its war chest.
Borrowing is possible because Russia’s debt stock is relatively low (although access to international markets has been cut off since the invasion and subsequent sanctions) and taxes can be increased again.
And a lot depends on what happens to oil. Further declines in prices may mean increased insecurity, but equally increases may mean stability.
Experts therefore conclude that Russia should be able to continue paying the price of the war, at least in the short term.
“Putin will encourage the central bank to print money; he will continue to increase taxes, sell state property and nationalize commercial companies,” Inozemtsev said.
“This will enable him to obtain enough money to continue the war for 2026 and possibly 2027.”
There is also the question of whether growing economic discontent in Russia will translate into growing political discontent.
But there is evidence that the Kremlin’s thinking has changed in the last few weeks.
Russia agreed to peace talks with Ukraine for the first time in months, and US-led meetings were held in Abu Dhabi this week.
For Ukrainian negotiators, an important factor now comes into play: Russia’s war economy is showing signs of weakness and cannot continue indefinitely.
