The Russian economy this year is facing rising hurdles: uncontrolled inflation, a growing budget shortfall—partially due to immense military expenditures—and dwindling revenues from oil and natural gas.
Economic expansion has also sharply decelerated. However, the approaching economic storm is unlikely to compel President Vladimir Putin to enter negotiations soon to end the war in Ukraine. Analysts believe the Kremlin can sustain this for many more years at the present pace of hostilities and under existing Western sanctions.
“If you look at the economy itself, it will not be the final straw,” said Maria Snegovaya, a senior fellow for Russia and Eurasia at the Center for Strategic and International Studies (CSIS), a think tank. “This is not a catastrophe. It is manageable.”
Looking ahead three to five years, Russia can continue its military actions, she noted, observing that making a reliable assessment further out is difficult.
And a collective of exiled, anti-Putin Russian economists posit that the war of attrition could persist even longer, as the Kremlin’s capacity to wage war is “unconstrained by economic limitations.”
Western sanctions have not inflicted sufficient damage on Russia’s energy economy to alter Moscow’s war plans, Richard Connolly of the Royal United Services Institute (RUSI) told CNN.
“As long as Russia extracts oil and sells it at a reasonably fair price, they have sufficient funds simply to get by,” said the senior fellow for international security at the British think tank.
“I am not suggesting the situation is very optimistic for them, but they have enough strength so that the economy is not a factor in Putin’s calculations when he contemplates the war,” Connolly added.
This is unwelcome news for Ukraine and for the Trump administration, which has held numerous rounds of talks trying to broker a cessation of the conflict.
Tax Hikes and Price Rises
What has shifted for Russia is that the initial economic boost caused by a sharp rise in military spending appears to have ended, and now the Kremlin is compelled to “continue shifting the burden of the war onto Russian society,” Snegovaya stated.
This societal burden manifests as substantial increases in corporate and income tax rates, along with a hike in the value-added tax (VAT), to help finance record levels of military outlays. Russian consumers are also contending with steep price increases, particularly for imported goods.
But, unlike in the West, elevated inflation “does not generate much social discontent” in Russia, Snegovaya contended, pointing to the effects of state propaganda and repression.
Like other experts, Connolly also mentioned that inflation in post-Soviet Russia has consistently been high, so consumers are accustomed to it. The International Monetary Fund forecasts that Russia’s annual inflation this year will be 7.6%, down from 9.5% in 2024.
Russia is now allocating nearly 40% of its budget “to aggression,” NATO Secretary General Mark Rutte stated earlier this month, which is one of various estimates of Russian military spending. These expenditures rose by 38% last year compared to 2023, according to an April report from the Stockholm International Peace Research Institute.
The spending surge has generated a new class of wartime economic “winners,” including defense contractors such as arms manufacturers, and blue-collar workers. As a result, poverty has decreased in certain parts of Russia, meaning Putin faces even less pressure from segments of the populace, experts argue.
“It was like an adrenaline shot,” Kurbanhaleyeva said of the economy’s military uplift, although she noted a subsequent slowdown in overall growth.
Some of Russia’s most disadvantaged rural areas have also experienced an economic upswing since the conflict began, partly due to the substantial salaries flowing to Russian soldiers and their families—a tactic the Kremlin employs to recruit volunteers and avert widespread mobilization, aiming to replace those lost on the front lines in Ukraine.
“Russian soldiers today receive more than any Russian soldier in the history of Russian soldiers,” Connolly of RUSI stated. “They earn more than they would ever have hoped for if they had remained in these relatively depressed parts of the country and taken up other employment in the civilian economy.”
The Russian government has also disbursed large compensations to the families of soldiers killed or wounded in the conflict, Kurbanhaleyeva observed.
Partially by channeling funds toward military personnel and their kin, the Kremlin has managed to mollify discontent, despite Russian casualties in Ukraine nearing one million people, with 250,000 fatalities, according to a CSIS estimate released in June.
“I do not think the regions will have an effect on sustaining the war, but the fact that there are no outbreaks of public protest removes pressure from Putin when he makes decisions about next steps,” Connolly remarked.
Experts suggest the Kremlin may be mindful of concerns regarding the return of a large cohort of war veterans—unemployed and with costly medical requirements—should a peace agreement materialize.
“It is in Putin’s interest to continue this war, at least from an internal viewpoint,” said Kimberly Donovan, director of the Economic Statecraft Initiative at the Atlantic Council.
Sanctions Evasion Proves Costly
While the economic hurdles are manageable in the short term, the long-term situation could be quite different. Russia has been heavily utilizing its sovereign wealth fund, which, according to a recent Atlantic Council report, is creating “new trade-offs for the Kremlin,” as the cushion once protecting the general public from costs depletes.
The value of assets that are liquid or easily convertible to cash in Russia’s National Wealth Fund has fallen by 57% since the war began, according to data from the Kyiv School of Economics.
As the fund diminishes, “it is hard to envision a scenario in which the Russian government could sustain current defense expenditures without sweeping social spending cuts visible to the general public,” the Atlantic Council report stated.
Furthermore, recent sanctions imposed by the US and UK against Russia’s two largest oil concerns—“Lukoil” and “Rosneft”—have raised the business cost for Russia, Donovan of the Atlantic Council informed CNN.
“They (Russian oil producers) are rerouting oil exports via smaller Russian firms… All of that costs significant money,” she said.
If this combines with tighter sanctions enforcement and increased pressure on India and China to cease purchasing Russian oil, the Kremlin may eventually have to adjust its outlook, she contended.
“The more pressure we can exert on Russia with sanctions like these, the higher the cost will be for them to try and circumvent them.”
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