Russia on the edge of economic collapse after 40 months of war

Forty months is a long time in a war. Even more so for an economy already burdened by dangerous dependencies on a fossil-fuel-based world that, with luck, will be consigned to the history books within a few decades. Nearly three and a half years after Vladimir Putin gave the order to invade Ukraine — thus burning all bridges with the West — Russia is now trapped in a maze with no easy way out: sluggish growth and soaring prices, with annual increases in the double digits.

The St. Petersburg International Economic Forum, once a showcase and symbol of Russia’s strength in the global market, turned a couple of weeks ago into a parade of Putinism — though not a particularly cheerful one. “We are on the brink of a recession,” admitted Economic Development Minister Maxim Reshetnikov. The reserves that had supported the country’s finances in recent years, added Central Bank Governor Elvira Nabiullina, “are depleted.”

Little remains of the Russia of late 2021, when verbal clashes with Kyiv were intensifying, but few — very few — suspected the step Putin was about to take. Today, in July 2025, the Russian Central Bank finds itself in a paradoxical crossroads: waging a double battle against inflation and against the Kremlin itself. Something like dancing a waltz on a barrel of dynamite.

“The country is in a state of stagflation,” the Centre for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP). “Economic dynamics are declining rapidly, and there is a risk of a technical recession in the second and third quarters, but inflation remains high.”

It’s been less than three weeks since the central bank — supposedly independent from government control — symbolically lowered interest rates: from 21% to 20%. In doing so, it fulfilled a long-standing demand from the Kremlin. It was the first rate cut since September 2022, the year of Russia’s invasion of Ukraine. This marked a break from a long cycle of interest rate hikes aimed at curbing rising prices.

The situation, however, remains dire. Official inflation still hovers around 10% year-on-year, although several independent institutes estimate the real figure to be above 15%. With military spending still running wild, “risks remain skewed towards inflation,” warned Nabiullina. “Our rate cut approach requires greater caution.”

The contradiction facing the central bank is a true reflection of the current state of the Russian economy, which has long dropped out of the world’s top 10 in terms of size. By now, even the Kremlin is beginning to acknowledge the obvious: that the economic boom driven by the war industry is coming to an end and that the savings made before the war are no longer enough.

Maxim Oreshkin, economic advisor to the all-powerful Presidential Executive Office, declared that the emperor has no clothes just before the St. Petersburg Forum: “The model that ensured growth in recent years has largely reached its limit [...] We need to advance — not forward, but upward: to the next technological and organizational level.”

Still, Russian propaganda continues to claim that the country is doing better than the European Union, its continental nemesis. The unemployment rate, it boasts, is minimal — just over 2%. Russia’s national statistics office, Rosstat, highlights that the average monthly wage has, for the first time, surpassed the 100,000-ruble mark (about $1,300), a 40% increase compared to 2022.

Prices eating away at wage increases

That’s the snapshot in nominal terms — not in real ones. Even according to the official (and sanitized) figures, inflation has surged by 24% over that period. “The government and others are hiding the real inflation figures because if they reveal the truth, they would have to raise wages in the public sector, pensions, and other payments,” warned lawmaker Nikolay Arefiev a few months ago. “And they don’t want to spend the money.”

They don’t want to — and they can’t. Russian authorities had hoped to close out 2025 with a public deficit of just 0.5%, the lowest since 2021, back when the war was just beginning and high fossil fuel prices were filling the state’s coffers. But the extremely costly fighting in Ukraine continues, and the lower house has just revised its forecast to more than triple that figure: it now expects a deficit of 1.7%, the same as in 2024. The Kremlin has less than four trillion rubles in liquid reserves left in its sovereign wealth fund — roughly equal to the projected deficit for this year.

The real rise in prices is eating away at wage gains — week by week, month after month. It’s hurting Russians’ wallets, yes, but also the national mood in a country at war: only one in 10 Russians say their financial situation has improved this year, according to the FOM sociological research center. One in five say it’s gotten worse.

The TsMAKP think tank is equally pessimistic about the Russian economy: “There is a trend toward an almost complete slowdown in activity: the stagnation of investment in machinery and equipment has been exacerbated by the growing problems in the construction sector,” it warns. “And, most importantly, a crisis in consumption is looming, especially in the demand for non-food goods.”

After a period of economic overheating, signs of crisis are mounting. Despite countless government subsidies for the defense industry, overall credit growth has risen by just 1% so far this year. Seven out of 10 companies reported a collapse in consumer demand during the first quarter, according to a survey by the Stolypin Institute. Job vacancies have fallen to their lowest point since the start of the war, according to data from human resources firm Huntflow. Wage payment delays have tripled, while more than 8.8 million Russians are unable to repay loans that are less than 90 days overdue. Car sales have plummeted by 25% in the first half of the year, and clothing chains report sales down between 30% and 35% — partly due to the rising cost of other essential household expenses.

Military spending — the sole engine of the Russian economy since February 2022, alongside oil and gas exports — artificially boosted economic activity in 2023 and 2024, fueled by high demand for weapons and inflated salaries for conscripts. But that boom, typical in wartime economies, is now starting to fade. Partly because of Western sanctions — but not only because of them.

One year of breathing room

The flip side of the war is that the defense sector has drained — and continues to drain — vast resources from a real economy mired in recession. The civilian industry has been in decline since last fall, wiping out the growth accumulated during the early years of the war, which had been fueled by massive public spending. And there’s a further complication: instead of replacing imports with domestic production, as Putin insists, the Russian market is increasingly dependent on other countries — especially China.

If the military sector is excluded from the equation, Russian civilian production has grown by just 1.9% over the past four years, according to data from Rosstat and the Higher School of Economics. That’s far less than other countries in its immediate region — and almost certainly less than it would have grown had Russia not chosen to invade Ukraine.

The Kremlin has a little over a year of fiscal room left to sustain its current level of military spending before it will need to make major cuts, says Vladislav Inozemtsev, co-founder of the Center for Analysis and Strategies in Europe (CASE). And looming on the horizon is a big question: what happens if peace breaks out? It’s hard to imagine that soldiers — currently earning over €2,000 ($2,350) a month, a highly respectable salary in Russia — will be willing to go back to earning just a quarter of that once the fighting ends.

In this scenario, argues Maxim Mironov, a professor at IE Business School, Moscow may still have one card to play: further devaluing the ruble, even at the cost of importing more inflation. The government, which earns revenue in dollars and euros from hydrocarbon exports but spends in rubles, would benefit from a weaker national currency. So would most Russian companies — except importers — who are suffering from a painful loss of competitiveness.

Tailwind from the Middle East

That was the context in which Russia found itself when Israel launched a large-scale military campaign against Iran on Friday, June 13. As expected, the Kremlin condemned the attack on one of its key allies. But beneath that official stance lay another reality — more complex and, in fact, more favorable to Moscow’s interests: the price of oil and natural gas, cornerstones of Russia’s export economy, surged sharply.

For a few weeks at least, Moscow was able to move past the recent slump in commodity prices, which had drastically cut its short- and medium-term revenue outlook. Those price drops, in the words of Elina Ribakova of the Peterson Institute for International Economics, had become “one of the largest, if not the largest” indirect sanctions on the Russian economy — even more significant than the formal sanctions packages passed by the G7.

Her numbers are striking: a $10 drop in the global price of crude oil slashes $17 billion from Russia’s public budget — about 0.8% of GDP, according to Ribakova. And, of course, the reverse is also true.

Given that military spending now consumes more than 40% of Russia’s (classified) federal budget, “every dollar gained or lost is one dollar more — or less — for the war,” says Ribakova, who is also a researcher at the Brussels-based think tank Bruegel. A swift resolution to the increasingly complex Middle East crisis would push prices back down — and “increase Putin’s incentive to negotiate,” says Sergei Guriev, rector of Sciences Po in Paris.

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