Russia's Wartime Economy Shows Strain, Economists Warn of Long-Term Erosion

Russia's economy is experiencing increasing strains due to extensive military spending, which is widening the budget deficit and dampening consumer and business sentiment. While economists do not foresee an imminent financial crisis or collapse, citing crucial oil export revenues that remain robust due to high global prices, underlying long-term problems are eroding the economic foundation.

The government's ability to finance its prolonged invasion of Ukraine is currently supported by these oil revenues. Low unemployment rates and government stimulus in less affluent regions have also helped to curb widespread public discontent, a narrative that aligns with the Kremlin's presentation of stability ahead of Russia's recent parliamentary elections.

However, indicators of consumer sentiment have shown a downward trend since a peak in 2024-2025, a period when increased military expenditures fueled growth and wages. More recently, consumers have grappled with rising gasoline prices and supply disruptions caused by Ukrainian drone attacks that targeted refineries. Similar disruptions have affected small businesses, with significant losses in inventory and customers reported due to strikes against online retailers like Wildberries and Ozon.

Economic growth, which peaked at over 4% annual expansion in 2023-2024, has slowed. The government projects a growth of 0.6% for the current year, following a contraction in the first quarter that was partially offset by a rebound in the second.

The consumer sentiment index, compiled by the independent Levada Center, fell to 94 over the summer, a decrease from 116 recorded in the spring and summer of 2025. Readings below 100 indicate a predominantly negative consumer outlook.

Public concerns, as expressed by citizens in Moscow, primarily revolve around basic needs such as pensions and prices. While some individuals report personal financial stability, others express a desire for improved living standards for pensioners and more affordable housing and domestic travel, along with slower price increases.

Economists describe Russia's economic state as one of "tolerable stability," with public sentiment characterized by "grumbling" rather than active protest. The economy is seen as stagnant but stable, avoiding recession. Disruptions to shopping habits are not considered significant enough to alter public support for the Kremlin, and President Vladimir Putin's approval rating, despite a recent decline, remains elevated compared to pre-war levels.

A key indicator of economic stress is Russia's growing budget deficit and the government's efforts to secure additional funding. This has led to increased value-added taxes, higher fees, and tighter taxation on small businesses, yet the deficit continues to expand. By the end of July, the budget deficit stood at 2.8% of annual economic output, nearly double the initial target. Russia's reserve fund has diminished to 1.6% of GDP, necessitating domestic bank borrowing, which entails high interest rates, with Russian bonds yielding as much as 17%.

The high interest rates, maintained by Russia's central bank to combat inflation driven by war spending, strain civilian companies that lack the preferential credit access afforded to defense firms. Additional war funding comes from private lending by Russian banks to defense-related entities, a practice that keeps these debts off the official deficit figures. Western sanctions continue to limit Russia's access to new investments that would enhance economic productivity.

The combination of high spending, low growth, rising debt, and elevated borrowing costs has led some economists to warn of dangerous structural erosion, even if an immediate collapse is not imminent. The current economic trajectory is considered "unsustainable," though the timeline for any potential crisis remains uncertain.

Oil export earnings, which had fallen below $10 billion per month prior to the Iran conflict, recovered to $15.8 billion by June and $13.8 billion in July. These elevated energy prices could temporarily alleviate budget constraints. Economists suggest that stricter measures against Russia's sanctions-evading oil tanker fleet are necessary to alter this situation.

Funding for defense factories and recruitment bonuses has benefited Russia's poorer provinces. Some defense factories, such as the Uralvagonzavod tank factory, have significantly increased their workforce and production since the invasion of Ukraine. However, shortages of skilled labor and the emigration of hundreds of thousands, largely due to fears of conscription and political repression, are hindering production across the economy.

Kremlin spokesperson Dmitry Peskov has downplayed concerns about monthly deficit figures, asserting that macroeconomic stability is assured. Nevertheless, some economists have cautioned that Russia is falling behind in global technological and economic competition, potentially impacting its ability to sustain a prolonged conflict.