Russia’s economy, which initially defied Western sanctions and saw growth driven by massive military spending and robust oil exports, is now showing significant signs of a downturn. Recent economic indicators are flashing red with a decline in manufacturing activity, a tightening in consumer spending, and stubbornly high inflation, which are straining the national budget, according to the Wall Street Journal. Russian officials are openly acknowledging the risks of a recession. Economy Minister Maxim Reshetnikov warned last month that Russia was on the ‘verge of a recession,’ while Finance Minister Anton Siluanov described the situation as a ‘perfect storm.’ Companies, from agricultural machinery producers to furniture makers, are reducing output. The central bank announced on July 3 it would debate cutting its benchmark interest rate later this month, following a reduction in June.
The slowdown indicates that Western sanctions, though not a knockout blow, are increasingly taking a toll. If sanctions intensify further or global oil prices fall, Russia’s economy could face more severe instability. This downturn undermines Putin’s strategic bet that Russia can financially outlast Ukraine and its Western allies, suggesting Moscow may struggle to finance the war indefinitely. While analysts suggest this economic sputtering is unlikely to immediately alter President Vladimir Putin’s war objectives, as his focus on ‘neutering Ukraine’ overrides broader economic concerns, it exposes the limits of his war economy.
The article also highlights that the reliance on military spending as a growth driver is not sustainable and may lead to a contraction of the civilian economy. The war in Ukraine and financial constraints are causing pressure on the Kremlin, adding to the economic challenges. Experts warn that this approach is not viable in the long term. Military spending accounts for over 6% of GDP this year (the highest since Soviet times) and approximately 40% of total government spending. This has led to high inflation, forcing the central bank to raise interest rates to a record 21% to try and tame it. Higher interest rates have increased borrowing costs for businesses, curbing investment, expansion plans, and squeezing profits. The economic comedown has already begun, with Russian GDP growth slowing to 1.4% in the first quarter compared to a year earlier, down significantly from 4.5% in the fourth quarter of 2024.
Businesses across Russia are feeling the effects. Rostselmash, the country’s largest producer of agricultural machinery, announced in May it would cut production and investment, and pull forward mandatory annual leave for its 15,000 employees due to a lack of demand. In Siberia, electricity grid operator Rosseti Sibir stated it was on the verge of bankruptcy due to high debt, halting investments and proposing tariff hikes for industrial users.
While some analysts argue the Russian banking system remains stable, others warn of increasing instability. A recent report by the Washington, D.C.-based Center for Strategic and International Studies (CSIS) highlighted risks from a government decision to control war-related lending at major Russian banks. The state could direct banks to offer preferential loans, potentially forcing the government to absorb losses if high interest rates prevent companies from meeting obligations. The Moscow-based Center for Macroeconomic Analysis and Short-Term Forecasting assessed in May that the risk of a protracted systemic banking crisis in 2026 was ‘moderate’ and growing.
These economic challenges intensify pressure on the Kremlin by reducing its financial capacity to fund its war in Ukraine. The government has operated with a budget deficit throughout the war and projects this will continue for at least two more years. This fiscal strain could provide an opening for Western nations to implement more powerful sanctions. Falling oil prices present another significant risk for Russia, as energy sales account for about a third of its budget revenues. The price of Russian crude has consistently remained below the level assumed in this year’s budget, and Russia’s oil-and-gas revenue in June fell to its lowest level since January 2023, according to Finance Ministry data.