Russian Wartime Economy

This report examines the impact of Russia’s war-driven defense spending on its economy since the full-scale invasion of Ukraine and the Western sanctions that followed. It first describes Russia’s gradual pivot to military Keynesianism—a state-led macroeconomic approach based on the belief that increased military spending can stimulate the economy—with a focus on key investments in Russian defense spending that have boosted the country’s growth. This includes massive budgetary and extra-budgetary financing allocated to the military industrial complex and personnel recruitment efforts.

Next, the report examines current issues stemming from, or exacerbated by, the war, sanctions, and soaring military expenditures. These include an acute labor shortage, inflation, and a recent slowdown in growth. The report also identifies key future bottlenecks that have the potential to pose significant threats to Russia’s adaptation strategy. These include uncertain oil revenues, a diminished current account, an economic overreliance on China, and a potential credit crisis. The report shows that declining oil prices constitute a major threat to the state budget’s most important revenue source, which might worsen in a global trade war. Russia’s dependence on hard currencies like the dollar and the euro, with only partial “yuanization” of its foreign trade transactions, is another important constraint highlighted in this analysis.

The report ends with an evaluation of Russia’s ability to keep the economy, war effort, and reconstitution drive afloat for at least another three years under three potential sanctions scenarios: (1) status quo sanctions, (2) partial relief, and (3) sanctions reinforcement. It concludes that under the first scenario—status quo—absent major changes, Russia would be able to sustain its current economic and military model for at least another three years. Under the second scenario—a partial lifting of existing sanctions—Russia’s economic model would likely remain the same, but additional breathing room would ultimately provide Russia with more fiscal space to proceed with speedier military reconstitution efforts in certain areas of its defense industry, impacting Ukrainian and Western security. Under the last scenario—dramatic sanctions expansion and qualitatively strengthened enforcement efforts—Moscow’s existing socioeconomic model may face more serious challenges, constraining its manufacturing capacity and limiting its ability to conduct a long-term war effort.

All in all, there are three major takeaways from the report:

1. Russia is muddling through the Western sanctions regime, with its economy impacted but not ruined and its defense industry capable of maintaining the current levels of attrition through the combination of boosted domestic arms production and personnel recruitment efforts in addition to military and economic assistance from third countries. The Kremlin hence sees no immediate need to negotiate an end to the war, unless the terms of the peace deal effectively equal to a Ukrainian capitulation on key political questions.

2. Partial sanctions removal, while potentially increasing the resources available to the Russian war effort, is unlikely to lead to a major restructuring away from Russia’s current economic orientation. Russia will remain committed to supporting its defense industry no matter the domestic tradeoffs required, and Western firms are unlikely to reestablish their position in the Russian market at the scale of their pre-2022 presence.

3. Finally, even if the war in Ukraine ends soon, the Kremlin is likely to maintain its policy of military Keynesianism by continuing to direct significant funds from the federal budget and other non-budgetary sources to the country’s bloated defense industry in order to reconstitute its military. Russian negotiators are unlikely to value sanctions relief alone as a large enough inducement to cease their commitment to further aggression in Ukraine. Western diplomats and supporters of Kyiv’s defense of its sovereignty should be clear-eyed in this regard. Overall, due to valuable combat experience, extensive knowledge about the development of sanctions-evading infrastructure, and an intensive post-war reconstitution drive, Russia will remain a meaningful threat to Western security.

Introduction

Despite the unprecedented number of economic sanctions the West has imposed on Russia, the Russian economy has successfully adapted to the new reality and continues to maintain material support for the country’s war effort. The Kremlin has mitigated the collapse of foreign investment with massive state-led investment into the military industrial complex. Through a combination of technocratic skill, adaptable supply chains, a low debt-to-GDP ratio, critical assistance by China, Iran, and North Korea, among other countries, and most importantly, a consistent flow of energy revenues, Russia’s economy has not collapsed and continues to adjust to sanctions while maintaining its war effort at the current levels of intensity. This has helped Russia adjust to the new status quo, allowing it to support both its war machine and social spending programs at levels that preserve social stability.

This does not, however, mean that the Russian economy is not facing any constraints. In recent months, for instance, lavish government spending on the defense industry, combined with generous payouts to soldiers and their families, has reinforced long-term imbalances within Russia’s macroeconomic trajectory, including labor shortages, rising inflation, and a projected economic slowdown. In addition, Russia’s dependency on energy revenues, hard currency, and Chinese imports, among other factors, are also magnified by the ongoing sanctions. But while Russia’s wartime economic adaptation is imperfect and comes at the expense of its long-term development goals (including an overall modernization of the country and retainment of human capital), it appears generally sustainable in the near term.

This report examines the factors keeping Russia’s economy afloat, along with potential signs of economic stagnation, to reach a better understanding of the structure of the Kremlin’s wartime economy, its strengths and weaknesses, and its potential for military reconstitution. It also explores the sustainability of Russia’s current trajectory, as well as the socioeconomic, defense, and military implications of war- and sanctions-induced constraints. Given that the Western impact on Russia’s economic resilience primarily hinges on sanctions, the report also explores the likely outcomes of the three future sanctions scenarios: (1) existing Western sanctions remain in place, (2) they are partially lifted, or (3) they are reinforced.

This report has greatly benefited from the discussions held within an expert workshop, as well as one-on-one interviews with leading analysts of the Russian economy and defense industry, both in the United States and abroad. These efforts were complemented by extensive desk research, including tracking statements from top Russian state officials, press and data releases from major Russian state agencies and companies, articles from relevant academic and policy journals, and statistical data by major financial institutions.

The report is divided into four parts. The first looks at Russia’s military-economic adaptation via military Keynesianism. The second and third parts analyze existing and future vulnerabilities associated with this model. The fourth and final part presents several scenarios for the Russian wartime economy going forward, depending on the strength of sanctions and concomitant constraints and opportunities.

Part I

Russia’s War-Driven Defense Spending

Military Keynesianism

One of the key factors contributing to Russia’s ability to successfully adapt to Western-imposed restrictions is a series of state-led macroeconomic policies referred to as “military Keynesianism,” which aims to stimulate the economy by increasing state-led military spending. Since its 2022 invasion of Ukraine, the Kremlin has doubled down on domestic arms production and import diversification efforts, poured funds into industries that directly or indirectly contribute to the war, and issued generous payments to Russian soldiers, new recruits, and their families. These measures have put more money in people’s pockets, leading to soaring aggregate demand for both military and civilian services. This has also helped align significant segments of the Russian population with the state’s military objectives.

Historically, comparable policies have boosted economic growth in countries at war or on a war footing, especially in the short term. Some notable examples of countries where increased defense spending contributed to economic growth include the United States, which spent around 8.5 percent of its GDP on defense from 1955 to 1975, accompanied by economic growth of 3.6 percent per year; and Israel, whose military spending between 1967 and 1993 averaged 19.1 percent of the country’s GDP per year, while the average growth of the Israeli economy during that time came in at 4.8 percent. The Soviet Union’s defense spending was roughly 2.5 times higher than that of modern-day Russia, for some time similarly supporting economic growth. While such expenditures, among other factors, ultimately undermined the Soviet economy, it took four decades for this to occur. Therefore, increased military spending alone is unlikely to be the cause of an economic crisis or stagnation, and it should be analyzed within a country’s broader fiscal, financial, sociopolitical, and military contexts.

Longer-term economic effects of Moscow’s continued military Keynesianism are uncertain. Some argue that the economic growth achieved at the expense of heavy industry is running out of steam, as evidenced by increased inflationary pressure and stress in the labor market. Skeptics further point to emerging signs of “stagflation”—inflation combined with minimal economic growth—claiming that, as the war has led to rising prices and labor shortages, the economy as a whole will be harmed. Yet with the Central Bank of Russia’s (CBR) key interest rate of 21 percent per annum and an appreciating ruble seemingly causing inflation to decelerate, Russia might be able to achieve a coveted soft landing (see the section on the “inflation tax” below).

Moscow’s pivot to military Keynesianism is not simply an opportunistic war adaptation strategy but a long-contemplated policy. After Russia’s 2008 invasion of Georgia revealed profound deficiencies in the Russian army and the 2008–09 financial crisis showcased the vulnerability that came with the country’s dependency on petrodollars, the reformed and modernized defense industry was identified as one of the main alternative sources of economic growth among Russian defense and military elites. In 2012, then–Prime Minister Vladimir Putin personally argued that “the huge resources invested in modernizing Russia’s military-industrial complex and equipping the army shall serve as fuel to feed the engines of modernization of the economy, creating real growth and a situation where government expenditures fund new jobs, support market demand, and facilitate scientific research.”

Reflective of the Kremlin’s commitment to the modernization of the Russian Armed Forces, the Russian defense budget has been allowed to grow faster than the country’s GDP. For instance, between 2005 and 2015, the average annual growth rate of the national defense budget was 7.9 percent, while the average annual growth of GDP was 3.4 percent. However, it was Russia’s full-scale invasion of Ukraine that contributed to an even sharper rise in Russia’s defense spending. Between 2011 and 2021, the defense budget averaged 2.8 trillion rubles ($53 billion) per year. In 2022, it reached 5.51 trillion rubles ($79 billion), and in 2023, it reached 8 trillion rubles ($94 billion). In 2024, defense spending increased even further, exceeding the originally planned 10.4 trillion rubles ($112 billion) for the year and instead climbing to around 13 trillion rubles ($140 billion). Throughout 2024, the Kremlin continuously increased budget expenditures, which in the fourth quarter rose by nearly 30 percent year-on-year. Toward the end of the year, Russia’s Ministry of Finance allocated an extra 1.5 trillion rubles ($16.2 billion) beyond the planned budget, which also included additional military funding, due to “unexpected expenses,” as explained by Finance Minister Anton Siluanov.

This year’s military expenditures are reflected in the Federal Budget Law for 2025–27. The first iteration of the law was approved in December 2024. The Russian Finance Ministry has since updated some of the key parameters of the 2025 federal budget—including decreasing total budget revenues and increasing total budget expenditures—and the State Duma is currently in the process of reviewing and approving the proposed amendments. However, Siluanov has stated that, despite the proposed changes, budget priorities are the same, with defense spending set to remain steady. This report, therefore, draws numbers from the first iteration of the federal budget law unless otherwise specified. According to that document, in 2025, Russia plans to spend a record high of 13.5 trillion rubles ($145 billion), or 6.3 percent of its GDP, on national defense (this is viewed as a direct figure for military expenditures). In 2026 and 2027, 12.8 trillion rubles and 13.1 trillion rubles are allocated for this purpose, respectively. An additional 3.5 trillion rubles ($38 billion) will be spent on national security and law enforcement (i.e., on internal security forces) in 2025. Expenditures under this section of the budget are planned to rise to 3.6 trillion rubles and 3.7 trillion rubles in 2026 and 2027, respectively. Total spending for 2025 in these two budgetary chapters—national defense and national security— will be around 17 trillion rubles, or about 40 percent of the total government expenditures now estimated at 42.3 trillion rubles in 2025. Costs under these chapters exceed expenditures on education, healthcare, social policy, and the national economy combined. The same applies to 2026 and 2027 (see Figure 1). Moreover, some analysts believe that a portion of nominally non-defense budget items will likely be used to finance the needs of the defense industry. For instance, some funds from the “national economy” chapter of the budget— such as money spent on transportation, road infrastructure, communications, and computer science, among other items—might constitute defense spending. Defense-related expenditures may also be drawn from the budgetary chapters and subchapters on housing, social support, health, physical culture and sport, and border service, among others. This level of military spending, by some estimates, could in reality total around 15.5 trillion rubles ($167 billion) or 7.2 percent of GDP.

▲ Figure 1: Russian Defense, National Security, and Total State Spending, 2021–27. Source: CSIS calculations based on the data gleaned from the Federation Council (2021, 2025-27), Luzin (2022-24 defense), TASS (2022 national security), State Duma (2023 national security), and RBC (2024 national security).

Key Lines of Defense Spending

Around 40 percent of the 13.5 trillion rubles allocated to the national defense chapter of the budget in 2025 will be spent on the Russian Armed Forces, with similar estimates provided for the next two years. The armed forces subchapter includes payments for personnel, expenditures connected with most operations and maintenance, and arms purchases. About 57 percent of the money under the national defense chapter will be spent on “other questions of national defense,” and this trend is expected to continue in 2026 and 2027. According to the Stockholm International Peace Research Institute’s Julian Cooper, the “other questions” subchapter is likely “being treated as a reserve for reallocation during the year.” This means that the Kremlin has decided to leave a lot of wiggle room for war-related expenses in the federal budget, contingent upon developments in the war.

MILITARY INDUSTRIAL COMPLEX

It is difficult to pinpoint exact spending on specific military efforts because in 2022, the government stopped publishing detailed data on budget execution and expenditures allocated to military operations. It is nonetheless possible to glean from the budget that one of Moscow’s key priorities is military technology production and military research and development (R&D). The government plans to spend around 353 billion rubles ($3.8 billion) on applied R&D under the national defense chapter in 2025, with further increases expected for the next two years. The budget also mentions two state programs through which spending for various aspects of military technology manufacturing and development can be channeled: (1) securing the country’s defense capability, toward which approximately 2.6 trillion rubles ($28 billion) has been allocated in 2025, and (2) developing the defense industrial complex, for which some 8.9 billion rubles ($96 million) has been allotted this year.

Channeling money toward this effort is critical. Considering that the Kremlin initially envisaged its “special military operation” to be rather short-lived, it was not immediately accompanied by large-scale industrial mobilization as Russian war planners did not expect to lose significant volumes of military equipment in Ukraine. The picture has since changed. According to Russian Prime Minister Mikhail Mishustin, the manufacturing sector—which includes defense firms working toward fulfilling state contracts for the current war—has been the country’s main growth driver. Similar to Mishustin, economist Natalya Zubarevich, seeking to showcase the significance of defense enterprises in Russia’s economy, has claimed: “When I see how in the previously terribly depressed Kurgan region the manufacturing industry grew by 48 percent in January–July [of 2024], I understand how many additional infantry fighting vehicles Kurganmash built.” Not everything is built from scratch, however. Around 70 percent of the weapons and equipment deployed on the battlefield has reportedly been drawn from Soviet-era stockpiles, which Russia refurbishes before sending to the front. It is unclear for how long Russia can rely on these stockpiles, with some analysts arguing that Soviet-era conventional arms, including artillery and tanks, might be depleted by the end of 2025. According to Western and Ukrainian sources, Russia has lost anywhere from 22,000 (a lower estimate by Oryx) to over 100,000 (a higher estimate by the General Staff of the Ukrainian Armed Forces) weapons and pieces of equipment since the start of the war, some of them quite expensive. In December 2024, Ukrainian sources claimed that the total value of Russia’s destroyed military equipment exceeded $79 billion. Ukraine’s most recent unprecedented “Spider’s Web” attack on Russian strategic bombers this June has increased this number by at least another $7 billion.

If the above claims are true, significant budgetary investments in the manufacturing industry will likely continue in the years to come to build new stockpiles of arms and equipment. Satellite imagery already shows ongoing modernization and expansion efforts at major Russian military factories that produce various weapon parts, ammunition, and industrial chemicals used in small arms and artillery. Significant funds are also directed toward drone production (around 112.1 billion rubles, or $1.2 billion, for 2025–27)—with Russian officials claiming that the domestic drone industry is the least impacted by Western sanctions and Ukrainians asserting that Russia aims to increase its drone production to 500 a day—and the radio-electronics and microelectronics sectors (about 101.4 billion rubles, or $1.1 billion, for 2025–27). Besides these funds, the defense sector will continue benefiting from extra-budgetary resources. For instance, already in January 2025, Russia invested 111 billion rubles ($1.2 billion) from its National Welfare Fund into the state-owned defense conglomerate Rostec. Defense enterprises also receive targeted loans from Russian banks, including Promsvyazbank, to fulfill state contracts. Compared to expensive loans provided at 18–19 percent per annum for non-military purposes, defense firms receive loans in the range of 5–6 percent (see Part III for a more detailed discussion on Russian state-backed subsidized loans).

However, if the recent past is any indication, the manufacturing sector also faces limitations. Following the 2014 Ukraine crisis, Russia embarked on an import substitution program, with the Kremlin announcing plans to substitute Western components used to build Russian weapons systems with domestic alternatives by 2020. Despite spending about $25 billion pursuing this policy from 2015 to 2018, the government still failed to meet its goals and ultimately extended the deadline to 2025. Therefore, while the money planned to be spent on military technology production and development for 2025–27 represents a significant increase from the initial amounts dedicated to this effort, the ongoing attempts are unlikely to be enough for Russia to achieve full self-sufficiency. Some experts believe that, despite overall military budget growth, payments to Russian forces in Ukraine and their families (detailed below) limit greater investment in the military-industrial complex. Already, the first signs of contraction in Russia’s manufacturing industry are emerging, likely connected with logistical challenges such as delays to rail transportation and labor shortages (discussed in Part II), among other problems.

Therefore, expenditures for foreign arms and technology purchases are likely accounted for in the federal budget for 2025–27, even if the exact amount set aside for this type of spending is not explicitly provided in the document. Russia is expected to continue purchasing weapons and technologies from the three main enablers of its war effort—China, Iran, and North Korea. Russia’s military industrial sector has become critically dependent on Chinese shipments of restricted electronics and other dual-use goods over the past three years. According to Russia sanctions expert Elina Ribakova, Beijing has facilitated Moscow’s export control evasion in three ways:

• By shipping items made by Chinese companies in China to Russia, which in 2023 accounted for around half of all Russian imports of critical technologies included in the U.S. Bureau of Industry and Security’s Common High Priority List (CHPL).

• By relying on transshipments to deliver Western-made goods initially sold to China to Russia (This category comprised 18 percent of Russian CHPL imports in 2023).

• By sending to Russia items manufactured by Western companies in Chinese factories (This offshore production made up 16 percent of Russian CHPL imports in 2023).

Overall, based on the Kyiv School of Economics’ estimates, in 2023, around 76 percent of battlefield-related deliveries to Russia came from China and Hong Kong, and 90 percent of all restricted high-tech imports were facilitated through Beijing. In 2024, Moscow purchased $115 billion worth of goods from Beijing—72 percent higher than pre-war levels—with the majority of those imports being machinery, electronics, and vehicles (see Part III for more).

In addition, Russia has reportedly received over 5 million rounds of ammunition and scores of ballistic missiles from North Korea, with Ukrainian army officials suggesting that 60 percent of the artillery and mortar shells deployed by Russian forces in Ukraine in 2024 had come from Pyongyang. According to South Korean intelligence estimates, North Korea could have earned up to $5.5 billion from these arms exports since the start of the war in Ukraine. Additionally, Moscow could pay Pyongyang around $572 million annually for the North Korean troops sent to the front line. Iran has also emerged as an important supporter of Russia’s Ukraine campaign, especially through its speedy shipments of Iranian-made combat drones. In return, Tehran has sought to sign deals on billions of dollars’ worth of Russian military equipment, such as combat aircraft, attack helicopters, and radars.

PERSONNEL RECRUITMENT

Russia will spend a sizable portion of its federal budget on personnel recruitment efforts and benefits for veterans and families of the fallen between 2025 and 2027 in order to replenish significant personnel losses, raise the number of soldiers in the Russian military to the planned 1.5 million, and mitigate the social impact of high casualty rates. While it is again difficult to pinpoint the exact amount of funding planned to be spent on this effort from the budget, it will probably remain as significant as it was in recent years. From mid-2023 to mid-2024, authorities reportedly paid at least 3 trillion rubles (around $32 billion or 1.8 percent of Russia’s GDP) to military personnel and their relatives. Over time, given the high casualty rates, with up to 80 percent of new recruits reportedly hired to replace combat losses, the Kremlin has been forced to increase payments to soldiers to boost recruitment levels. In July 2024, Putin signed a decree more than doubling the baseline sign-on bonus from 195,000 rubles ($2,100) to 400,000 rubles ($4,309) for the rest of the year. In the second half of 2024, a total of 48.56 billion rubles ($523 million) from the federal budget was allegedly spent on sign-on bonuses—16.14 billion rubles ($174 million) more than the total for the first half of the year. In addition to the 400,000 ruble federal bonus, new hires also received top-up payments of various amounts from the regions that recruited them, with the total sign-on package per person ranging anywhere from 800,000 rubles ($8,600) for recruits from the poorest regions to more than 2 million rubles ($21,500) for recruits from wealthier or Ukraine-adjacent areas. In addition to sign-on bonuses, throughout 2024, the state-linked fund Defenders of the Fatherland provided payments to the wounded ranging from $1,000–$10,000, depending on the injury.

Considering that the average monthly wage in Russia is 86,500 rubles ($932), this recruitment strategy, rooted in hefty financial incentives, has yielded the intended results. Moscow has been able to sufficiently replenish its forces without resorting back to the partial military mobilization it tried in fall 2022, which remains deeply unpopular and has the potential to further disrupt the labor market. Both Russian and Ukrainian sources confirm that Russia fulfilled its recruitment targets in 2024, hiring around 440,000 soldiers. Its goal for 2025 is to sign contracts with another 343,000 soldiers.

All in all, while Russia’s current defense spending, officially at 6.3 percent of GDP, (but by some estimates, in reality, totaling 7.2 percent), is below that of the Soviet Union and the United States during the Cold War’s peak, it remains double the post-Soviet average. Importantly, even if the war in Ukraine ends soon, the Kremlin will likely stick with the policies of military Keynesianism by continuing to channel money from the federal budget to the bloated defense industry in order to reconstitute its military. According to economist Alexandra Prokopenko, the military “still generates demand, because Russia needs to replenish stockpiles and [pay] people. . . . On a political level, Russia wants to have a strong army ready to act regardless [of] if there is a war somewhere or not . . . so the personnel will be kept in a sense of ‘constant war readiness.’ This constant source of demand will only dry out when stockpiles have been replenished.”

Part II

Existing Pitfalls in Russia’s Current Adaptation Strategy

Labor Shortage: A Long-Standing Problem Exacerbated by the War

Russia’s technocrats have identified a “labor famine” as the main issue facing the economy. One of its key drivers is the long-term demographic challenge that Russia, like other post-Soviet states, has been grappling with for decades. Back in 2000, Putin warned that Russia risked becoming “an enfeebled nation” due to population decline. Yet Russia’s working-age population has since continued to shrink by several hundred thousand people annually due to low birth rates and unhealthy diet and lifestyle choices, among other factors. By 2021, the worker deficit in Russia was already estimated at 2.2 million people.

While other European countries face their own demographic challenges, they benefit from immigration and have not experienced the rapid emigration Russia saw in 2022. The onset of the full-scale invasion of Ukraine has significantly exacerbated Russia’s long-term demographic challenge, leading to a chronic labor scarcity inside the Russian market. An important factor in Russia’s labor shortage has been the exodus of younger Russians. Though estimates vary, some 600,000–1 million Russians are said to have left the country in 2022, and while some have since returned, around 400,000–500,000 Russians are still believed to be residing abroad to date. An estimated 80–90 percent of those who left were reportedly under the age of 45. Other sources indicate that, in 2022 alone, the number of workers aged 16–35 fell by 1.33 million, and their share of the labor force was the lowest on record since 1996.

War-related employment also contributes to the labor famine. The expansion of employment in the military industrial complex, war-related logistics, construction, and support services has dramatically impacted the labor pool available to the civilian economy (see Figure 2). In 2022, for instance, around 10 percent of the population in Russia was directly or indirectly connected to the defense industry, and this figure has since only increased. Another important aspect of war-related employment is, of course, a significant number of working-age Russians serving in Ukraine. According to the Russian authorities, 300,000 able-bodied men were conscripted into the Russian military during the “partial mobilization” between September and October 2022; independent Russian investigators have placed this figure at around 527,700. Add to these numbers the men who have volunteered to fight in Ukraine (around 800,000 between 2023 and 2024), as well as the men who have been killed or made unable to work due to their injuries (total Russian casualties in Ukraine are currently estimated at closer to one million), and a clear picture emerges of a Russian labor market facing a drastic cut in supply. In total, somewhere between one to two million laborers are estimated to have functionally left Russia’s productive economy since February 2022.

A government crackdown on undocumented migrants following the deadly Crocus City Hall attack in March 2024 led to an outflow of migrant workers, further contributing to the deteriorating workforce. In 2022, around 26,600 migrants were reportedly deported; in 2023, this number increased to 44,200; in 2024, it almost doubled, reaching 80,000.

All of these combined factors have led to the unemployment rate’s decline from the past decade’s 5–6 percent average to 2.3–2.4 percent by March 2025. In 2024, the CBR stated that 73 percent of Russian businesses were understaffed.

The demand for workers is particularly high in the defense industry, which now employs over 3.8 million people and has the alleged capacity to increase salaries by 20–60 percent to attract more workers. Russian defense firms are thus better positioned to compete for workers than non-defense firms, which lack the state support provided to their defense-related counterparts. As a result, employee incomes in the defense industrial sector have skyrocketed in a relatively short period of time, while goods have been produced toward the war effort, rather than the real consumer market. In some regions, salaries at defense factories are on average about 40,000 rubles ($500) higher than those in civilian sectors, forcing the latter to increase wages to stay competitive. All of this has led to significant increases in the real wages of Russian workers, particularly at the lower end of the economic ladder. These factors combine to pressure employers to raise revenue and lead to price increases that contribute to Russia’s general inflation.

▲ Figure 2: Russian Defense Spending and Unemployment. Source: CSIS calculations based on the data gleaned from the Federation Council, State Duma, Vedomosti, TASS, RBC (state spending), Rosstat (unemployment), and Interfax (latest unemployment).

The Inflation Tax: Russia’s Inability to Bring Domestic Inflation Under Control Shows a Clear Mismatch Between Supply and Demand

Russia’s market-based economy today is avoiding Soviet-era shortages in goods when demand outstripped supply. However, it instead is experiencing its market-based doppelganger—domestic inflation. Russian annual inflation came in at 10.2 percent in April 2025. From January 2022 to January 2025, Russia’s monthly inflation numbers averaged 9.4 percent, according to public data from the CBR. While Russia’s actual rate of inflation may exceed the CBR’s official estimates, a recent analysis by the Bank of Finland concluded that despite some data irregularities in official Russian economic statistics, there is “no compelling evidence of extensive systematic data manipulation.” For this reason, Russia’s official rate of inflation remains a constructive point of reference.

Russia’s persistent inflation since the onset of the full-scale invasion of Ukraine stems from several structural features within the Russian wartime economy: military Keynesianism and Russia’s chronic labor shortage, described above, and concurrent pressure on the ruble.

A major contributor to the pressure on the ruble—and thus inflation in Russia—is the elevated cost of key imports, which resulted from the financial sanctions and export controls applied against Russia by the pro-Ukraine international coalition. There is evidence that suppliers who have been exporting to Russia since before 2022 have increased their prices (and, in turn, their profit margins) when selling to Russian buyers, reflecting not only the rise in transport and insurance costs when dealing with the contemporary Russian market, but also the risk these firms face in potentially running afoul of Western sanctions enforcers. By deterring certain suppliers from selling to the Russian market, and by forcing the use of illicit networks to maintain a flow of critical goods and components into the Russian war machine, sanctions have led to Russian importers paying elevated prices for these items, with the added costs passed on to their customers. Russia’s dependence on imports applies downward pressure on the ruble, which in turn pushes inflation upward, further raising the cost of imports and creating a vicious cycle.

To combat inflation, the CBR has cranked up interest rates, which currently stand at 21 percent. However, due to the wild mismatch between fiscal and monetary policy inside Russia, the CBR’s efforts are undercut by the Ministries of Defense and Finance, which continue to lavish subsidies, particularly in the form of preferential loan schemes (discussed in Part III), on sectors of the Russian economy serving the war effort. Additionally, the CBR is seemingly facing continued pressure from business elites who argue that its policies hinder their ability to maintain solvency. While chronic inflation often builds gradually before culminating in a crisis, that concern appears less pressing for Russia today, with official inflation figures far below those in several contemporary upper-level developing economies, such as Turkey and Argentina, that suffer from persistent inflation.

If anything, the recent slowdown of inflation since its peak in 2022 across a number of indicators in response to high interest rates seems to indicate a soft landing, with the volume of total lending to households and businesses beginning to pull back. Of note is the fact that the Ministry of Finance was actually able to reach its target for first-quarter sovereign debt sales ahead of schedule, indicating that the domestic Russian debt market might be pricing in a rate cut in response to decelerating inflation in the near future. Lastly, as discussed in Part III, the Russian government recently announced changes to the tax code meant to draw additional funds from more profitable Russian companies and the increasingly generous savings accounts offered by Russian banks in an environment of elevated real rates. The Russian monetary authorities’ fight against inflation appears sustainable, at least for now.

Russia’s Growth Slowdown: A Sign of Trouble to Come?

As discussed above, Russian economic growth in the last three years has been primarily driven by state-led investment. Austria’s Raiffeisenbank estimated that government spending directly accounted for one-fifth of Russia’s GDP growth. However, in the early years of the war, civilian sectors also grew, reflecting the increase in the share of final consumption expenditures in the GDP structure.

That situation might now be changing. Recent evidence suggests that non-military industrial production has stagnated since mid-2023. Meanwhile, Russia’s manufacturing sector, a category that includes defense enterprises fulfilling state contracts, is also slowing down. While in 2024 the manufacturing sector grew by 8.6 percent, in March 2025 it suffered its steepest downturn in nearly three years, with the Purchasing Managers’ Index—an important survey of business executives used to track key economic indicators—falling to 48.2 in March, down from 50.2 in February. In February 2025, Russia’s industrial production growth also hit a two-year low, rising just 0.2 percent year-on-year, a sharp decline from a 2.2 percent increase in the previous month.

In February 2025, the CBR lowered its growth predictions for 2025 to 1–2 percent of GDP. The combination of labor constraints, flatlining productivity, and durable inflation, compounded by a slowing growth rate, spiked fears of stagflation in Russia, at least in the country’s nondefense sectors. In a telling admission of concern, in March 2025, President Putin publicly urged his economic managers to not strangle growth in their effort to fight inflation. In early April, Alexander Shokhin, president of the Russian Union of Industrialists and Entrepreneurs, said, “We are clearly heading, as they say, toward ‘zero growth.’”

More recently, Rosstat reported that Russia’s GDP grew by just 1.4 percent in the first quarter of 2025, the slowest growth since the second quarter of 2023, when the economy began recovering from the 2022 collapse caused by the war and sanctions. However, according to the CBR, after seasonal adjustment, Russia’s GDP actually declined by 1.2 percent in the first quarter of 2025 compared to the previous quarter, although this follows an unusually high base in the fourth quarter of 2024. While Russia faces slowing growth and high inflation, edging toward stagflation, it is too soon to confirm this, as inflation trends remain near the CBR’s target. The slowdown could still be reversed by higher government spending or a lower key rate; conversely, external shocks such as a global slowdown could significantly worsen the situation for Russia.

Overall, the major factors contributing to Russia’s ongoing economic slowdown are the deliberate effort on the part of monetary authorities to bring down domestic inflation, plus the economy hitting the limits of spending-fueled growth. Importantly, another factor is the decline in export demand most likely driven by a weakening global economic environment as a result of ongoing unpredictability in international trade outlooks, which could be magnified by the continued consolidation of the sanctions regime.

Part III

Key Future Bottlenecks

Oil Revenues and Beyond

Going forward, a decline in oil prices may put additional pressure on Russia’s economy. Despite efforts to diversify the economy in recent decades, Russia continues to be strongly dependent on export revenues (estimated at $417.2 billion in 2024). In the past, oil and gas have constituted about half of Russia’s exports, but in recent years their share in the Russian budget has been declining relative to non-hydrocarbon revenues. While oil and gas made up around 50 percent of Russia’s budget revenues between 2011 and 2014, that figure stood at 42 percent in 2022, 30 percent in 2023, and 30 percent again—or 11.13 trillion rubles ($108 billion) —in 2024 (see Figure 3). The decline in the proportion of hydrocarbon revenues is especially noteworthy considering it happened during a time of favorable energy prices, with crude oil prices soaring after Russia’s full-scale invasion of Ukraine (see Figure 4).

▲ Figure 3: Hydrocarbon Share of Russia’s Federal Budget. Source: CSIS calculations based on the data gleaned from the following sources: “О проекте федерального бюджета на 2025 год и на плановый период 2026 и 2027 годов” (On the draft federal budget for the year 2025 and for the planning period of 2026 and 2027), Russian Federation Council; and “Минфин РФ повысил ожидаемый дефицит бюджета на фоне снижения цен на нефть” (The Ministry of Finance of the Russian Federation increased the expected budget deficit against the backdrop of falling oil prices), Meduza, April 30, 2025.

▲ Figure 4: Urals Oil Market Price vs. Russian Budget Price Target. Source: CSIS calculations based on the data gleaned from the Russian Federation Council, Trading Economics, Reuters (March 2025 oil price), and Bloomberg (April 2025 oil price).

Several reasons explain this decline. First, the Kremlin deliberately tried to diversify its budget revenues amid multiplying Western restrictions on Russian energy sales, seeing non-oil taxes as the primary funding source for its war in Ukraine. In 2025, the Kremlin anticipates growth in its total tax revenue to trillions of rubles, primarily driven by sales and corporate taxes. Part of that increase should come from forecasted growth in company earnings and individual consumption levels, as well as redirection of extra regional tax revenues to the federal budget. Another portion of the increase is expected to come from the rise in non–oil-and-gas revenues, which have already been growing as a share of the federal budget, from 61 percent in 2019 to 69 percent in 2024.

Sanctions and other restrictions also played a role in the Kremlin’s shrinking hydrocarbon revenues. About 10 percent of Russia’s budget revenues before 2022 came from Gazprom, the Russian state-controlled energy giant and the world’s largest producer of natural gas, through customs, excise duties, and profit taxes. Growing losses in the European gas market started around the time of Russia’s 2022 invasion of Ukraine as a result of the Kremlin’s self-imposed throttling of gas exports to Europe, which used to purchase 39 percent of Russia’s pipeline gas exports, in addition to the destruction of the Nord Stream pipelines. In 2023, Gazprom accumulated losses for the first time since 1999, constituting $7.6 billion, and faced another loss of $13.1 billion in 2024. The complete cessation of gas transit through Ukraine since January 2025 will likely lead to an additional loss of approximately $6 billion annually, unless Russia finds ways to redirect these flows to other pipelines or liquefied natural gas (LNG) terminals. The dramatic decline in export volume to Europe delivered a blow to the financial condition of Gazprom, which amid its 2024 losses had to start selling off its portfolio of luxury properties and is now facing major restructuring. While the federal budget impact of lost gas revenue is relatively minor, as Energy Markets and Policy Director at the University of Texas at Austin Ben Cahill flags, the greater risk is that the Russian state may need to financially support Gazprom in the future.

However, the major bulk of Russian budget revenues comes from oil (crude oil and petroleum products) rather than gas revenues. In 2022, the oil sector accounted for 66.5 percent of hydrocarbon revenues, rising to 74.6 percent in 2023 and 77.7 percent in January–September 2024. But Western sanctions on Russia’s oil supplies significantly affected Russia’s budget revenues. For example, the EU embargo on purchases of Russia’s seaborne crude oil and refined oil products imposed at the end of 2022 forced Moscow to redirect export flows of its crude oil and refined products away from Europe and toward Asia, losing revenues in transaction costs. (The added cost of shipping Russian oil from Novorossiysk or Primorsk to India ranges from $10 to $15 per barrel.) Russia’s current crude oil exports, sold primarily to China and India, are subject to the oil price cap restrictions that prevent the use of Western-domiciled support services such as shipping, insurance, reinsurance, and trade finance for commercial trade of Russian crude oil priced above $60 per barrel or petroleum products traded above separate price caps.

In the two years since the imposition of the price cap, Urals crude has traded at approximately 15 percent below the Brent crude oil benchmark. During this period, Russia is estimated to have lost €14.6 billion in revenue from Urals-grade crude exports. While Russia has found a way around the oil price cap by investing in an uninsured “shadow fleet,” sanctions-enforced discounts to the market oil price have deprived Russia of an estimated 15–20 percent of the oil revenue it would have received absent the sanctions. (Had the price cap worked as originally designed, this figure would have reached 30 percent.) The restrictions imposed by the outgoing Biden administration in January 2025 (so far sustained by the Trump administration), which blocked two major Russian oil producers and sanctioned many of Russia’s shadow fleet vessels, accounting for about 22 percent of Russia’s 2024 seaborne exports, have further deepened the impact. In February 2025, Russia’s monthly fossil fuel export revenues declined by 3 percent month-on-month. A key development was a significant 21 percent drop in oil shipments via shadow fleet tankers compared to January, while oil transported by G7+ owned or insured vessels increased by 15 percent. This shift suggests that the final rounds of the Biden administration sanctions may have had a measurable impact on Russian oil exports, even if Russia is expected to adapt over time unless further enforcement measures are introduced.

Russia’s dependence on oil revenues and limited access to hard currencies further undermines its economic resilience. Due to the Western-imposed freeze of the CBR’s foreign currency reserves, the ruble has effectively become a nonconvertible currency with its value highly dependent on Russia’s current account (see below). Drops in hydrocarbon revenues can now lead to pronounced drops in the ruble’s value. The synchronized decline of oil exports and the weakening ruble may at some point force a reduction in imports that the Russian economy increasingly relies on to properly function.

Despite the notable reduction in hydrocarbon revenues, oil revenues in particular remain the single most important source of finance for the Russian budget, potentially representing a major vulnerability for the Kremlin. In recent decades, major economic crises in Russia tended to follow a sudden decline in oil prices. For example, various Western constraints and sanctions against the Soviet Union only truly delivered when combined with the collapse of energy prices in the mid-1980s, which crippled the Soviet economy and was among the triggers for the Gorbachev reforms. Low oil prices were also a significant factor in instigating the 1998 economic crisis. Accordingly, the Western effort to reduce the amount of cash at the Kremlin’s disposal can only succeed if more effective measures targeting Russia’s energy revenues are introduced and maintained by the Western coalition. By some estimates, an oil price decline to $30 per barrel would deprive the Russian budget of an amount comparable to all current military expenditures, making the foreign trade balance negative in the context of continuing war and sanctions. This would be critical to shortening the timeframe in which Putin can fund a war of this scale, reducing it from an almost indefinite period to just a few years. Within two to three years, such a decline in oil prices might actually lead the Russian economy to the problems that had been forecast at the onset of the 2022 invasion (such as ruble devaluation and inability to obtain critical imports). Indeed, recent reports indicate that the CBR is deeply concerned about a scenario in which the United States and the Organization of the Petroleum Exporting Countries (OPEC) flood the market with oil, similar to the 1980s, potentially triggering a prolonged price collapse.

This time, however, as energy expert Ben Cahill highlights, this glut is more likely to result from a recession and declining oil demand, rather than a deliberate market flood by the United States.

Indeed, after U.S. President Donald Trump announced sweeping tariffs on April 2, 2025, fears of a tit-for-tat trade war’s impact on global growth and oil demand sent Brent crude prices tumbling over 20 percent in a week, hitting a four-year low, while Urals crude dropped below $50. Also in April, the International Energy Agency lowered its 2025 oil demand forecast to 730,000 barrels per day, citing economic weakness in China, the primary driver of oil demand growth over the past two decades.

Because oil and gas revenues have provided significant fuel for Russia’s war machine, if energy prices continue to decrease—as global energy forecasts for 2025 and 2026 anticipate—Russia will have to find other ways to raise money to maintain high defense spending for its planned military reconstitution. This could be achieved in part by further cuts to other economic sectors, including healthcare, education, and social policy. Another possibility would be to continuously increase corporate and personal income taxes. Moscow could also use its rainy day National Welfare Fund, which is currently worth around 12 trillion rubles ($117 billion), or 5.5 percent of GDP. However, the fund’s holdings of cash and investments that can be easily liquidated declined by 24 percent (to 3.39 trillion rubles, or $39 billion) in early 2025 as compared to the start of last year, and now constitute less than half their value before the full-scale invasion of Ukraine, when they stood at 8.8 trillion rubles ($102 billion). The CBR has even flagged existing risks of the fund being completely depleted if, for instance, oil prices collapse in 2025. Finally, the government could also borrow more. In 2025, the International Monetary Fund (IMF) estimates Russia’s general government gross debt to reach 21.4 percent of GDP, which is low by international standards. Rather than borrowing from abroad, the domestic banking system, primarily driven by state-owned banks, could purchase additional government bonds.

Besides hydrocarbons, significant Russian budget revenues come from exporting coal, iron ore, nonferrous metals (like aluminum and nickel), precious stones, minerals, and fertilizers, as well as agricultural products, wood, machinery, and equipment. In the post-2022 period, revenues from these products helped partially counterbalance the sanctions-induced decline in hydrocarbon revenues. However, many of these exports were also impacted by Western sanctions and declining demand. For example, the sanctions adopted by the European Union in December 2024 targeted a number of Russian ships, including those transporting grain, while U.S. and UK sanctions continued to curb Russian exports of nonferrous metals. As a result, from 2022 to 2024, the share of chemical products and machinery and equipment in Russian exports decreased from 15 to 11 percent; revenues from coal exports fell by 20 percent between 2021 and 2024 and are estimated to decline further in 2025; revenues from grain and fertilizer fell by 11 and 17 percent in 2024 as compared to 2023, respectively; and iron ore and nickel prices fell by 21 and 7 percent between 2023 and 2024. Tariffs, trade tensions, and recession risks are pivotal factors affecting all commodities—including oil and gas, metals, and agriculture. China remains central to global demand across these sectors. Combined with enforcement of oil sanctions, the simultaneous targeting of various Russian exports through additional Western sanctions could severely worsen its economic situation.

Current Account

Continued export revenues since 2022 have been Russia’s primary economic shield in the face of war-related hardship and sanctions, with the greatest earnings coming from oil exports. Since commodity sales are typically settled in “hard currencies” like the dollar and the euro, Russia’s continued ability to earn revenue on these products provides a steady flow of hard currencies into the Kremlin’s coffers, allowing it to maintain its elevated level of imports despite the ruble’s de facto nonconvertibility due to sanctions. While inflation makes Russian imports more expensive in ruble terms, it makes the Russian government’s ruble-denominated earnings from exports yielding hard currencies even higher, making it easier for the Kremlin to meet its domestic obligations.

However, the ruble’s effective nonconvertibility holds its value captive to the continued inflow of hard currencies into the Russian economy. When export revenues in dollars and euros remain robust, the supply of these currencies inside the Russian economy remains stable, as does their value vis-à-vis the ruble. Conversely, when the inflow of these currencies decreases, their supply in Russian currency markets also shrinks, making it difficult to meet the demand from importers and businesses seeking to store their earnings in non-ruble-denominated accounts. The amount of rubles these actors are then willing to pay for hard currencies goes up, thereby pushing the value of the ruble downward.

This dependency on hard currency is a major vulnerability of the Russian economy. As Russian economist Sergey Aleksashenko remarked during a workshop held by the authors, the specter of a currency crisis is the number-one fear keeping Russian economic policymakers up at night. This very scenario played out in November 2024, when new U.S. sanctions on 52 Russian banks (including Gazprombank) by the outgoing Biden administration led to a precipitous drop in the ruble’s value to its lowest level against the dollar since the immediate aftermath of the invasion of Ukraine in March 2022, with a fall of 7 percent in one day, and the loss of a third of its value compared to summer 2024. While the ruble quickly recovered as Russian banks were able to come up with alternative means of bringing in dollars, this exposed the vulnerability of the Russian wartime economy to a potential balance of payments crisis. Conversely, drops in imports might now send the value of the ruble upward, as occurred in 2022, when there was a spike in oil prices but Russian imports had collapsed in the early days of sanctions (see Figure 5). But a ruble that is too strong can also create problems for the Kremlin in its own right. Given that Russia’s critical oil revenues are denominated in dollars but state spending is priced in rubles, a stronger ruble reduces the effective amount of rubles earned from dollar-denominated oil trades available for state spending.

▲ Figure 5: Urals Oil Price and Ruble Rate. Source: CSIS calculations based on the data gleaned from Trading Economics, Reuters, and Moscow Times.

▲ Figure 6: Russian Current Account and Inflation. Source: CSIS calculations based on the data gleaned from the following sources: “Инфляция и ключевая ставка Банка России” (Inflation and key rate of the Bank of Russia), Central Bank of Russia; and “Статистика внешнего сектора” (External sector statistics), Central Bank of Russia.

Chinese Economic Support to Russia

In the immediate post-invasion period, the curtailing of Russia’s critical trading relationship with Europe threatened its economic stability, as the European Union had been Russia’s most important trading partner, accounting for 37.3 percent of its international trade in goods in 2020. However, China has proved critical in backfilling for Russia’s diminished trade with the West and keeping the Russian defense industry, and broader macroeconomy, afloat.

Chinese trade has been critical for supporting Russia’s export revenues—in 2024, bilateral trade between the two countries hit $244.8 billion, with Russia serving as China’s top supplier of oil, accounting for nearly 20 percent of China’s crude imports for most of the year. Due to the design of the G7’s oil price cap, Chinese oil purchasers, along with their Indian counterparts, have been able to buy Russian crude on the international market at beneficial prices, encouraging imports. As previously mentioned, international traders have demonstrated a willingness to purchase oil above the price cap by engaging with Russia’s shadow fleet. These transactions have proved a critical source of hard currency for the Russian economy, allowing the country to maintain elevated imports of key technologies needed for its war effort.

Trade with China has also proved crucial to Russia’s military goals. Chinese firms have filled the gap left by their Western competitors in the Russian market, providing 53 percent of Russia’s imported goods as of 2023—such as high-tech components and dual-use goods that enable the Russian war machine. While China has denied allegations of supplying lethal aid to the Russian military, statements by high-ranking U.S. officials make clear that Beijing has allowed its producers of military and dual-use goods to approach that red line. Ukrainian President Volodymyr Zelensky also recently claimed that China supplies Russia with lethal aid, including artillery and gunpowder, and helps manufacture weapons on Russia’s territory.

One important element of the growing trade between China and Russia is the increased use of the Chinese yuan to settle transactions between the countries’ firms. The yuan’s semi-convertible status impedes its usefulness as a currency for international settlements. However, it is increasingly used in Sino-Russian transactions as a substitute for Western currencies, with Russian officials claiming that over 90 percent of Sino-Russian trade has been settled in either rubles or yuan. Yet despite the existence of a yuan-denominated “swap line” between the CBR and the People’s Bank of China, the full “yuanization” of the Russian economy remains far from complete. This is demonstrated first by the disparity in overnight lending rates on yuan-denominated loans inside Russia versus inside China. In Russia, these loans can be far more expensive than in China. If there were greater yuan liquidity in Russia, the interest rates on these loans would align more closely with those in China, where yuan-denominated instruments are the most liquid. Second, signs of stress have manifested themselves within the Russian domestic currency market for yuan-denominated instruments, with major lenders speaking of a yuan liquidity shortage and calling for action by the CBR to relieve the concurrent pressure on the ruble. Both of these data points speak to an incomplete process of yuanization within the Russian economy, which in turn speaks to the continued relevance of both dollars and euros to the maintenance of Russian trade.

If Western policymakers were to somehow reduce Chinese support for Russia, it could deliver a significant blow to Russia’s macroeconomic stability. However, this scenario currently appears unlikely. Both Russian and Chinese leaders have, at least rhetorically, maintained a firm commitment to their “no-limits” partnership in opposition to Western hegemony over the international system. In light of China’s revisionist ambitions, Beijing will seek to support the Kremlin as a means of exerting geopolitical pressure on Europe and the United States. However, China’s banks have typically obeyed Western restrictions on Russia, and they are likely to maintain this stance barring a drastic deterioration of China’s relationship with the West.

Credit Crisis in the Making?

One of the Russian government’s preferred tools to support elevated defense spending is offering state-backed subsidized loans to companies operating in sectors strategic to the war effort. New legislation passed shortly after the full-scale invasion enabled the government to control war-related lending at major Russian banks, directing them to offer preferential loans—on state-determined terms—to Russian businesses involved in the war effort. Some analysts have estimated that this effort has contributed to a total corporate borrowing binge of over $446 billion. A significant share (roughly half) of these loans, as the argument goes, have funded Russian businesses across 15 industrial sectors providing various goods and services to the defense industry, such as electronics and optical products, chemical products, transport vehicles, and finished metal products, as well as engineering, construction, and information technology services. It remains to be seen whether Russian defense firms and affiliated industries can repay these loans, or if the government will need to assume the financial burden to keep them solvent. Other analysts dispute claims about the scale of these loans, highlighting that the Russian financial system remains stable and capable of covering the costs of these debts if the government needs to step in. Whether Russian state financing takes the form of direct payments or subsidized loan portfolios, the effect remains the same: an ongoing dramatic increase of government-backed spending injected into the Russian economy.

At the individual level, preferential loan schemes preceded Russia’s full-scale invasion of Ukraine. A preferential mortgage program was initiated during the Covid-19 crisis to help stimulate the Russian economy. However, once Moscow moved on Kyiv in 2022, the government remained hesitant to eliminate the program, for fear that it would contribute to social dissatisfaction. As money flowed to defense sector personnel and their families, they in turn invested their newfound gains into real estate, taking advantage of the preferential mortgage system. With the beneficiaries of the program now making up some of the core constituencies behind the Kremlin’s war effort, the government continued to defer cutting the preferential mortgage scheme, despite the CBR publicly arguing it was one of the main forces counteracting the bank’s interest rate policy to bring down inflation. Ultimately, a compromise was reached, narrowing the scope of borrowers eligible for subsidized mortgage rates. The debate over the mortgage program illuminates a dilemma facing Russia’s economic managers—how to effectively manage inflation while continuing to use elevated defense and social spending to fuel the country’s war effort and maintain domestic political stability. Walking this tightrope could prove difficult if economic conditions in Russia were to dramatically worsen overnight, such as through a collapse in export revenues from stricter sanctions, a shock collapse in global commodity prices, or a general recession.

That said, the analytical consensus is that Russia’s banking and credit systems appear stable for now. Since the early 2000s, the Kremlin has taken a traditional approach toward the management of its debts. According to the IMF, Russia’s general government gross debt as a percentage of GDP has only risen slightly in recent years, from 18.5 percent in 2022 to 19.5 percent in 2023 and an estimated 20.3 percent in 2024, and then an estimated 21.4 percent in 2025. For comparison, the IMF projects at the time of writing that France’s general government gross debt-to-GDP ratio for 2025 could reach 116.3 percent, with the United States at 122.5 percent, and Italy at 137.3 percent.

Russia’s banking system remains well capitalized, with an estimated half a trillion dollars in retail liabilities as of November 2024. With interest rates at 21 percent and official monthly inflation averaging for most of the war at roughly 9 percent, Russians are incentivized to place their money in interest-bearing accounts, with real returns potentially reaching 11 percent. Total deposits into the Russian banking system were up 70 percent in 2024, with money market funds also increasing in popularity. However, the Russian debt load cannot keep growing infinitely; yields on Russian government 10-year notes had reached nearly 15 percent at the time of writing. Currently, roughly 45–50 percent of outstanding Russian sovereign debt is reported by the government to have been issued with floating interest rates, given the domestic market’s current appetite for such instruments. This means that if the CBR further raises its key rate, the government’s debt load will increase as well. However, if policymakers are ultimately able to get inflation on a downward trajectory and make the decision to start a rate-cutting cycle, Russia’s sovereign debt load will similarly decrease.

Part IV

Scenarios

For now, the Russian economy continues to grow, export revenues remain robust, and inflation has not exploded out of control. The Putin regime’s adherence to conventional economic practices in the two decades preceding its full-scale invasion of Ukraine positioned the Russian economy, at least in financial terms, to weather the current pressures. However, as the above discussion has demonstrated, Russia’s economy is heavily exposed to bottlenecks in key sectors and faces constraints—including labor shortages, flatlining productivity, durable inflation, and a slowing growth rate—that may be amplified or alleviated depending on the Western sanctions regime.

The Trump administration has recently discussed the possibility of either lifting or tightening some sanctions on Russia depending on the progress of ceasefire talks. How the West approaches sanctions toward Russia is a critical variable for the Russian economy. This final part of the report thus assesses three different scenarios for Western sanctions and their impact on the Russian economy as well as war and reconstitution efforts. This analysis is based on three assumptions: First, it looks at the immediate time horizon of the next three years. Second, it excludes the likelihood of a major crisis arising from internal factors. Third, it assumes the war will continue at the current level of intensity.

Scenario 1: Status Quo

Under the first scenario, in which sanctions remain in place at the present level, the current pattern of Russia’s economic adaptation, described as “growth without development,” is likely to continue. Russia will likely muddle through. The country’s investment climate will remain damaged; the domestic import substitution effort will continue to face capacity constraints and, thus, dependence on foreign imports will linger; problems with replacing aging infrastructure will persist; and little nondefense technological innovation will occur.

In this scenario, Russia’s labor productivity growth will remain sluggish, hindered by limited adoption of modern technologies, insufficient investment, and management challenges. The ongoing conflict will further strain resources, diverting potential investments from more productive sectors to support the war effort. This diversion will exacerbate labor shortages, particularly in defense-related industries, and hamper technological advancement, thereby constraining Russia’s capacity to achieve significant productivity gains across its economy.

Absent foreign direct investment, state-led investment will remain the main factor driving economic growth, which is likely to slow down to about 1 percent per year. The Kremlin will still possess multiple sources of revenue to rely on. The banking system is likely to remain well-capitalized, with a steady influx of depositors attracted by high rates, enabling the government to borrow domestically and leverage these resources. The increase in household incomes, driven by a labor shortage and interest earnings from bank deposits, would serve as an additional driver of economic growth, contributing not only to current consumption but also to other industries like construction. Russia can further tap into the savings in the National Welfare Fund.

The budget deficit may continue to increase due to the cumulative effect of the gradual erosion of revenues caused by multiple chokepoints (such as a falling oil price, with the expected average price used in federal budget calculations already revised in a recent budget update from $69.70 to $56 per barrel) and increasing expenses (like the growing price tag of recruiting new “volunteers” to the war) but will remain manageable for the foreseeable future. Indeed, in May, the Finance Ministry reported a 21 percent year-on-year increase in spending, with a record 36.6 percent of the 2025 budget already used in the first four months of the year. Factoring in projected decline in energy revenues, the ministry raised its projected budget deficit in 2025 to 1.7 percent of GDP. Over time, pressure to restore the incomes of pensioners and public sector workers eroded by inflation may lead to a further increase in the budget deficit. According to analyst Alexander Kolyandr, “the size of the Russian deficit will be unpleasant but nothing to write home about. Russia has enough liquidity to borrow domestically.” However, if interest rates in Russia stay at elevated levels, there is a risk that they could further crimp growth in the non-defense economy, where access to preferential financing is more limited. If the Russian economy persists in its slow growth trajectory, however, the likelihood of a CBR rate-cutting cycle will rise, potentially providing some relief even if at the expense of higher inflation.

The ongoing labor shortage represents an additional challenge in this scenario. As economist Janis Kluge points out, “For military Keynesianism to be successful, there has to be some degree of unemployment. It is the factor that has driven economic growth in Russia over the past two years.” Such a model allows expansive growth through recruitment of extra labor. Low unemployment levels currently observed in Russia—holding at 2.4 percent—risk accelerating inflation, as expanding production may necessitate the need to pay increasing salaries to attract and retain workers. However, Russian analysts have highlighted additional sources of extra labor that could help fill this gap: (1) Russia has long had a trend of excessive employment, particularly in large corporations, where optimization could free up 1.5–2 million jobs, (2) many “excessive” jobs, including those of security guards, drivers, and low-level bureaucrats, could be eliminated to free up additional labor, and (3) there are also opportunities in reforming Russia’s educational and immigration systems to free up and attract more labor.

If sanctions remain in place at the current level without additional enforcement, they will be more of a hindrance than a break on the Russian economic machine. For example, although nearly half of Russian defense industry companies are under sanctions, imports for both sanctioned and non-sanctioned enterprises remain roughly equal, despite international restrictions on the supply of materials and components. Absent additional enforcement, the cost of transaction workarounds will likely decrease and become more efficient over time due to ongoing business adaptation. The main effects of new sanctions packages are typically concentrated in the first two to three months, while businesses invest in developing evasion routes and mechanisms, with their impact diminishing over time as companies utilize these strategies and the costs of evasion decrease. Nonetheless, existing sanctions seem to have had a long-term negative impact on Russian businesses’ return on investment in foreign trade, as the same operations now require more capital. (By some assessments, Russian companies spend $10–$30 billion a year on commissions for foreign payments to evade sanctions.) These factors will continue to inflict downward pressure on the Russian economy and budget revenues, as well as accelerate inflation. Mounting inflation, in turn, will become a part of Russia’s “new normal” but will not be a game-changer. A critical risk in this scenario may arise from the deteriorating health of the global economy and global oil demand, due to a slowdown in global trade and a weakening of final demand in advanced economies, which will also impact Russian oil exports.

Based on the authors’ discussion with Russian economic and defense industry experts, the current status quo would enable Russia to sustain the war for at least the foreseeable three-year horizon for two reasons: (1) Russia has adapted to this reality and is balancing the demands of its war machine with social spending programs to maintain stability (though in real terms, social spending has gone down relative to defense spending), and (2) in terms of direct material costs, the war does not appear to be overly burdensome for Russia. In December 2024, then–U.S. Secretary of Defense Lloyd Austin argued that over the span of three years, the Kremlin had “squandered more than $200 billion” on war-related expenses. But Russia’s 2025–27 budget, which sets aside at least 39.4 trillion rubles ($424 billion) to be spent on the war in the next three years, suggests that the Kremlin views military spending at around 6–7 percent of GDP as sustainable, and the current budget framework will likely remain stable despite substantial military expenditures.

The war-related reconstitution in this context is already taking place. Having suffered roughly a million casualties, Russia plans to increase its force to 1.5 million active service members; has started one of the largest rounds of conscription in years, with about 160,000 men between 18 and 30 expected to join the army by July 2025; and continues to recruit around 30,000 soldiers per month for battlefield purposes. The Russian defense industry has also succeeded in manufacturing massive quantities of artillery shells—around 250,000 per month—which may not only meet the current war needs but also put Russia on track toward creating a stockpile three times larger than that of the United States and Europe combined. Moreover, the Russian defense industrial base is expected to build 1,500 tanks, 3,000 armored vehicles, and 200 Iskander ballistic and cruise missiles throughout this year.

What is not clear is the extent to which Russia plans to produce these systems from scratch or rely on its dwindling Soviet-era equipment stockpiles that can be refurbished and sent to the battlefield. For instance, of the 2,100 tanks that were sent to the Russian Armed Forces in 2023, only 210 were new, while the rest represented either modernized or restored Soviet-era variants. Russia has been losing anywhere from 560 to 3,000 items of military equipment per month (based on Oryx and Ukrainian Armed Forces estimates, respectively) since the start of the 2022 war. Yearly equipment losses, therefore, are higher than what the Russian defense industrial base can produce from scratch, especially if the reports about depleting Soviet-era weapons stockpiles are true. According to defense expert Paul Schwartz, the rates of reconstitution will vary depending on weapon systems. It will be increasingly difficult for Russia to produce new and more advanced tanks and armored vehicles in sufficient numbers to offset its losses. Yet Moscow can likely produce modernized tanks in larger numbers provided it has not exhausted its existing stockpiles of Soviet-era systems. Production of advanced weapons, such as high-precision missiles, or much bigger and complex systems, such as warships, will take even longer. But this is where the so-called “axis of upheaval” countries come into play, helping Russia in the areas where its domestic capabilities are constrained. Accordingly, North Korea, Iran, and Belarus will very likely continue their arms deliveries to Russia and China will maintain its shipments of dual-use goods.

Overall, under the status quo scenario, Russia has a growing army, continues its domestic defense industrial reconstitution drive by favoring mass production of cheaper weapons for the front over innovation, and imports necessary arms and technologies from China, Iran, and North Korea. These circumstances will enable Moscow to continue its war of attrition in Ukraine. According to Paul Schwartz, it would even be within Russia’s current ability to mount a simultaneous operation against a country like Georgia on the scale of the 2008 invasion if it had a pressing need to do so (as evidenced to some extent by Russia’s operations countering the Ukrainian presence in Kursk). While carrying out a smaller-scale military operation in another country would not be easy considering the ongoing fighting in Ukraine, if Russia is able to navigate the status quo, the Kremlin may be able to launch a limited-scale offensive in another theatre if it considered such an operation within its national security interests.

Scenario 2: Partial Sanctions Remain

In a scenario where the United States engages in either a partial or full removal of sanctions, but other participants of the Western sanctions regime—most importantly the European Union—maintain their sanctions, Russia’s economy would receive much-needed breathing space. However, challenges will remain.

Most likely, the European Union and partners in the G7 would remain committed to keeping their trading relationships with Russia to a minimum and maintaining export bans on critical goods. However, without the United States backing the sanctions, their impact would be curtailed. While the legal authority for U.S. sanctions policy rests on statutes codified by the U.S. Congress, much of the sanctions regime’s actual enforcement depends on the discretion of the president via his political appointees and executive orders, which are easily reversed. Therefore, risks to sanctions enforcement stem not principally from changes in legislation—a slower process within the U.S. political system—but mainly from the discretion of the U.S. executive leadership to consciously remove sanctions or dial down sanctions implementation.

Regarding export controls, Russia is eager for the United States to lift sanctions on the imports of aircraft parts, machinery, and equipment crucial for transport and power generation given the challenges to the country’s civil aviation, transport sector, and manufacturers. While Russia has found ways to substitute for some of these components or import them through alternative channels, those have proven to be both complex and costly. At the moment, the greatest threat to potential sanctions violators is the risk of being cut off from access to the U.S. dollar, the world’s primary reserve currency. If the United States were to remove the threat of secondary sanctions for actors supplying the Russian military industrial complex, Russia’s access to these critical inputs is likely to increase. The European Union would be unable to maintain the same kind of deterrent with the threat of removal from the international euro system, given the more limited role of the euro in international transactions. However, the United States might be hesitant to allow an unimpeded flow of key components and dual-use goods from Western firms via third countries into the Russian economy, for fear of their further transmission into China and other unfriendly states.

Given the long-stated policy preference of the Trump administration for lower international oil prices, the United States could weaken sanctions on Russian oil exports, allowing more Russian oil to reach international consumers, and thereby potentially contributing to lower prices. However, given the White House’s push to expand U.S. LNG sales globally, it is unlikely the administration will fully lift the bans on key technology transfers to Russia’s LNG industry that were imposed under the 2014 sanctions. Sanctions on Arctic LNG 2 and smaller Russian LNG projects have kept large volumes of gas off the market, aiding U.S. LNG exporters. A removal of these sanctions could limit market share for U.S. exporters, especially in Europe. A potential compromise could include the U.S. government turning a blind eye to enforcement of these sanctions, with U.S. energy firms receiving significant stakes in Russian energy projects, for example, in the Arctic. This way, U.S. firms would directly profit from any growth in Russian LNG sales, potentially mitigating concerns out of Washington over direct competition. Apart from sanctions relief, it remains highly uncertain albeit possible that Russia could resume some pipeline gas exports to Europe—most likely through Ukraine if the conflict is resolved. A restart of exports via the Yamal-Europe pipeline or Nord Stream 1 and 2 appears less likely at the moment.

Russia’s other stated preference is revoking sanctions on some of its major banks and thereby gaining access to international capital markets. For the Kremlin, the latter would be particularly beneficial, given the high costs of domestic borrowing. The easing of financial sanctions would facilitate Russian firms’ ability to repatriate hard currency earnings accumulated in accounts abroad, such as China and India, where Russian oil trade remains robust. Additionally, allowing foreign investment into Russia could help alleviate inflation and pressure on the ruble. Furthermore, if financial sanctions on the CBR were removed, some of Russia’s frozen sovereign bank reserves could be mobilized, opening up an additional key source of hard currency financing for the country’s economy. Yet the lion’s share of the CBR’s assets are within European legal jurisdictions. Importantly, even if there is a slackening of financial sanctions, it is highly likely that Russian banks would maintain their sanctions circumvention infrastructure as a precaution against future sanctions measures.

Conversely, revoking some financial sanctions—or restructuring existing ones—could add to the pressure on the ruble by encouraging large-scale, institutional capital flight out of Russia. While they are imperfect points of comparison, estimates of Russian capital outflows during the 2008 financial crisis stand at $133.6 billion, and estimates from its 2014 economic slump come in at $151.5 billion. With an outflow of this scale during wartime, Russian authorities would have no choice but to institute strong capital controls, which could apply political pressure on the Kremlin as Russian savings denominated in rubles began to dramatically decline in value. However, the CBR would most likely apply not only the stick of capital controls to keep money in the country, but also the carrot of elevated interest rates to incentivize Russian money to stay put. In 2022, the ruble was able to maintain its value and even appreciate after the initial shock of the invasion because Russia’s bumper returns on hydrocarbon exports that year coincided with a collapse of Russian imports as sanctions took immediate effect. In a future scenario, given Russia’s extensive sanctions circumvention infrastructure, this kind of collapse in imports appears unlikely.

In a scenario of partial sanctions relief, while some Western companies could stand to make sizable profits, the risks would remain significant. A future return of U.S. sanctions could make business operations risky, and any Western assets in Russia would be threatened by seizure or outright nationalization if geopolitics takes a confrontational turn. The Kremlin continues to reward loyalists with the redistribution of assets inside the country, and Western-owned firms will remain ripe targets. That said, if U.S. sanctions on financial transactions were removed or weakened, non-EU corporations would sense an opportunity, with traders of energy and other commodities likely standing to benefit. However, in recent public comments, the leaders of major oil traders who all sold Russian crude before 2022 noted that they would approach a return to full-scale operations in the Russian market with caution. It remains unlikely that major U.S. financial institutions would return to Russia, nor asset-heavy firms whose businesses would require more extensive in-country operations and investments. American consumer firms might be tempted by Russia’s 140 million-strong consumer market, but the reputational risk will remain robust as long as Putin sits in the Kremlin. Depending on the industry, Western companies returning to the Russian market would face competition from local firms likely to be protective of their market share and willing to use their political connections to muscle out foreign rivals.

In Russia, reduced competition, emerging market gaps, and protective policies have given rise to a group of businesses that thrive under current conditions—and now fear disruption more than isolation. Certain sectors of the Russian economy, such as the agricultural industry, consumer goods producers, and firms that have tried to invest in import substitution efforts, may feel threatened or jilted by the return of Western competitors. Others took on high-risk loans to adapt to the new conditions and worry that reopening markets would undermine their position. In contrast, some import- and export-dependent businesses could see certain costs lowered and new foreign market opportunities open in the context of partial sanctions relief. But even if there is a partial removal of sanctions, it is unlikely that business in Russia will return to the pre-2022 status quo.

The Iran experience may be telling. After the completion of the Joint Comprehensive Plan of Action (JCPOA), Iran was granted considerable sanctions relief. However, while Iran expected a return to normal, with Western businesses and financial institutions reverting back to their practices prior to the flurry of Western sanctions, Tehran was left disappointed. Western businesses were very reluctant to go back into the Iranian market. Many Western banks were worried of running afoul of other U.S. laws and were concerned that sanctions could return. In that sense, sanctions relief is not an on/off switch, as Western businesses will inevitably worry about being burned again.

The capacity of European states to backfill for the United States on sanctions enforcement would be limited but not nonexistent. In May 2025, for instance, the EU—in parallel with the United Kingdom, but notably not the United States—released its seventeenth sanctions package since February 2022, following an unsuccessful conversation between Presidents Trump and Putin over a potential ceasefire agreement in Ukraine. In the event of a partial sanctions lift, the European Union and other G7 countries could thus maintain their own enforcement of sanctions. They are positioned to effectively track vessels traversing the Baltic Sea as part of Russia’s shadow fleet, and limit Russian banks’ access to the Belgium-based SWIFT payment system. Additionally, they could maintain the freeze on over 200 billion euros worth of CBR reserves immobilized in the European Union’s jurisdictions, in addition to those funds frozen in Australian, Japanese, Canadian, and British accounts.

But the EU’s ability to preserve the sanctions regime depends on its capacity to sustain regular sanctions extensions by unanimous votes in the European Council. In a partial sanctions lift scenario, Hungary and Slovakia may demand concessions from the EU for their acquiescence or potentially threaten the entire sanctions renewal process, which happens every six months. The EU is currently exploring legal ways to bypass potential Hungarian opposition, and also retains significant financial and political leverage it can use with Budapest and others. After all, the EU has passed 17 sanctions packages since the full-scale invasion and sanctions of some form against Russia have been renewed every six months for the past decade. Moreover, unlike sanctions policy, the EU’s tariff policy is under the full purview of the European Commission, and therefore does not require unanimity among member states to be weaponized against Russia.

Additional calls may emerge from within the EU business community to rebuild trade with Russia. The resumption of Russian gas sales to Europe at their prewar scale, while unlikely at the moment, risks boosting the Kremlin’s revenues to power its war effort and would reload a potent weapon of economic influence that Moscow could aim at European capitals. There is little doubt that German and other European businesses would be eager to receive gas flows from Russia, given higher energy costs are impacting their economic competitiveness. However, such a step would be extremely contentious within the European Union, generating significant opposition from Eastern European leaders and likely EU institutions as well.

In all, the sanctions regime would be weakened, thereby releasing some of the pressure on the Russian economy. Russian supply chains would be strengthened, enabling a greater inflow of key imports and lowering their cost. This in turn would lessen the pressure on the ruble and Russian inflation. Continued government spending on the war effort combined with Russia’s chronic labor shortage would mean that the inflation challenge would not totally disappear, requiring elevated interest rates for longer. But crucially, a weakening of enforcement of the G7’s oil price cap—which is estimated to have effectively forced Russia to lower the price of its oil by roughly 15 percent—would potentially allow further hard currency flows into the Kremlin’s coffers.

The extra financial breathing space would ultimately leave Russia with more room for maneuver in the prosecution of its war effort in Ukraine. In particular, the defense industry would have more resources to invest in further development and production of those arms and technologies that have proven essential in the Ukraine war, including advanced drones, electronic warfare systems, and precision strike weapons. Furthermore, Russia would have the potential to possibly diversify certain key defense industry supply chains away from their current overexposure to China. However, given Beijing and Moscow’s growing ideological, strategic, and economic alignment, serious decoupling remains unlikely. The defense industry would also accelerate the production of so-called legacy weapons and equipment drawn from Soviet-era reserves, such as tanks and armored vehicles, to replace losses on the battlefield. Russia is also capable of ramping up production of other types of advanced equipment. For example, it now manufactures nearly 300 of its main battle tank, the T-90M, each year (up from about 40 in 2021, before the invasion), according to Western intelligence estimates. Reportedly, almost none are being deployed to the front lines in Ukraine and are instead being held in reserve within Russia for future use. However, it is unclear to what extent a relaxation of certain sanctions would enable Russia to increase the overall manufacturing capacity of weapons and equipment in a way that would leave its armed forces well-supplied in Ukraine while allowing for a concurrent intensive rebuilding and expansion of its stockpiles for future large-scale missions.

Altogether, while partial sanctions relief would not qualitatively alter Moscow’s military capabilities, due to extra financial breathing space, its war horizon would likely extend even further beyond the next three years, thus challenging Ukrainian and Western security.

Scenario 3: Western Sanctions Become Stronger

In a scenario where U.S.-led peace talks with Russia and Ukraine stall due to Moscow’s refusal to negotiate in good faith, the strengthening or the broadening of the current sanctions regime remains a possibility.

Among the available measures to strengthen sanctions is lowering the oil price cap. The Center for Research on Energy and Clean Air estimates suggest that a reduced price cap of $30 per barrel would have cut Russia’s oil export revenue by 41 percent from the onset of sanctions in December 2022 through February 2025. However, the struggle to enforce the oil price cap even at $60 makes one doubt the possible effectiveness of such measures at lower levels. To make the price cap more effective, the United States and its allies could implement stricter control over the shadow fleet. This could entail sanctioning additional shadow fleet vessels, which has proved a successful strategy to date, along with prohibiting the sale of tankers to entities likely to employ deceptive tactics. Yet it is increasingly difficult to accurately identify such ships, as they often use automatic identification system blackouts to conceal entry into Russian ports or ship-to-ship transfers at sea and flag hopping (i.e., registering under flags of convenience from countries that are less inclined to enforce Western sanctions and have complicated ownership and management structures in place, enabling the shadow fleet to hide links to Russia). Enhanced naval protection, which would include increasing the number of coast guard personnel monitoring suspicious vessels, could help alleviate this issue, although it would be a resource-intensive approach. In addition to correctly identifying and sanctioning the vessels, detaining members of the crew until appropriate investigations are completed could serve as an extra deterrent against future sanctions evasion.

Yet more impactful than targeting the shadow fleet would be to threaten and use secondary sanctions. The interviewed experts highlighted the need to broaden the sanctions coalition in order to pressure the largest buyers of Russian oil, such as China and India, to seek alternative suppliers. President Trump’s recent threat to impose secondary tariffs of 25–50 percent on the buyers of Russian oil might be a measure severe enough to force these countries to limit such purchases, if their implementation is workable. India would be in a particularly troublesome position—it has surpassed China to become the biggest purchaser of seaborne (but not total) Russian crude oil, the latter comprising around 35 percent of New Delhi’s total crude imports in 2024. As India is already refusing to buy crude oil from Iran due to U.S. sanctions, being forced to diversify away from Russian oil would likely increase the country’s costs of oil imports. In China’s case, amid the ongoing trade war, the extent of remaining U.S. leverage is less clear. But the heightened economic uncertainty, which may follow a global trade war, may slow global growth and weaken oil demand and prices. This would impact Russia’s economy, given its ongoing dependence on energy exports. Finally, if the White House indeed proceeds with the threatened secondary tariffs, such a drastic measure will also alter the internal dynamics within OPEC+. Any decrease in Russian barrels on global markets would allow the rest of the OPEC+ members to benefit by increasing their own production and exports without lowering prices, but such a decision will also weaken group solidarity.

Another notable area where sanctions can be expanded or more rigorously reinforced is the current export controls regime on critical technologies essential for Russia’s war effort. There is a reasonable suspicion that certain organizations that remain unsanctioned, such as the Russian state corporation for space activities Roscosmos and state corporation for nuclear energy Rosatom, as well as some civilian entities within Rostec, might be contributing to Russia’s war needs. The interviewed experts also flagged the need for a more effective coordinated enforcement mechanism across the G7 and EU countries for current export controls, analogous to the Coordinating Committee for Multilateral Export Controls (COCOM), which existed during the Cold War. Enforcement could be strengthened not only by going after intermediaries and financial institutions aiding Moscow’s sanctions circumvention effort in third countries such as China, but also by working with Western producers to implement a more rigorous vetting and tracking mechanism to ensure that Western dual-use technology does not end up in Russia. Such collaboration between Western governments and private firms can create a public-private infrastructure that can be used in the future as well, if similar restrictions are introduced against other countries such as China.

Overall, despite the increased costs of dramatic sanctions expansion or qualitatively strengthened enforcement efforts for the sanctions coalition countries, Russia would face significant pain. If Russian energy exports (which in 2024 comprised about 30 percent of its federal budget revenues) are actually reduced via secondary sanctions, and the cost of importing dual-use goods rises for Moscow due to increased export control enforcement, its already slowing economy could face increased pressure on its current account. The strengthened sanctions regime would further exacerbate issues with labor shortages by further decreasing labor productivity—with every new Western sanction, restriction, or enforcement comes a Russian evasion effort, and high-skilled workers in Russian firms would likely spend more time devising new sanctions evasion routes or money settlement schemes. This would increase the operational costs of these firms and require additional members of the Russian workforce to spend their energy on sanctions circumvention, rather than making contributions to Russia’s overall productivity.

Russia’s war effort in this scenario, therefore, would likely be impacted, as lower oil revenues and a labor shortage could translate into a further contraction in the manufacturing industry, which is critical for maintaining steady levels of weapon flows to the battlefield. Additionally, if export control enforcement is strengthened, Russia’s access to critical technologies from China would also be impaired, further impacting the manufacturing sector. The government might also be forced to decrease payments and limit certain social benefits for soldiers and their families, which would hinder future recruitment and might even lead to a second wave of partial mobilization and ensuing brain drain from the country. Declining compensation for war participation and the worsening economic situation might contribute to growing social tension, as in the case of the Soviet-Afghan war. Meanwhile, Ukraine, through the help of its Western partners, might be able to capitalize on Russian struggles and strengthen its position on the battlefield.

Conclusion

After three years of war and sanctions, the Russian economy finds itself battered, but not broken. Despite expectations of its imminent demise, the Russian economy did not collapse in the face of the Western sanctions regime and the strains of wartime mobilization. Rather, the Russian economy adapted, and has so far been able to manage the tradeoffs necessary to fuel its war effort in Ukraine, circumvent Western sanctions, and maintain macroeconomic stability.

Russia has nonetheless faced real challenges. Sanctions have raised the costs of its critical imports, cut down on export revenues, and riskily exposed the economy to a growing dependence on trade with China. Russia’s reliance on turbocharged spending via military Keynesianism has collided with its chronic labor shortage, further fueling a domestic inflationary cycle triggered by the sanctions regime’s attack on Russian supply chains. Russia’s current account remains the country’s most glaring economic vulnerability. A dramatic drop in export revenues, a surge in capital flight, or a further increase in the country’s import costs, if timed fortuitously, could push Russia in the direction of a balance of payments crisis. Lastly, the Russian economy appears to have hit the growth limit of its military spending–dependent model, as existing capacity limits have collided with elevated interest rates to lead to significantly lower growth projections in 2025 and 2026 compared to the growth numbers achieved in 2023 and 2024.

However, at least over the short-to-medium term, Russia faces no signs of internal economic collapse. The country continues to earn valuable hard currency revenues from its commodities exports, and the financial system remains well capitalized, despite a growing (but manageable) debt burden. The Russian government’s economic technocrats and corporate managers continue to facilitate adaptation to the Western sanctions, and the regime’s canny distribution of military funding streams have consolidated the Kremlin’s domestic position.

In the scenario where the sanctions regime remains as is, Russia will be able to continue its war in Ukraine, at least at the current level of intensity, over the next three years. If there is a partial removal of sanctions, the Russian economy will gain some breathing space and additional resources for its war effort, but the overall macroeconomic position of the country will not radically shift. Lastly, if additional sanctions are added or the enforcement mechanisms of the current sanctions are strengthened, Russian revenues would contract, forcing more tradeoffs in the allocation of spending, and potentially reinforcing Ukraine’s position both on the battlefield and at the negotiating table.

In all three of these scenarios, barring unforeseen factors, Russia’s domestic economic position remains constrained but not overwhelmed. In this context, Russian diplomats, while eager for sanctions relief, are unlikely to make major concessions to Ukraine and its partners at the negotiating table based on economic considerations alone. Western governments, whose goal is to support Ukraine’s sovereignty, contain Russian power projection, and ultimately deter further aggression from Moscow, must be clear-eyed in their engagement with a Russian leadership that remains committed to long-term confrontation with the Western-led international order.

The Russian economy has lived many lives since February 2022. After the initial shock of the invasion wore off, the country experienced a dramatic sugar high thanks to historic hydrocarbon revenues, and surging government spending. The economy now appears to have entered its post–sugar high hangover, with growth slowing, and its internal reorganization settling down. However, the Russian war economy will most likely continue to lumber along, and prioritize allocating resources to maintain its military position on the Ukrainian front, no matter the cost to the country’s future productivity.

Maria Snegovaya is a senior fellow for Russia and Eurasia with the Europe, Russia, and Eurasia Program at CSIS and a postdoctoral fellow in Georgetown University’s Walsh School of Foreign Service. She studies Russia’s domestic and foreign policy, as well as democratic backsliding in post-communist Europe and the tactics used by Russian actors and proxies who exploit these dynamics in the region.

Nicholas Fenton is an associate director and associate fellow with the Europe, Russia, and Eurasia Program at CSIS, where he focuses on Russian foreign policy, the war in Ukraine, and changes in the Russian economy since 2022.

Tina Dolbaia is an associate fellow with the Europe, Russia, and Eurasia Program at CSIS, where she examines political, economic, and military developments in Russia and Eurasia, as well as Russia’s defense-security relations with Global South countries. She is particularly interested in Russia’s evolving military industrial production capabilities and how it leverages its diplomatic and defense ties in the Global South.

Max Bergmann is the director of the Europe, Russia, and Eurasia Program and the Stuart Center in Euro-Atlantic and Northern European Studies at CSIS.