The vulnerabilities in Russia’s war economy are becoming increasingly evident.
Despite President Vladimir Putin’s claims of resilience, the reality is that inflation is on the rise, reserves are dwindling, and the financial demands of the ongoing conflict in Ukraine are intensifying.
Projections indicate that liquid reserves could be depleted by fall 2025, leading some economists to suggest that a ceasefire may be the only viable option to stabilize the country’s finances and avert a deeper economic crisis.
As the true numbers come to light, they reveal a nation stretched thin and on the brink of a financial collapse.
How is Russia financing the war?
Russia has adopted a two-track strategy to finance its war efforts, one that masks the true cost of the conflict.
The official defence budget—set at 6.3% of GDP—is publicly disclosed to present an image of financial discipline.
The real story, however, is a shadowy off-budget financing mechanism. Under laws quietly passed shortly after the invasion, Russian banks are coerced into issuing preferential loans to defense contractors at the state’s command, regardless of the contractors’ creditworthiness.
This method has fueled a staggering 71% increase in corporate debt, totaling $415 billion, with an estimated $210–250 billion funneled directly into war-related activities.
This hidden debt highlights the Kremlin’s reliance on economic coercion to fund its military ambitions, risking systemic financial instability and a systemic credit crisis in the process.
While this strategy has allowed Moscow to sustain high military expenditures without alarming observers and its citizens, it has triggered significant economic consequences.
Reports reveal that Russia has already surpassed its planned military budget for 2024 by almost 3 trillion rubles (or $28 billion).
Inflation has climbed above 9%, and the Central Bank of Russia (CBR) has raised interest rates to 21%, creating financial strain for businesses outside the war economy.
Are Russia’s reserves running out?
Russia’s financial safety net, the National Wealth Fund (NWF), has been drained to perilous levels.
Liquid assets have plunged from $117 billion in 2021 to $31 billion by late 2024, driven by the enormous financial demands of war and the need to prop up an economy crippled by sanctions.
Source: Bloomberg
The fund’s reserves are now on track to be fully depleted by the 3rd quarter of 2025. This depletion is exacerbated by declining export revenues. While energy sales held steady in 2024, tightening sanctions and falling oil prices have eroded their value.
The ruble’s depreciation, from 34 to the dollar in 2013 to 103 today, has further worsened inflation and reduced the purchasing power of Russian households.
Can Russia’s economy sustain its military spending?
Defense spending now accounts for a third of Russia’s budget. This focus on the war effort has created significant economic distortions, such as labor shortages and skyrocketing costs for credit.
Mobilization and emigration have drained the workforce, leaving industries struggling to operate.
Meanwhile, businesses outside the defense sector are buckling under high borrowing costs, with some major companies teetering on the brink of bankruptcy.
For example, real estate developers like Samolet and PIK have seen sales drop by 50% after mortgage subsidies ended.
Manufacturing has also suffered under Western technology sanctions, with only 7 airliners completed out of 108 planned since 2022.
The strain is spreading across the economy, raising concerns of a broader financial crisis.
How do sanctions factor in?
Western sanctions have compounded Russia’s challenges. Measures targeting oil and gas revenues, technology imports, and financial transactions have eroded the country’s economic foundations.
While Russia has circumvented some sanctions through mechanisms like the “shadow fleet” of oil tankers, the overall impact is undeniable.
The latest sanctions package from the outgoing Biden administration and threats of higher tariffs from President Donald Trump add to the pressure.
These actions aim to weaken Russia’s ability to fund its war and force it to negotiate.
Since his inauguration, Trump has adopted a firm stance against Putin, asserting that Putin is “destroying Russia” and should quickly reach a deal to end the conflict.
With that being said, Vladimir Putin has recently expressed his readiness to meet with the US President, but his decision largely depends on the approach of the U.S. administration.
What’s the outlook for 2025?
Economists are divided on how long Russia can sustain its current trajectory. Optimists argue that high defense spending, though costly, can be managed for a few more years.
Skeptics, however, point to growing imbalances, such as toxic debt in the banking system and unsustainable reliance on domestic borrowing.
President Putin’s frustration with the economic situation has become evident. In December 2024, he criticized officials for the decline in private investment, revealing his own concerns over the economy’s trajectory.
Yet his options are limited. Raising taxes or cutting spending could spark domestic unrest, while continued borrowing risks a credit crisis.
For Ukraine and its allies, this economic fragility could be seen as an opportunity. A well-coordinated strategy of military aid, sanctions enforcement, and diplomatic pressure could force Moscow to consider a ceasefire.
However, any agreement will hinge on complex negotiations, with Ukraine demanding robust security guarantees and refusing to cede occupied territories.
Could a ceasefire really save Russia’s economy?
A ceasefire could temporarily alleviate Russia’s mounting economic pressures. Inflation might stabilize, interest rates could decrease, and the alarming depletion of reserves might pause. This short-term reprieve could help businesses regain footing and avoid financial collapse.
However, the long-term trajectory is far more uncertain. Recovery hinges on sanctions being lifted—a step Western nations have tied to substantial concessions, such as reparations and recognition of Ukraine’s territorial integrity. Without such agreements, Russia’s economy remains on a knife’s edge, where the risk of a broader financial meltdown looms large.
Western leaders have made it clear that sanctions relief will only come as part of a comprehensive peace agreement, including reparations and guarantees of Ukraine’s sovereignty.
Putin himself insists that Russia can fight indefinitely, but the mounting economic strain may force his hand. A protracted conflict risks not only financial collapse but also the erosion of public support as living standards decline.
As 2025 unfolds, the choices made in Moscow, Kyiv, and Washington will decide whether this brutal conflict draws to a close or Russia exhausts what remains of its strength.
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