For a while, it looked as if Russia’s economy had beaten the odds.
After Western sanctions, oil embargoes and the cost of war weighing heavily, its economy bounced back faster than expected.
Factories worked around the clock, wages rose, and GDP figures impressed even the most pessimistic analysts.
But two years later, that momentum is gone. The boom that once defied forecasts has faded into stagnation, and the Kremlin is making ordinary Russians foot the bill for the war it promised would not touch their lives.
The fading of the wartime boom
The numbers tell a straight-forward story.
In both July and August of 2025, Russia’s GDP was just 0.4% higher than a year earlier. Surveys of businesses show contraction across manufacturing and services. Corporate profits are weak, and the stock market has lost its energy.
Forecasts now expect the country to grow at less than 1% for the next two years.
Source: The Guardian
What was once a war-driven expansion is now an economy struggling to stay afloat.
The boom of 2023 and 2024 was powered by money rather than productivity. The government poured roughly 5% of GDP into defense factories, infrastructure and wage subsidies.
Soldiers, technicians and machinists were hired in droves. This drove unemployment to record lows while real wages hit all-time highs. For many Russians, it felt like a version of prosperity, even if inflation was eating away at pay packets.
This are starting to look worrying now. The state is pulling back spending while the central bank is tightening. Interest rates peaked at 21% earlier this year and are now at 17%.
The goal of fighting inflation remains a struggle, with the CPI rate currently sitting above 8%, while the cost of borrowing has frozen private investment.
Source: The Guardian
A government running out of room
The sudden change in Moscow’s finances is striking. The country’s budget deficit reached 4.9 trillion rubles, about 61 billion dollars, in the first seven months of this year.
The government’s reserve, known as the National Welfare Fund, is already two-thirds depleted. Oil and gas revenues that used to sustain the economy have dropped now from 135 billion dollars last year to around 100 billion. That’s a sharp 26% drop.
To fill the gap, the Kremlin is now raising taxes. From 2026, value-added tax will rise from 20% to 22%. The threshold at which small businesses begin to pay VAT will drop from 60 million rubles to 10 million, capturing tens of thousands of new taxpayers.
A 5% gambling tax will also take effect. Finance Minister Anton Siluanov said these increases are meant to “balance the budget without excessive borrowing.”
At the same time, spending patterns reveal what Moscow prioritizes. Defense outlays will fall slightly from a record 13.5 trillion rubles to 13 trillion in 2026. But a separate category, national security and law enforcement, will rise by more than 13%.
It looks like the government’s strategy is not to cut the war effort, but to expand its internal control.
This marks the end of the fiscal party that kept the wartime economy alive. Economists inside Russia describe the 2026 budget as a compromise between two camps: the generals who demand more funding and the technocrats who fear runaway inflation.
But the compromise is simple. The public will have to pay for the damages.
The militarization of everyday life
War spending has transformed the structure of Russia’s economy. Before the invasion of Ukraine, the country planned to deliver about 400 armored vehicles a year. It now produces close to 4,000.
Drone output has grown from 140,000 units in 2023 to 1.5 million in 2024 after local factories replaced Iranian imports. Between 2022 and 2024, defense expenditures reached 22 trillion rubles, roughly 263 billion dollars.
Source: Bloomberg
The scale of mobilization is vast. Defense and related industries have absorbed hundreds of thousands of workers, keeping official unemployment at record lows.
For many small towns, arms production is now the only source of stable income. Pulling back would mean layoffs, shrinking tax receipts and social unrest. The Kremlin cannot easily unwind what it has built.
But this permanent militarization carries a cost. Money and labor are locked into low-productivity activities. Civilian industries, such as housing to healthcare, now receive less funding.
Innovation in non-military fields has slowed. What began as emergency spending has become a structural feature of the Russian state.
Putin now speaks of “dual-use” production, encouraging defense plants to make goods for civilian markets such as aviation, shipbuilding and medical equipment.
But conversion is easier to announce than to achieve. Factories optimized for missile systems do not easily switch to consumer products. Without the constant flow of state orders, Russia’s industrial base could seize up.
Searching for new lifelines
To keep its arms factories busy, Moscow is turning outward. State arms exporter Rosoboronexport reports a record 60 billion dollars in foreign orders. Analysts expect annual sales of 17 to 19 billion dollars in the first four years after the war.
Source: Bloomberg
Russia is returning to arms fairs in India, China, the Middle East and Africa, selling tanks, drones and air defense systems at discounted prices.
And there is precedent for this move. The Soviet Union became a global arms supplier after the Second World War, using wartime capacity to gain diplomatic leverage. Putin appears to be following that playbook.
But the math is tight. Even with rising exports, orders cover less than half of Russia’s current defense budget. The rest must come from domestic demand, or more taxes.
Meanwhile, the country’s traditional export engine is sputtering. Between early 2022 and 2025, the value of Russian goods exports fell by nearly 40%.
Oil prices have weakened, Western buyers have vanished, and sanctions have forced Moscow to rely on a fleet of shadow tankers to ship crude to India, China and Turkey at discounted rates.
The new face of the conflict
Economic limits have not changed Putin’s ambitions, but they have changed his methods.
Russia is now fighting a cheaper war. Instead of large offensives, it relies on drones, cyber-attacks and sabotage. European countries have faced airspace violations, GPS interference and strikes on infrastructure. None of these actions cross NATO’s threshold for war, but together they test the alliance’s unity.
This strategy delivers results at low cost for Moscow. A drone launched across a border can cause millions in damage and political discord for the price of a family car. Cyber-attacks and disinformation campaigns stretch European defenses without additional spending.
This “grey-zone” warfare fits the logic of an economy that must conserve resources while keeping its adversaries off balance.
Domestically, the Kremlin’s goal is to sustain normality. Wages remain high in defense-heavy regions, and propaganda emphasizes stability over luxury. Most Russians have learned to live with shortages and inflation. With dissent criminalized, the social pressure that might force policy change is largely absent.
A state built for endurance, not growth
Russia’s economy now rests on a narrow base. That is war production, oil exports under sanctions, and the ability of citizens to absorb higher taxes and prices.
Growth of around 1%, inflation near 8% and high interest rates have become the new normal. The government has chosen stagnation over crisis.
And while the system looks stable for now, it ultimately shows a country trading its future growth for short-term survival.
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