Western leaders expressed confidence when imposing sanctions on Russia following its invasion of Ukraine in 2022. "The Russian economy is on track to be cut in half," declared then US President Joe Biden in March of that year, predicting it would fall out of the world's top 20 economies. However, this forecast proved inaccurate. After an initial shock, Russia's economy experienced a significant boom, driven by surging military expenditure. By 2025, Russia had climbed to become the world's ninth largest economy, surpassing Canada and Brazil and trailing only Italy, France, and the United Kingdom.
Economic Stagnation Takes Hold
Yet, further advancement now appears improbable. In 2026, unmistakable indicators reveal the Russian economy is finally running aground. While the dramatic collapse envisioned by the West may not materialise, the Kremlin confronts its most unstable economic situation since the conflict began. Growth has decelerated to a near standstill, influenced by declining oil prices—a crucial source of government revenue—and enduring demographic pressures that elevated defence spending had previously concealed.
Fiscal Gaps and Public Squeeze
To address the fiscal shortfall, ordinary Russians are encountering tax increases and a state apparatus restructured for warfare, resulting in diminished funding for welfare, education, and healthcare. Concurrently, trade with key allies has grown more subdued, corporate bankruptcies are escalating, and labour shortages have become acute. The International Monetary Fund has downgraded its growth projections for Russia to a mere 0.6% in 2025 and 0.8% in 2026—the lowest annual rates since the recession triggered by sanctions after the 2014 annexation of Crimea, excluding the pandemic years.
Oil Revenues and Sanction Impacts
This loss of economic momentum coincides with a reduction in oil and gas revenues, which are fundamental to financing Russia's war machine. In 2022, fossil fuel taxes constituted approximately 40% of the federal budget, sufficient to cover war costs. Preliminary estimates for the first three quarters of 2025 indicate this share has decreased to 25%. Falling prices contribute to this decline, with Ural oil dropping from about $90 per barrel in early 2022 to $50 by late 2025, amid a global surplus. Western sanctions also play a role, despite Russia's endeavours to secure new buyers.
China, India, and to a lesser extent Turkey, increased their purchases after the invasion as exports to Europe declined sharply. Nevertheless, by 2026, their combined trade volume remains substantially lower than the pre-war purchases from sanctioning nations. India, in particular, has reduced its acquisitions in recent months due to threats of trade tariffs from US President Donald Trump. Isaac Levi, a policy analyst at the Centre for Research on Energy and Clean Air, noted, "Russia's fossil fuel export earnings in 2025 were 13% below prewar levels, squeezed by tougher sanctions, Ukraine's drone strikes on energy infrastructure, the struggle to find new markets for its gas exports, and lower global oil prices."
Demographic Challenges and Inflation
Vladimir Putin's difficulties with oil may represent only a temporary setback, especially if prices rebound in 2026. However, long-term demographic pressures are now severely impacting the Russian economy. The population has consistently declined since 2019, from 145.5 million to 143.5 million in 2024, due to falling fertility rates, war casualties, and emigration. While Western nations have experienced similar fertility declines, immigration has helped sustain population growth, a factor absent in Russia.
Dr Marek Dabrowski, a fellow at the Brussels-based thinktank Bruegel, stated, "Russia doesn't have the potential for rapid growth. The war-related business climate is, of course, part of the story, but the major story here is the long-term demographics. It hasn't changed." This demographic reality has led to widespread labour shortages, reflected in an unusually low unemployment rate of just 2%.
Tax Hikes and Monetary Policy
The Kremlin has attempted to bolster its fiscal stance through several substantial tax increases. In 2025, corporation tax rose from 20% to 25%, and higher income tax bands were introduced. Additionally, a VAT increase from 20% to 22% took effect at the start of 2026—exceeding rates in the US, UK, France, or Germany. Although the Russian government has exempted some essential goods, this VAT hike compounds persistent inflation that has driven up the cost of basic necessities.
While the war's effect on inflation in the West has been widely discussed, Russia has endured far higher and more prolonged inflation. Efforts to combat this inflation have further contributed to the economic slowdown. Dr Vladislav Inozemtsev, an economist and co-founder of the Centre for Analysis and Strategies in Europe thinktank, remarked, "There is an irresponsible policy conducted by the central bank and the finance ministry that started to 'cool the economy off' in 2023 for fighting inflation. For this, the central bank has raised its key rate up to 21%, the government abandoned its subsidised mortgage programme, and the banks started to cut loans and increase rates."
Military Spending and Public Morale
There are indications that this economic hardship is affecting the morale of ordinary Russians. According to Gallup polling conducted in Russia, the invasion initially boosted economic optimism during the wartime boom. In July 2021, most Russians believed the economy was deteriorating, but by November 2022, this perception had reversed, with a majority viewing conditions as improving. However, by August 2025, this optimism had waned, with 39% of Russians stating economic conditions were worsening, up from 29% in 2022.
War Funding and Future Prospects
The crucial question for Ukraine is whether Russia can sustain its surge in military expenditure. Throughout the conflict, Russian military spending as a share of GDP has doubled to over 7%—twice the US's 3.4% and higher than any individual NATO member. However, the rapid increase in spending during the war's early years has now slowed, with only a 0.1 percentage point rise between 2024 and 2025.
Russia occupies a unique position regarding options for maintaining its war chest. Borrowing remains feasible due to a relatively low debt stock, though access to international markets has been severed since the invasion. Taxes could be raised further, and outcomes heavily depend on oil price fluctuations. Additional declines may heighten precariousness, while increases could lead to stabilisation.
Experts generally agree that Russia should be capable of financing the war in the short term. Inozemtsev added, "Putin will encourage the central bank to print money; he will continue to raise taxes, sell state property and nationalise business corporations. This will allow him to get enough money to wage the war for 2026, and, most probably, for 2027."
Political Implications and Peace Talks
Another consideration is whether growing economic discontent in Russia will evolve into political dissatisfaction. Recently, there is evidence the Kremlin's stance may be shifting. Russia has consented to peace talks with Ukraine for the first time in months, with US-led meetings occurring in Abu Dhabi. For Ukraine's negotiators, a pivotal factor is now evident: Russia's war economy is displaying vulnerabilities and cannot endure indefinitely.
