EXPLAINED: How Russia’s economy declined in war

More than three years after its full-scale invasion of Ukraine, Russia has defied expectations by weathering an unprecedented storm of Western sanctions. Once predicted to buckle under the weight of global economic isolation, Moscow’s economy instead posted remarkable growth in 2024 — even outpacing all G7 nations, according to official Russian data.

With a reported GDP growth of 4.3% in 2024, Russia surged ahead of the UK’s 1.1% and the US’s 2.8% growth. Much of this expansion was driven by record military expenditure from the Kremlin and continued revenues from oil exports. While the EU has largely severed energy ties with Moscow, Russian oil has found alternative buyers in China and India. The use of a “shadow fleet” of opaque tanker operations has further allowed the Kremlin to skirt sanctions and maintain crude shipments.

Another surprising development was the resurgence of the rouble, which, according to Bank of America, became the world’s best-performing currency this year, gaining over 40%. But as 2026 approaches, that streak of resilience appears increasingly vulnerable.

Domestically, the Russian economy is beginning to show signs of significant strain. Inflation remains stubbornly high at 9.9% as of April, largely fueled by import shortages due to sanctions and soaring wages driven by a massive labour crunch. The country faced a shortfall of 2.6 million workers at the end of 2024, a gap largely attributed to mass conscription and emigration of military-age men.

The Central Bank has attempted to rein in inflation by sharply raising interest rates to 20%, the highest in years. While this may cool prices, it has also made borrowing prohibitively expensive, stifling private investment and industrial growth. Meanwhile, oil and gas revenues — once the bedrock of Russia’s economic might — fell by 35% year-on-year in May, squeezing public finances and widening the budget deficit.

Economic Minister Maxim Reshetnikov recently warned that the Russian economy was “on the verge” of a recession, citing concerns over overheating. Political analyst András Tóth-Czifra noted that while military spending remains protected, the strain is now evident in the form of cuts to infrastructure, utilities, and public services. “The quality of provision is really suffering,” he said.

Despite this, Moscow officials continue to project confidence. Kremlin spokesperson Dmitry Peskov has repeatedly insisted that Russia’s macroeconomic fundamentals remain strong and that the country is developing successfully under government stewardship.

Yet experts warn that Russia may be entering a prolonged phase of stagnation. Economist Yevgeny Nadorshin believes the downturn will be “mild” but inevitable, dismissing talk of collapse as exaggerated. He notes that Russia’s unemployment rate remains historically low at 2.3%, though admits that defaults and bankruptcies are expected.

Looking ahead, geopolitical developments could shape Russia’s economic trajectory. Should a peace agreement with Ukraine materialize — an outcome U.S. President Donald Trump has publicly supported — some of the financial pressures could ease. However, European sanctions are likely to persist, and any return to pre-war energy ties with the West remains unlikely, according to Dr. Katja Yafimava of the Oxford Institute for Energy Studies.

Even if Russia continues redirecting oil exports to Asia, replicating the same strategy with gas will be more difficult. Long-term challenges remain: depleted state revenues, reliance on war-related spending, and an inability to import critical technologies all point to a narrowing economic path.

In the end, while Russia has proven more adaptable than many anticipated, the cumulative effects of war, sanctions, and isolation appear to be catching up — and the Kremlin may soon run out of ways to offset the cost.

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