The Russian economy, long thought resilient in the face of Western sanctions imposed after Moscow’s 2022 invasion of Ukraine, has run into significant headwinds and is now showing clear signs of stagnation. After years of defying early predictions of economic collapse, Russia’s growth has slowed sharply, raising questions about its ability to sustain its prolonged war effort and underlining deeper structural weaknesses.
When sanctions first hit in 2022, Western leaders forecast dire outcomes for Russia’s economy, with some suggesting it could be halved in size. Instead, Russia’s response was to pivot toward increased military spending and find new markets for its oil and gas, particularly in Asia. As a result, by 2025 Russia had grown to become the world’s ninth-largest economy, surpassing several major economies. Yet this apparent resilience now appears increasingly fragile as growth stalls and long-term pressures mount.
The deceleration stems from several converging factors. Central among them is the collapse in oil revenues, which historically have formed the backbone of Russian state finances. Global oil prices that once hovered around USD 90 per barrel have declined toward USD 50, reducing the tax and export income Moscow relies on to fund both government programs and military expenditures. Sanctions, tighter enforcement by Western powers targeting Russia’s shadow shipping fleet, and reduced purchases from key buyers such as India have compounded the problem, cutting deeply into energy export earnings.
Russia’s demographic challenges are equally profound. A shrinking population, driven by low fertility rates, war casualties and emigration, has contributed to labor shortages in many sectors despite an extremely low official unemployment figure. These longer-term pressures had been masked for years by wartime demand and fiscal stimulus, but they are now coming to the fore.
In an attempt to bridge widening budget gaps, the Kremlin has introduced a series of heavy tax increases and cuts to public spending on services such as healthcare and education. Inflation pressures, exacerbated by higher taxes like an increase in value-added tax earlier this year, have added strain on Russian households and businesses, fuelling bankruptcies and eroding public economic confidence.
International financial institutions have taken note of the shift. The International Monetary Fund downgraded its growth forecast for Russia to a mere 0.6% in 2025 and about 0.8% in 2026 — figures that, outside the pandemic years, represent the slowest expansion Russia has seen since sanctions following its 2014 annexation of Crimea. These rates also lag behind most Western economies, highlighting the stark contrast between Russia’s wartime economic model and those of its trading partners.
The impact of stagnation on the ongoing conflict in Ukraine remains a critical question. While Russia still has financial tools — including borrowing and printing money — to sustain military operations, many analysts believe that the erosion of oil revenues and rising domestic economic strain could eventually force a recalibration of its strategic approach. Recent moves toward renewed interest in peace talks with Ukraine may reflect this shifting economic calculus, though the Kremlin has so far offered no indication of scaling back its stated war aims.
Economic stagnation has thus thrust President Vladimir Putin into a more precarious position, balancing the need to maintain military momentum with growing domestic economic pressures. How Russia navigates this period of slow growth and fiscal strain could have significant implications not only for the future of the Ukraine war, but also for the stability of its political and economic system in the years ahead.
