Virendra Pandit
New Delhi: Fighting an inconclusive war against Ukraine since February 2022, with little tangible results despite wanton destruction of the neighbouring country and its own areas, Russia’s war-time economy shows signs of extreme stress due to mounting debt and heavy military spending, the media reported on Friday.
Russia, among the top crude oil and gas exporter, is now facing problems with refined oil and diesel and importing some of it from even India, its second largest buyer of crude.
One key sign of stress is Russia’s budget deficit and the government’s efforts to find new sources of money. President Vladimir Putin has resorted to increasing value-added tax paid by consumers at the cash register.
However, there is so far no imminent financial crisis or economic collapse, economists say. With crucial oil export revenues holding up due to high prices from the Iran war, the government is still able to find the money to pay for its four-and-a-half-year-old invasion of Ukraine, at least for now.
Meanwhile, low unemployment and government largesse in poor regions help keep a lid on consumer grumbling. That picture suits the Kremlin’s narrative of stability ahead of Russia’s stage-managed parliamentary election that got underway on Friday and concludes Sunday.
But economists warn that longer-term problems are gnawing at the foundations – and could one day result in a crisis.
Consumers and businesses are more pessimistic. Indicators of consumer sentiment have drifted down since a peak in 2024-25, when increased military spending was pumping up growth and wages. More recently, consumers have coped with higher gasoline prices and shortages due to Ukrainian drone attacks that knocked out refineries. And many small businesses have lost inventory and customers due to strikes against online retailers Wildberries and Ozon.
Concurrently, growth has slowed from a peak of over 4 per cent annual expansion in 2023-24. The government foresees 0.6 per cent this year, and the economy shrank in the first quarter before rebounding somewhat in the second.
The consumer sentiment index compiled by the Levada Centre, an independent Russian pollster, fell to 94 over the summer, down from 116 in spring and summer of 2025. Readings under 100 indicate that consumer sentiment is more negative than positive.
People asked about the election in Moscow responded with mostly basic concerns about pensions and prices.
The gasoline situation and Wildberries strikes have made the war more visible to people but don’t constitute a crisis, said Chris Weafer, CEO of the Macro-Advisory Ltd. consultancy active across the former Soviet Union. He described the economy as in a state of “tolerable stability” and the public mood as “grumbling” but not protesting.
“The economy is under strain – it’s stagnant to the effect that it’s stable but not growing,” Weafer said. “But it’s not facing recession either.” Most people “are not that affected” by the Ukrainian strikes, he said. “Just because your shopping habits are disrupted, that’s not going to change the public support for the Kremlin.”
President Vladimir Putin’s approval rating has declined in recent months but remains higher than it was before the war started in 2022.
Budget deficit
One key sign of stress is Russia’s budget deficit and the government’s efforts to find new sources of money. Putin has resorted to increasing value-added tax paid by consumers at the cash register, raising a raft of other fees and tightening taxation of small businesses. But the deficit has continued to climb.
By the end of July, budget data showed a deficit of 2.8 per cent of annual economic output – almost twice the original annual budget target. Available resources in Russia’s reserve fund have dwindled to 1.6 per cent of GDP, meaning the Kremlin needs to borrow from domestic banks.
That, however, means paying high borrowing costs, with interest rates on Russian bonds as high as 17 per cent, according to Janis Kluge, an expert on Russia’s finances at the German Institute for International and Security Affairs.
Budget stress is “adding to doubts about how long Russia can sustain the war,” he wrote in a recent report. Russia’s central bank has kept rates high to contain the inflation caused by war spending. That stresses civilian companies who don’t get the privileged access to credit afforded defence firms.
Another source of war funding has been increased private lending by Russia’s compliant banks to defence-related companies, meaning those debts are not showing up in the deficit figures.
Warning: Endgame
Some warnings have been sounded that the endgame is coming for Russia’s economy.
Over the long term, Western sanctions deprive Russia of new investment that would make the economy more productive.
And the risk factors – high spending, low growth, rising debt and elevated borrowing costs – lead some economists to warn that while Russia’s economy has not collapsed, its structural foundations are eroding dangerously.
The current trajectory is “unsustainable,” according to Torbjorn Becker at the Stockholm School of Economics. Still, “the timing of a crisis remains highly uncertain.”
Higher oil prices
Oil export earnings, which had fallen below USD 10 billion per month ahead of the Iran war, rebounded to USD 15.8 billion by June and USD 13.8 billion in July.
Russia’s budget constraints “may effectively disappear for as long as elevated energy prices persist,” Becker wrote.
To change that, tougher measures against Russia’s sanctions-evading oil tanker fleet must be a priority, he argued.
The Kremlin says everything’s under control Kremlin spokesperson Dmitry Peskov said month-to-month deficit figures were volatile and that “this is not a figure that should be cause for concern. Macroeconomic stability is absolutely ensured.” But the chief economist of Russia’s state-owned VEB.RF state development bank, Andrei Klepach, warned in a speech that due to sanctions and economic isolation, “we’re falling behind in the technological and economic competition in the world,” and that “we can’t win the competition in this war of attrition.” He was fired.