"Russia's war economy has problems, but it is not on the verge of collapse"

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Has the end finally arrived? After four years of growth that defied sanctions, a growing group of economists from various think tanks maintains that Russia’s war economy has its days numbered. A new report published by the Kiel Institute for the World Economy argues that the country is now facing “structural exhaustion.” Charles Hecker, of the Royal United Services Institute, estimates that “Russia is likely already in recession.” Nigel Gould-Davies, of the International Institute for Strategic Studies, goes further and speaks of “the looming crisis in Russia’s political economy.” Even official Russian figures point to a 0.2% contraction in GDP in the first quarter compared to the previous year.

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Since invading Ukraine in early 2022, Vladimir Putin’s Russia has mocked those who repeatedly predicted economic collapse. It defied Western sanctions by reorienting trade toward countries like China and India, and spent its ample fiscal reserves on the military, infrastructure, and social benefits. Between 2022 and 2025, Russia’s GDP per capita, adjusted for inflation, increased by 12%; a figure that is not impressive when compared to the standard of other emerging markets like China or India, and which is also inflated by defense production that does not benefit households, but is nonetheless a good result in the face of catastrophic forecasts. Despite new tensions, the country’s war economy is not on the verge of collapse.

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Let’s start with the weak official statistics. This is, to a large extent, a statistical mirage. The increase in the value-added tax (VAT) in January, which went from 20% to 22%, had prompted Russians to make massive purchases at the end of 2025, which bolstered growth for that quarter at the expense of the next. The beginning of 2026 also had fewer working days than the previous year and dire weather, even by Russian standards. A potentially cleaner indicator of economic activity, produced by Goldman Sachs, is consistent with slow growth but rules out a deep crisis. Data from VEB, another bank, point to an acceleration of GDP in March and April, partly thanks to the rebound in oil prices. It is almost certain that Russia is not in recession.

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In other sectors, the outlook is mixed. Consumer confidence fell, according to a measurement by the Levada Center, an independent polling organization. However, it was coming from near a historic high. Finding a job may be a little harder than it was a year or two ago, but unemployment remains near its historic low, at around 2%. Russia is finding it harder to export fossil fuels—the engine of its economy—as Ukraine intensifies attacks on its energy infrastructure, and in a context where oil prices plummeted after the peaks reached during the Iran war. Even so, total goods exports in April (the latest official figures available) were slightly higher than the previous year.

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People crossing a street with the headquarters of the Russian oil company Lukoil in the background, in Moscow, Russia, on Thursday, October 23, 2025

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In other respects, the economy is actually improving. Inflation has halved from its recent peak, which had exceeded 10%. Real wages, which are already 25% higher than in 2019, continue to rise. Many companies are doing very well. In the first five months of 2026, Aeroflot, the flag carrier, transported its passengers on journeys totaling 40 billion kilometers, almost a tenth more than in the same period of the previous year. It is evident that the oligarchs are doing even better. Sales of luxury cars smuggled from the West are through the roof; so far this year, they have bought 80% more Lamborghinis than in 2025.

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It is true that this resilience owes much to Russia’s strong fiscal stimulus. Last year, the government spent the equivalent of 7% or 8% of GDP on the armed forces. Those who foresee a crisis argue that this huge outlay absorbs labor from the rest of the economy, in addition to draining public finances.

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Perhaps. However, Russia’s military spending represents an increase of 3% or 4% of GDP relative to the post-war norm: it is not an insignificant figure, but it is also not enough to generate a devastating domino effect. The civilian economy is treading water, holding its own rather than contracting.

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On the other hand, Russia’s fiscal problems are not yet acute. To pay for Putin’s war, the government can raise taxes, as it recently did with VAT. It can finance any remaining deficit —currently around 3% of GDP— by drawing on emergency reserve funds. It can borrow in a domestic market that it has captive. In case of extreme necessity, Putin’s financiers can confiscate the ruble deposits of corporations and households. This would be a last resort with real collateral consequences. But who is going to stop them?

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Considering all factors, Russia can expect GDP growth of around 1% this year: a performance similar to that of France or Canada. More severe sanctions, such as those announced by Great Britain on June 16, could trim this growth a bit. The same will happen with oil prices if they continue to fall, and if Ukrainian attacks on Russian oil infrastructure escalate. However, it would take something much more radical to slow the march of Putin’s war economy.

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