As Russia’s President Vladimir Putin celebrated new diplomatic victories this week—strengthening ties with India’s Prime Minister Narendra Modi, securing a “no limits” partnership with China’s Xi Jinping, and finalizing a long-anticipated Moscow-Beijing gas pipeline agreement—the country’s domestic economy is sending alarming signals.
While Kremlin officials portray a picture of resilience, with Putin claiming that Russia is experiencing a “soft landing,” economic indicators suggest a growing crisis. According to the Financial Times, Russia’s wartime economy, which benefited from steady oil and gas prices and increased military spending in the early stages of the Ukraine war, is now grappling with slower growth, surging defense costs, and diminished energy revenues.
Warning Signs at Home
The Financial Times cites German Gref, CEO of state lender Sberbank, who described Russia’s economic condition as one of “technical stagnation.” Energy revenues—once a lifeline for Moscow—have fallen by 20% during the first eight months of 2025 compared to the same period last year, according to the Russian Ministry of Finance. Analysts surveyed by the central bank predict GDP growth of just 1.4% by the end of this year, with forecasts not exceeding 2% over the next three years. A worst-case scenario envisions a deep recession.
Aleksandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, explained to the Financial Times that Russia’s earlier economic confidence relied on ample oil earnings to plug social gaps. “But now that money is no longer available at the same scale, so it’s time to set priorities.”
Budget Gaps and Spending Strains
Russia’s budget deficit has already widened beyond planned targets. Finance minister Anton Siluanov reportedly informed Putin that additional “financial resources” would be needed to meet obligations, as the shortfall reached Rbs4.9tn ($61 billion)—about 2.2% of GDP—by mid-2025.
While some modest cuts to infrastructure and subsidies may free up Rbs2tn ($2.5 billion), economists say borrowing is Russia’s preferred route. The central bank’s interest rate cuts—from a peak of 21% in June to 18%—have made debt servicing more manageable, reinforcing Putin’s stance that “the deficit can be increased” without jeopardizing the state’s overall stability.
Nevertheless, reliance on borrowing masks deeper issues. Russia’s reserve fund has been halved due to wartime spending, while foreign assets remain frozen under Western sanctions. The Financial Times quoted Janis Kluge of the German Institute for International and Security Affairs warning that “there are real trade-offs in the budget” for the first time.
Structural Challenges
Beyond budgetary concerns, Russia faces labor shortages, disrupted payment systems, and inflationary pressures. VTB Bank has provisioned for a quarter of its corporate loans as potentially uncollectible—a stark reflection of growing financial strain. The strong rouble, up 20% against the US dollar since January, further complicates matters by squeezing revenues without addressing underlying weaknesses.
Though inflation has been brought below 9% year-on-year in July—down from a high of 17.8% in April 2022—businesses remain burdened by high borrowing costs, exacerbating the slowdown.
The War Economy Endures
Despite mounting concerns, Russia shows no sign of scaling back its war-focused economic model. As the Financial Times reports, wartime spending has nearly doubled in nominal terms since 2022. Even if a ceasefire were reached, experts argue that military production would continue, with factories needing years to rebuild depleted reserves.
Kluge and former officials warn that Moscow’s defense-driven approach remains entrenched, and while some investment programs may eventually be rebalanced, “a hard stop to military production” is unlikely.
