Russia's Wartime Economy Shows Strain as Debt and Military Spending Mount

Russia's wartime economy is showing deepening strains as heavy military spending drives up the budget deficit, consumer and business sentiment sours, and growth slows. Yet economists caution that none of this points to an imminent financial crisis or collapse.

High oil export revenues, buoyed by elevated prices linked to the Iran war, are still providing the government with enough money to fund its 4 1/2-year-old invasion of Ukraine — at least for now. Low unemployment and state spending in poorer regions have also helped contain public discontent.

That mix suits the Kremlin's narrative of stability as a stage-managed parliamentary election got underway Friday and concludes Sunday.

Warning signs beneath the surface

Consumer sentiment has drifted down since a peak in 2024-25, when military spending was fuelling growth and wages. More recently, households have contended with higher gasoline prices and shortages after Ukrainian drone attacks knocked out refineries. Many small businesses have lost inventory and customers due to strikes against online retailers Wildberries and Ozon.

Growth has slowed from over 4% annual expansion in 2023-24. The government forecasts 0.6% this year, and the economy contracted in the first quarter before rebounding somewhat in the second.

The Levada Center's consumer sentiment index fell to 94 over the summer, down from 116 in spring and summer of 2025. Readings below 100 indicate sentiment is more negative than positive.

In Moscow, voters asked about the election cited pensions and prices. Alexander Vertukhin, a 72-year-old retired military prosecutor, said the government should focus on "a decent standard of living for pensioners," adding that he was doing fine financially. Dmitry Kirillin, 26, said he wanted housing and travel to be more affordable and prices to rise more slowly.

'Tolerable stability'

Chris Weafer, CEO of the consultancy Macro-Advisory Ltd., described the economy as in a state of "tolerable stability" and the public mood as "grumbling" but not protesting. The gasoline situation and Wildberries strikes have made the war more visible, he said, but do not amount to a crisis.

"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, he added, "are not that affected" by the Ukrainian strikes.

President Vladimir Putin's approval rating has declined in recent months but remains higher than before the war began in 2022.

Budget pressure and borrowing costs

A key sign of stress is the budget deficit. By the end of July, budget data showed a deficit of 2.8% of annual economic output — almost twice the original annual target. Available resources in Russia's reserve fund have dwindled to 1.6% of GDP, meaning the Kremlin must borrow from domestic banks.

That carries high costs, with interest rates on Russian bonds reaching as high as 17%, 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.

The central bank has kept rates high to contain war-driven inflation, squeezing civilian companies that lack the privileged credit access afforded to defence firms. Another funding source has been increased private lending by compliant banks to defence-related companies, meaning those debts do not appear in deficit figures.

Over the long term, Western sanctions deprive Russia of new investment that would make the economy more productive.

Structural erosion

High spending, low growth, rising debt and elevated borrowing costs have led some economists to warn that while Russia's economy has not collapsed, its structural foundations are eroding dangerously. Torbjörn Becker of the Stockholm School of Economics called the current trajectory "unsustainable," though he said "the timing of a crisis remains highly uncertain."

Oil export earnings, which had fallen below $10 billion per month ahead of the Iran war, rebounded to $15.8 billion by June and $13.8 billion in July. Russia's budget constraints "may effectively disappear for as long as elevated energy prices persist," Becker wrote, arguing that tougher measures against Russia's sanctions-evading oil tanker fleet must be a priority.

Defence spending has been a boon to Russia's provinces, which are poorer than Moscow and St. Petersburg. With factories often running at full capacity, unemployment is 2.2% nationwide. The Uralvagonzavod tank factory in Nizhny Tagil increased its workforce from about 20,000 to more than 38,000 since the invasion, according to a recent report from the Center for Strategic & International Studies. Kupol, which makes drones and surface-to-air missiles, more than doubled its output in 2025.

Skilled labour shortages are restraining production, compounded by the emigration of several hundred thousand mostly younger people fearing conscription and political repression.

Kremlin spokesperson Dmitry Peskov said month-to-month deficit figures were volatile and "this is not a figure that should be cause for concern. Macroeconomic stability is absolutely ensured."

But Andrei Klepach, chief economist of the state-owned VEB.RF development bank, warned in a speech that sanctions and economic isolation meant "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.