In the shadow of its prolonged war effort and increasing international isolation, Russia’s economy teeters on the brink of long-term stagnation.
The Kremlin might insist that the country is resilient in the face of Western sanctions and economic pressure, but behind the bombast lies a troubling reality: Russia is not bouncing back. It is faltering.
As President Putin doubles down on militarisation and economic self-sufficiency, the broader economy is choking under the weight of inflation, budget deficits, and crumbling energy revenues. With a shrinking labour force and a financial system increasingly detached from global norms, the Russian economic model looks less like a phoenix rising from ashes and more like a bear stuck in hibernation, unable—or unwilling—to wake up.
Stagflation and Strain
While the Kremlin boasted of a surprise rebound in 2024, with GDP growth clocking in around 4%, the reality on the ground is far less optimistic. That growth was driven almost entirely by state spending on defence and wartime infrastructure. Strip away the camouflage of military stimulus, and the picture is bleak: most civilian industries are either flatlining or in decline. Russia is facing the spectre of stagflation—high inflation coupled with stagnant growth—a combination that has historically proven both stubborn and destructive.
Inflation stood at a punishing 9.5% at the end of 2024, fuelled by government wage hikes, aggressive subsidies, and a labour market so tight it’s on the verge of rupture. The Central Bank has reacted with drastic interest rate hikes, with the key rate sitting at 21%—a figure that would make any entrepreneur shudder. Investment has dried up, consumer spending is faltering, and the future looks worryingly dim for anyone not in uniform or arms manufacturing.
The Vanishing Labour Force
One of the gravest long-term threats to Russia’s economic health is demographic. The war in Ukraine has not only claimed hundreds of thousands of lives but has also drained the civilian workforce. Hundreds of thousands more have either been conscripted or fled abroad to avoid the draft. Skilled workers, IT specialists, engineers—many of them have chosen exile over enlistment. What remains is a workforce stretched thin, propped up by pensioners and temporary migrants.
Wages are rising rapidly, but not due to productivity gains. Rather, they are the consequence of scarcity, which only feeds inflation further. Without people to build, design, innovate, and manage, any talk of a sustainable economic recovery is little more than a Kremlin fairytale.
A Budget in Tatters
Russia’s National Wealth Fund—once a bulwark against economic downturn—has been gutted. Over the past three years, the war effort has drained two-thirds of its reserves. What remains is barely sufficient to cover even one year’s worth of budget shortfall. And those deficits are growing. In 2024, the government reported a 1.7% GDP deficit, a figure expected to balloon in 2025 unless oil prices stage an unlikely comeback.
But that is another headache. Urals crude is trading around $51 a barrel, far below the $70 assumed in Russia’s latest budget. With oil and gas still making up a third of federal revenue, the implications are stark: fewer funds for pensions, healthcare, and infrastructure. The government may continue to pour money into tanks and missiles, but the potholes on Russian roads and the shortages in Russian hospitals are beginning to scream louder than the state media can silence.
The Isolation Trap
Sanctions continue to bite, not with the immediacy of a guillotine but with the slow suffocation of a boa constrictor. The ruble has lost over half its value against the dollar and euro since 2022. Western firms have exited in droves, and those that stayed face legal limbo, regulatory hostility, and reputational damage.
Russia’s turn toward China and other non-Western partners has yielded mixed results. While trade has increased with some Asian countries, it remains nowhere near sufficient to replace the breadth and depth of Western investment, technology, and expertise that once flowed into the country. Russia may still be doing business—but it is doing it in a dimmer, narrower world.
Two Economies, One Problem
Russia is increasingly bifurcated between a defence economy flush with contracts and a civilian sector starved of oxygen. Arms manufacturers are hiring, expanding, and building. Meanwhile, car factories, retail outlets, and tech firms are downsizing, shuttering, or surviving on state aid.
This dual-speed system is unsustainable. Over time, even the military-industrial complex will suffer from the broader rot—without innovation, competition, or access to modern components, it too will stagnate. In the Soviet Union, defence could not carry the economy alone. In today’s Russia, the dream of autarky is meeting the same cruel fate.
A Grim Horizon
The Kremlin will no doubt continue to claim that Russia is weathering the storm. And in some ways, it is: mass unemployment has been avoided, and the country is not in full-scale collapse. But these are hollow victories. The foundations are crumbling, and there is no plan—only improvisation.
Recovery, if it comes, will require not just the end of war but the undoing of years of economic self-sabotage. Sanctions relief, fiscal reform, foreign investment, and above all, peace—none of these seem likely in the current political climate. Until then, Russia’s economy will remain what it is today: cornered, constrained, and caught in a long, bitter winter of its own making.
Main Image: By Минеева Ю. (Julmin) (retouched by Surendil) – Own work, CC BY-SA 1.0, https://commons.wikimedia.org/w/index.php?curid=3332136
