The Russian economy, once buoyed by wartime expenditure, is now showing unmistakable signs of stagnation. As growth falters and public services feel the strain from increased taxation, the implications for the ongoing conflict in Ukraine and President Putin’s grip on power are becoming increasingly significant.
A Booming Economy Turns Sour
In the wake of the 2022 invasion of Ukraine, Western leaders confidently predicted a swift economic collapse for Russia. Former US President Joe Biden asserted that the country’s economy would shrink dramatically, potentially dropping out of the top 20 globally. However, contrary to these forecasts, Russia emerged as the world’s ninth largest economy by 2025, buoyed primarily by increased military spending.
Yet, as we enter 2026, the narrative has shifted dramatically. Economic growth has decelerated sharply, largely due to declining oil prices—one of the Kremlin’s main revenue streams—and demographic challenges that high military spending had previously obscured. The International Monetary Fund (IMF) has revised its growth forecasts for Russia down to a meagre 0.6% for 2025 and 0.8% for 2026, signalling the lowest growth rates outside of the pandemic years since the sanctions imposed after the 2014 annexation of Crimea.
The Fiscal Tightrope: Tax Hikes and Public Services
In response to this economic malaise, the Russian government has resorted to significant tax increases, impacting ordinary citizens. Corporation tax rose from 20% to 25%, while income tax brackets were adjusted to extract more from higher earners. Starting in early 2026, the value-added tax (VAT) was increased from 20% to 22%, surpassing rates in leading Western economies, further squeezing household budgets amidst already high inflation.
The shift in spending priorities is alarming. Essential services like healthcare and education are being deprioritised as military expenditures absorb a growing share of the federal budget. In 2021, military spending accounted for approximately 5% of GDP; by 2025, this figure had surged to over 7%, eclipsing NATO members’ expenditures. Yet, as the economy strains under fiscal pressures, the Kremlin’s war economy is beginning to show cracks.
Trade Dynamics and Long-term Demographic Challenges
External trade dynamics are also shifting unfavourably for Russia. While countries like China and India initially increased their purchases of Russian oil and gas post-invasion, these volumes have not compensated for the significant drop-off in exports to European nations. The value of Ural oil has plummeted from around $90 per barrel in early 2022 to approximately $50 by the end of 2025, exacerbated by sanctions and a global oversupply.
Moreover, Russia grapples with persistent long-term demographic issues. The population has declined from 145.5 million in 2019 to an estimated 143.5 million in 2024 due to declining birth rates, war casualties, and emigration. This demographic decline is contributing to severe labour shortages, evidenced by a remarkably low unemployment rate of just 2%. Analysts warn that these demographic trends could stifle Russia’s economic recovery efforts and hinder future growth.
The Future of Military Spending and Political Stability
As economic conditions worsen, the Kremlin faces the critical challenge of sustaining its military expenditure. While the rise in military spending has slowed, Russia’s relatively low national debt could provide some leeway for borrowing. However, the ongoing sanctions limit access to international financial markets, constraining potential fiscal manoeuvres.
Despite these economic hurdles, experts suggest that Russia may continue to finance its military activities in the near term. Measures such as increasing taxes, selling state assets, and even printing money could provide the necessary funds for the Kremlin to maintain its military operations through 2026 and possibly into 2027.
The question of whether the increasing economic discontent among Russians will translate into political unrest looms large. Recent trends indicate a decline in public optimism regarding economic conditions, with a Gallup poll revealing that 39% of respondents felt the economy was worsening as of August 2025, a notable increase from 29% in 2022.
Why it Matters
The current economic stagnation in Russia poses significant risks not only for the Kremlin’s military ambitions in Ukraine but also for domestic stability. As financial pressures mount and public discontent grows, the sustainability of Putin’s regime could be tested. The Kremlin’s recent willingness to engage in peace talks suggests an awareness of this precarious balance, highlighting that a weakened war economy could ultimately push Russia towards a more conciliatory stance in the ongoing conflict. The situation remains fluid, and its evolution will undoubtedly have lasting implications for both regional and global geopolitics.
