The state of\u00a0Russia\u2019s economy has been one of\u00a0the most difficult topics to\u00a0assess during the wartime period. Contrary to\u00a0apocalyptic forecasts by\u00a0experts, the country weathered the sanctions shock of\u00a02022 and even returned to\u00a0economic growth \u2014 driven largely by\u00a0ballooning military spending, but also by\u00a0high energy prices and, in\u00a0some cases, a\u00a0successful reconfiguration of\u00a0disrupted supply chains. Those buffers, however, were not unlimited. By\u00a02025, accumulated risks had reached a\u00a0critical point. Growth has all but stalled, oil prices have fallen, and the Kremlin is\u00a0finding itself increasingly short on\u00a0funds to\u00a0finance its war in\u00a0Ukraine. The government has turned to\u00a0unpopular measures, including higher taxes on\u00a0businesses and households. Even so, the economy is\u00a0not yet on\u00a0the brink of\u00a0collapse. Meduza lays out five key takeaways from the past year \u2014 and the trends that could shape developments in\u00a02026.<\/p>\n
After two years of\u00a0war-fueled growth, Russia\u2019s economy is\u00a0slowing to\u00a0near zero<\/p>\n
Annual GDP growth fell<\/a> from 1.4 percent in\u00a0the first quarter of\u00a02025 and 1.1 percent in\u00a0the second to\u00a0just 0.6 percent in\u00a0the third. A\u00a0modest contraction is\u00a0likely in\u00a0the fourth quarter, and a\u00a0technical recession could follow in\u00a0early 2026. Still, the economy may narrowly remain in\u00a0positive territory in\u00a0the first quarter, posting GDP growth of\u00a0around 0.5\u20130.6 percent, a\u00a0senior economist at\u00a0a\u00a0Russian analytical center told Meduza.<\/p>\n This hovering around zero doesn\u2019t signal an\u00a0economic collapse. Rather, it\u00a0reflects a\u00a0return to\u00a0the economy\u2019s underlying growth potential after two years of\u00a0overheating fueled by\u00a0military spending. In\u00a02023 and 2024, GDP growth exceeded 4 percent \u2014 a\u00a0level not seen at\u00a0any point in\u00a0the previous decade, with the exception of\u00a02021.<\/p>\n You\u2019re currently reading Meduza, the world\u2019s largest independent Russian news outlet. Every day, we\u00a0bring you essential coverage from Russia and beyond. Explore our reporting\u00a0here<\/a>\u00a0and\u00a0follow us<\/a>\u00a0wherever you get your news.<\/p>\n Because the Russian government is\u00a0spending on\u00a0the war as\u00a0if\u00a0there were no\u00a0tomorrow, inflation is\u00a0being continually stoked and is\u00a0declining far more slowly than the Central Bank would like. To\u00a0prevent runaway consumer prices, the regulator has been forced to\u00a0keep its at\u00a0exceptionally high levels.<\/p>\n As\u00a0economic growth cooled in\u00a02025, the Central Bank began to\u00a0cut the rate very cautiously. According to\u00a0the bank, as\u00a0of\u00a0December 15, annual inflation stood<\/a> at\u00a05.8 percent and is\u00a0expected to\u00a0come in\u00a0below 6 percent for the year \u2014 still above the bank\u2019s 4 percent target. Meanwhile, household inflation expectations for the year ahead climbed<\/a> to\u00a013.7 percent, returning to\u00a0early-2025 levels.<\/p>\n At\u00a0its final board meeting of\u00a02025, the Central Bank managed to\u00a0cut the key rate only slightly, to\u00a016 percent. It\u00a0now forecasts<\/a> GDP growth of\u00a00.5\u20131 percent for 2025 and between 0.5 percent and 1.5 percent in\u00a02026.<\/p>\n Rapid military-sector growth has come at\u00a0the expense of\u00a0the civilian economy<\/p>\n In\u00a02025, Russian industry split even more starkly into two unequal sectors: a\u00a0growing military economy, prioritized for budget funding, and a\u00a0civilian sector that is\u00a0stagnating \u2014 and in\u00a0some industries already in\u00a0steep decline \u2014 as\u00a0high interest rates imposed by\u00a0the Central Bank choke off access to\u00a0credit.<\/p>\n Output in\u00a0the civilian core of\u00a0the manufacturing sector has remained nearly 5 percent below its December 2024 level for the past three months, according to\u00a0a\u00a0November review<\/a> by\u00a0the Center for Macroeconomic Analysis and Short-Term Forecasting.<\/p>\n Roughly two-thirds of\u00a0the sharp increase in\u00a0industrial output recorded in\u00a0October came from sectors dominated by\u00a0the defense industry. According to\u00a0Rosstat, total industrial production jumped 3 percent month-on-month in\u00a0October, driven largely by\u00a0defense-related manufacturing.<\/p>\n At\u00a0the same time, production of\u00a0construction materials and glass has been declining for about a\u00a0year, with output of\u00a0basic building materials down roughly 11\u201312 percent over that period.<\/p>\n The downturn in\u00a0the auto industry has been broad-based, affecting all major product categories. In\u00a0October, vehicle output fell 8.9 percent compared with the previous month and plunged 61.6 percent compared with October a\u00a0year earlier.<\/p>\n Even the headline growth in\u00a0the category of\u00a0\u201cother transport equipment,\u201d which rose 41 percent year-on-year, masks sharp divergence within the sector: aircraft production surged 86 percent, while railcar manufacturing collapsed by\u00a033.7 percent. As\u00a0Russian Railways scaled back investment programs under the weight of\u00a0nearly four trillion rubles<\/a> ($52.6 billion) in\u00a0debt, real capital investment in\u00a0freight rail transport fell 26.5 percent in\u00a0the first half of\u00a02025, while investment in\u00a0passenger rail dropped by\u00a047.6 percent.<\/p>\n Preferential budget financing for the defense industry has widened the federal budget deficit and fueled inflation, leaving Russia\u2019s Central Bank unable to\u00a0cut interest rates significantly. With the key rate still in\u00a0double digits, credit remains prohibitively expensive \u2014 a\u00a0burden borne first and foremost by\u00a0civilian industries.<\/p>\n Interest payments are also consuming a\u00a0growing share<\/a> of\u00a0corporate income. By\u00a0the third quarter of\u00a02025, companies were devoting a\u00a0record 38 percent of\u00a0their profits to\u00a0servicing debt.<\/p>\n Meanwhile, labor shortages have become chronic. Losses from the war, emigration, and a\u00a0sharp decline in\u00a0migrant inflows from Central Asia have left Russia facing an\u00a0acute shortage of\u00a0workers. Official unemployment remains extremely low, at\u00a02.2 percent, but analysts at\u00a0the Center for Macroeconomic Analysis and Short-Term Forecasting say<\/a> this likely masks problems being pushed \u201cinside companies,\u201d where they take the form of\u00a0hidden unemployment through reduced working hours.<\/p>\n The budget deficit is\u00a0at\u00a0a\u00a0record high as\u00a0reserves shrink and public debt grows<\/p>\n The federal budget deficit for 2025 is\u00a0expected to\u00a0reach a\u00a0record high for modern Russia: 5.7 trillion rubles ($72 billion), or\u00a02.6 percent of\u00a0GDP \u2014 far above the 1.17 trillion rubles ($15.2 billion), or\u00a00.5 percent of\u00a0GDP, originally planned.<\/p>\n As\u00a0of\u00a0December 1, the liquid portion of\u00a0Russia\u2019s National Wealth Fund stood at\u00a04.115 trillion rubles (1.9 percent of\u00a0GDP), or\u00a0about $53.4 billion. In\u00a0absolute terms, that is\u00a0less than the projected federal budget deficit for 2025. To\u00a0avoid depleting the fund entirely, the government increased<\/a> domestic borrowing this fall by\u00a02.2 trillion rubles ($28.3 billion), bringing total planned borrowing to\u00a0nearly seven trillion rubles ($90 billion). Of\u00a0that amount, 1.42 trillion rubles ($18.3 billion) will go\u00a0toward servicing existing obligations.<\/p>\n Under the budget law passed for 2026, the federal deficit is\u00a0set at\u00a03.8 trillion rubles ($48.9 billion), or\u00a01.6 percent of\u00a0GDP \u2014 but that projection appears optimistic given current oil-price dynamics. The government based its forecast on\u00a0an\u00a0average Urals crude price of\u00a0$59 per barrel next year, one dollar higher than this year\u2019s assumption. This raises the risk of\u00a0a\u00a0shortfall in\u00a0oil and gas revenues. Under Russia\u2019s fiscal rule, any such gap would have to\u00a0be\u00a0covered using the National Wealth Fund. A\u00a0senior economist at\u00a0a\u00a0Russian analytical center told Meduza that the shortfall in\u00a0oil and gas revenues could amount to\u00a0roughly 0.5 percentage points of\u00a0GDP relative to\u00a0the approved budget.<\/p>\n In\u00a02026, the government plans<\/a> to\u00a0raise an\u00a0additional 5.5 trillion rubles ($70.7 billion) on\u00a0the domestic market. Nearly four trillion rubles ($51.4 billion) of\u00a0that would go\u00a0toward financing the budget deficit, with the rest used to\u00a0service existing debt. The main buyers of\u00a0government bonds have been state-owned banks \u2014 Sberbank alone has purchased<\/a> about 25 percent of\u00a0outstanding federal loan bonds. This method of\u00a0financing is\u00a0among the most inflationary, akin to\u00a0\u201cprinting money\u201d (a\u00a0dynamic explored in\u00a0more detail by\u00a0The Bell<\/a>). \u201cThe more we\u00a0borrow, the less room the Central Bank will have to\u00a0lower interest rates,\u201d Russia\u2019s finance minister, Anton Siluanov, acknowledged<\/a> in\u00a0September.<\/p>\n The result is\u00a0that in\u00a02026, nearly half of\u00a0all federal spending will go\u00a0either to\u00a0the war and security agencies (38 percent) or\u00a0to\u00a0servicing public debt (8 percent). Military spending, like a\u00a0malignant growth, absorbs resources that could otherwise be\u00a0directed toward productive uses \u2014 education, health care, science, and infrastructure. It\u00a0supports employment and output in\u00a0certain industrial sectors, but undermines human capital, innovation, and the prospects for development in\u00a0the civilian economy.<\/p>\n Oil and gas revenues are falling as\u00a0oil prices decline<\/p>\n Everything points to\u00a0oil and gas revenues falling even further in\u00a02026 than in\u00a02025. The main driver is\u00a0not so\u00a0much a\u00a0decline in\u00a0export volumes due to\u00a0U.S. sanctions on\u00a0Rosneft and Lukoil, which together account for roughly half of\u00a0Russia\u2019s oil production, as\u00a0the fact that Russian crude has become even cheaper \u2014 caught between sanctions-related constraints and a\u00a0broader global slide in\u00a0commodity prices.<\/p>\n \u201cDespite the sanctions, despite announcements that India and China are cutting purchases of\u00a0Russian oil, despite attacks, shipments of\u00a0Russian crude are increasing \u2014 as, broadly speaking, they should under the OPEC+ [decision],\u201d said<\/a> Sergey Vakulenko, a\u00a0senior fellow at\u00a0the Carnegie Russia Eurasia Center in\u00a0Berlin. As\u00a0planned, Russia increased output to\u00a03.54 million barrels a\u00a0day of\u00a0crude exported by\u00a0sea, he\u00a0added.<\/p>\n The pickup is\u00a0visible in\u00a0the data. In\u00a0October, growth in\u00a0extractive industries reached<\/a> 0.7 percent, up\u00a0from an\u00a0average of\u00a00.2 percent a\u00a0month in\u00a0the third quarter. That increase was broad-based, affecting all major product groups.<\/p>\n The decline in\u00a0oil prices has been driven by\u00a0a\u00a0surge in\u00a0supply \u2014 above all from OPEC+ countries led by\u00a0Saudi Arabia, which spent much of\u00a0the year rapidly ramping up\u00a0production that had been frozen after the pandemic. Beyond OPEC+, output has also been rising<\/a> in\u00a0the United States, Brazil, Guyana, Argentina, and Canada. As\u00a0a\u00a0result, the global oil market could face a\u00a0record surplus in\u00a02026. Analysts at\u00a0the International Energy Agency estimate that with an\u00a0oversupply of\u00a0four million barrels a\u00a0day, the average Brent price next year would be<\/a> about $55 per barrel. For comparison, prices paid by\u00a0Indian buyers for Russia\u2019s Urals crude \u2014 factoring in\u00a0shipping and insurance \u2014 have averaged<\/a> around $57 over the past month.<\/p>\n \u201cOil prices have fallen globally, and the discount on\u00a0Russian crude relative to\u00a0benchmark grades at\u00a0destination ports has widened by\u00a0another $3\u20134 per barrel,\u201d Vakulenko said. \u201cRight now, most tankers leaving Russia\u2019s Atlantic ports are heading not to\u00a0India or\u00a0China, but to\u00a0Egypt. From there, of\u00a0course, a\u00a0tanker can change its declared destination again and say it\u00a0is\u00a0now sailing on\u00a0an\u00a0Egypt\u2013India or\u00a0Egypt\u2013China route.\u201d<\/p>\n Each additional layer of\u00a0obfuscation \u2014 intermediaries that assume legal and financial risks, ship-to-ship transfers at\u00a0sea, and other mechanisms used to\u00a0anonymize Russian oil \u2014 comes at\u00a0a\u00a0cost, Vakulenko noted.<\/p>\n According to\u00a0data from Argus Media, the average discount on\u00a0Urals crude currently stands<\/a> at\u00a0around $27 per barrel, though it\u00a0shrinks to\u00a0roughly $7.5 by\u00a0the time it\u00a0reaches India. How much of\u00a0that difference ultimately goes to\u00a0Russia is\u00a0unclear. What is\u00a0clear is\u00a0that the cheaper the oil, the stronger the temptation for buyers to\u00a0look the other way when it\u00a0comes to\u00a0sanctions.<\/p>\n The economy can endure another year of\u00a0war \u2014 at\u00a0the cost of\u00a0further degradation and falling living standards<\/p>\n Starting in\u00a0January, the Russian government will raise the value-added tax to\u00a022 percent, primarily to\u00a0help finance military spending. At\u00a0the same time, utility tariffs are set to\u00a0continue rising: in\u00a02025, household utility costs increased by\u00a0nearly 12 percent nationwide on\u00a0average, and further hikes are planned<\/a> in\u00a02026. A\u00a0new levy on\u00a0imported electronics is\u00a0also being introduced, while the tax burden on\u00a0small businesses is\u00a0being sharply increased. All of\u00a0this comes on\u00a0top of\u00a0earlier changes, including the increase in\u00a0the corporate profit tax from 20 percent to\u00a025 percent and the introduction of\u00a0a\u00a0progressive personal income tax with a\u00a0top rate of\u00a022 percent starting in\u00a02025 \u2014 and government pledges not to\u00a0raise taxes further before 2030.<\/p>\n \u201cAll of\u00a0this comes at\u00a0a\u00a0cost to\u00a0the economy,\u201d a\u00a0senior economist at\u00a0a\u00a0Russian analytical center told Meduza. \u201cHigher taxes discourage civilian industries, reduce investment and consumption, and ultimately lower average living standards relative to\u00a0what would otherwise be\u00a0possible.\u201d<\/p>\n Even after higher levies on\u00a0households and businesses, military spending \u2014 assuming it\u00a0does not grow further in\u00a0real terms \u2014 still cannot be\u00a0fully covered without running a\u00a0deficit. And that gap could widen simply as\u00a0a\u00a0result of\u00a0unfavorable conditions in\u00a0oil exports, the economist added.<\/p>\n Even if\u00a0the war were somehow to\u00a0end tomorrow, Russia\u2019s economy would be\u00a0paying for it\u00a0for years to\u00a0come.<\/p>\n What about the ruble?<\/p>\n Despite sanctions, falling oil prices, and forecasts<\/a> of\u00a0decline, the ruble has remained strikingly strong. Since the start of\u00a0the year, it\u00a0has gained about 45 percent and is\u00a0trading near 78 rubles to\u00a0the dollar. The currency has been buoyed by\u00a0a\u00a0drop in\u00a0imports and the Central Bank\u2019s high interest rate, which together have reduced demand for foreign currency. At\u00a0the same time, a\u00a0large share of\u00a0Russia\u2019s foreign trade is\u00a0now conducted in\u00a0rubles: in\u00a0October, 59.5 percent of\u00a0exports and 56 percent of\u00a0imports were settled in\u00a0the currency.<\/p>\n Countervailing forces, however, include falling oil prices and easing interest rates. If\u00a0those trends persist, the ruble is\u00a0likely to\u00a0weaken in\u00a02026.<\/p>\n Russia\u2019s Economic Development Ministry projects<\/a> an\u00a0average exchange rate of\u00a092.2 rubles to\u00a0the dollar next year. Analysts surveyed by\u00a0the Central Bank in\u00a0December expect<\/a> the rate to\u00a0average 90.3 rubles in\u00a02026. Alexander Isakov, who heads macroeconomic research at\u00a0Sber, forecasts that the ruble will weaken<\/a> to\u00a0around 90 per dollar by\u00a0mid-2026 and to\u00a0roughly 94 by\u00a0year\u2019s\u00a0end. Analysts at\u00a0Alfa Investments similarly expect<\/a> the exchange rate to\u00a0reach 92\u201394 rubles to\u00a0the dollar by\u00a0the end of\u00a02026.<\/p>\n Raising the pressure Trump is\u00a0hitting Russia with sanctions that even Biden shied away from. Can its war-weary economy handle them?<\/a>Raising the pressure Trump is\u00a0hitting Russia with sanctions that even Biden shied away from. Can its war-weary economy handle them?<\/a><\/p>\n