The range and scope of choices Russia has to sustain and escalate its war in Ukraine will ultimately depend on its economic resources. Understanding Russia’s wartime economy is therefore essential for sound security policy. Economic strain can narrow the Kremlin’s strategic options, but it does not make the regime less dangerous. On the contrary, fiscal pressure may intensify the incentive to seek a rapid military outcome before the costs of war become politically unmanageable.
For Europe and its Euro-Atlantic partners, the stakes are high. Russia’s wartime mobilisation has shown that it can rebuild and expand defence production even under sanctions. Yet structural weaknesses are mounting: a depleted labour force, shrinking reserves, rising borrowing costs, and an industrial base increasingly geared toward defence at the expense of civilian productivity. These pressures point to long-term fragility rather than imminent collapse.
Euro-Atlantic policy must reflect this reality – sustaining and tightening economic pressure where it matters most, while preparing for a Russia that, weakened but far from defeated, remains a persistent military and political threat on Europe’s eastern flank.
Russia’s wartime economy in 2026: fiscal exhaustion and structural strain
Russia enters 2026 with an economy showing unmistakable signs of fatigue. The remarkable economic growth of 2023 and 2024 was never organic; it was the consequence of massive public spending. According to the governor of the Russian Central Bank in June 2025, Russian economic resources, namely labour and production capital, are exhausted. To maintain its war efforts, Russia’s underlying structural weaknesses are becoming harder to conceal.
During 2023-2024, Russia recorded GDP growth of four to five per cent, a figure that at first glance suggested surprising resilience in the face of sanctions and international isolation. Yet this expansion was driven almost entirely by the state. Between 2022 and 2024, fiscal measures worth over 10 per cent of GDP were injected into the system, mostly via military-linked industries, propelling wage growth and high lending. This forced demand collided with an economy whose production capacity was already constrained by labour shortages, limited access to technology, and disrupted logistics. Overheating was the natural result. In 2025, economic growth decelerated to only one per cent, a dramatic slowdown that signals the end of the state-stimulus-driven boom.
One of the defining features of the post‑2022 period has been the emergence of a two‑track economy. Output from sectors directly tied to the war effort – public administration and defence, metal production, electronics, optical equipment, and the manufacture of transport vehicles – has increased by nearly 50 per cent compared with 2021. State orders, preferential financing, and unquestioned political priority have bolstered them. Russia has, in effect, rebuilt and expanded much of its defence‑industrial base at speed. Yet this success comes at an economic price: resources are continually diverted from productive civilian sectors, limiting prospects for modernisation in areas unrelated to the conflict. Civilian industries, by contrast, have experienced far more modest growth of around eight per cent over 2021-2025. The result is an increasingly imbalanced economy oriented around military necessity rather than long‑term development.
Russia’s demographic woes worsened by the war
Underlying these trends are deepening problems in the labour market. Since 2022, wages have risen significantly faster than labour productivity, a gap that speaks not to Russian dynamism but to scarcity. Unemployment remains at a historic low of two per cent. A tight labour market might normally signal economic strength, but in Russia’s case, it reflects demographic decline over the past three decades, worsened by military mobilisation and emigration. Firms struggle to find skilled workers to replace those lost to the armed forces or those who have left the country. The Russian state has also ceased to publish demographic statistics to hide worsening outcomes, such as a low birth rate.
Wage pressures are particularly acute in sectors favoured by the state, which push up compensation and distort labour allocation across the economy. Firms in sectors not included in state procurement supply chains are unable to compete with military-related sectors with high wages, as companies’ own finances have deteriorated during 2025. As economic activity cooled in 2025, several negative signals emerged, including reports of growing wage arrears (see graph above) and increased part-time work and labour shortages. Part-time work and salary cuts are traditionally important adjustment mechanisms in the Russian labour market rather than outright layoffs.
Sanctions and falling oil prices dealt a double blow in 2025
In addition to the labour market, external conditions are compounding Russia’s economic troubles. The existing sanction regime, whose impact is entangled with other simultaneous incidents, affects all flows of goods and services to and from Russia. At the same time, since 2022, Russia has rapidly adapted to sourcing dual-use and other restricted goods through intermediaries, but this adaptation has been expensive and inefficient. Recent research has proven that goods reach Russia at a higher cost and in smaller volumes.
More recently, both falling oil prices and sanctions have dealt a blow to the country’s most important source of foreign income. In the first nine months of 2025, Russia’s largest oil company, Rosneft, reported a 70 per cent drop in its profits. Sanctions by the US against Rosneft and the oil company Lukoil that became effective in November 2025 added to the distress of Russia’s oil sector. The effect is demonstrated by the widening discount Russia must accept on its main oil brand, Urals crude, relative to the global benchmark, Brent crude. The price difference stood at 29 USD/bbl in February 2026. Combined with the oil supply glut in the global markets, the price of Russia’s main crude oil export brand fell to its lowest level since May 2020. The war in Iran that erupted at the end of February and especially the restrictions on maritime traffic in the Strait of Hormuz have caused a surge in global oil prices by at least 20 per cent. If prolonged for several months, it may provide Russia’s state finances with more leeway. Moreover, the US government has issued a 30-day waiver from sanctions that permits the purchase of Russian oil already loaded, aiming to ease further global oil price hikes.
Fiscal situation deteriorating
Declining oil revenues, however, are not reflected in the 2026 state budget, which the Duma approved in November 2025. Due to sanctions, Russia’s discount on its oil exports is wider than the USD 11/bbl level anticipated in the budget framework. The 2026 budget is built on the assumption of USD 59/bbl for the Russian oil export price. Recent surging oil price futures over USD 70/bbl suggest that Russia’s oil export prices would reach its budgeted level for 2026 if the Strait of Hormuz closure persists for several months, restricting oil trade. Plans for 2026 also rely on a two per cent rise in the value-added tax rate, which has been openly stated to be directed to fund defence expenses. The tax hike is expected to bring one trillion extra roubles to the budget, but the revenues generated may prove lower as economic growth decelerates and consumption declines.
More interestingly, the 2026 budget includes a nominal five per cent cut in defence spending. However, national security expenses, seen as an integral part of war-related spending, have increased by a similar amount. This would still entail a significant decrease in real terms as inflation is expected to remain (according to budget assumptions) around five per cent in 2026. If the war continues throughout 2026, this seems unlikely. Given these assumptions, one should expect budgetary adaptations, which have occurred frequently over the past four years. In 2025, the realised federal budget deficit reached nearly three per cent of GDP, whereas the initial plan adopted in November 2024 had projected a deficit of 0.5 per cent. The new budget framework should thus be viewed more as a goal-setting exercise than as a binding fiscal plan.
Structural cracks, such as slowing growth, rising deficits, tight labour markets and mounting pressure on households, are already visible. Yet this shift is unlikely to alter the government’s strategic choices. Maintaining the war effort remains the state’s overriding priority, and economic policy will be shaped accordingly. Sinikka Parviainen
Unrealistic assumptions on domestic tax collection and oil prices will result in a wider-than-anticipated budget deficit. The Russian government expects a 1.6 per cent of GDP deficit in 2026, to be financed through domestic borrowing. The liquid portion of the National Wealth Fund, Russia’s rainy-day oil fund, has dwindled from around six per cent of GDP in 2021 to below two per cent, leaving little room for further drawdowns. Given the high key rate at 15.5 per cent in February 2026, the cost of issuing bonds is high, and in the 2026 budget, debt servicing costs are expected to reach nearly nine per cent of federal budget expenditure – a share double that of 2021. However, Russia’s debt-to-GDP ratio is still comparatively low (below 20 per cent), and its state-owned companies and banks can be compelled to absorb more government bonds. Any unconventional financing methods, such as outright printing money, cannot be ruled out to finance the war.
Russia does not face imminent economic collapse, nor is its capacity to wage war on the verge of total disintegration. What it confronts instead is a future defined by increasingly difficult trade‑offs. The state can maintain the war, but only by sacrificing the prosperity of its civilian economy, increasing political repression, and narrowing its prospects for future development. Structural cracks, such as slowing growth, rising deficits, tight labour markets and mounting pressure on households, are already visible. Yet this shift is unlikely to alter the government’s strategic choices. Maintaining the war effort remains the state’s overriding priority, and economic policy will be shaped accordingly.
Policy recommendations
The state of Russia’s war economy and its economic trajectory point to a range of priorities for policymakers in Europe and the Euro-Atlantic region, covering both technical matters and broader concerns.
First, close sanctions loopholes and raise enforcement. Russia continues to procure restricted goods through third-country intermediaries at elevated cost, but it manages. Tighter enforcement targeting key transit hubs and stricter secondary sanctions on financial institutions facilitating circumvention would further increase the cost of the war to Russia without requiring new primary measures. Also, sanctioning dual-use products with a broader scope (i.e., a smaller customs code) would alleviate the burden on customs officials of surveying sanctions compliance and reduce the incentives to innovate in customs coding for closely related products.
Russia’s economic difficulties are real and accumulating, but the regime retains meaningful capacity to adapt, repress dissent, and redirect resources. Euro-Atlantic partners should resist the temptation to ease pressure on the assumption that Russia is already on the verge of breaking. Sinikka Parviainen
Second, keep pressure on energy revenues. Oil and gas revenues remain the single most important source of Russian state income. European governments should maintain and extend sanctions to cover additional Russian oil companies and tankers, as well as third parties providing services to Russian oil and gas exporters.
Third, do not mistake strain for collapse. Russia’s economic difficulties are real and accumulating, but the regime retains meaningful capacity to adapt, repress dissent, and redirect resources. Euro-Atlantic partners should resist the temptation to ease pressure on the assumption that Russia is already on the verge of breaking and should maintain long-term defence investment and readiness accordingly.
Fourth, continue to monitor economic indicators and publicise research even if the results are not the desired ones. The effectiveness of sanctions and the Russian economic reality on the ground need more rigorous analysis, and inference may be distorted along the way. Investment in independent economic analysis, including support for researchers and institutions with access to Russian data, provides governments with the situational awareness needed to calibrate both economic and security policy.
All statistics are official Russian statistics from Rosstat, the Russian Ministry of Finance or the author’s calculations based on these data except for the oil price futures that are from ICE Brent crude Futures Europe.
The European Leadership Network itself as an institution holds no formal policy positions. The opinions articulated above represent the views of the authors rather than the European Leadership Network or its members. The ELN aims to encourage debates that will help develop Europe’s capacity to address the pressing foreign, defence, and security policy challenges of our time, to further its charitable purposes.
Image credit: Yury Shirokov / Alamy
