By the numbers, neither Western sanctions nor the costs of three years of war in Ukraine have chipped at Russia’s growth momentum.
The country’s GDP is expected to expand by 4% this year.
“However, this symbol of resilience is misleading,” Alexandra Prokopenko wrote for Carnegie Politika this week. “For the past two years, the Russian economy has been running like a marathon runner on fiscal steroids, and now those steroids have been taken off its back. ”
While it would possibly not finish in sudden collapse, Russia’s fixation and depfinishence on wartime expansion has created the irreversible risk of a “stagnation trap,” a researcher wrote Friday from the Carnegie Russia Eurasia Center.
Prokopenko believes that economic dynamics will slow down next year, leading to social and fiscal unrest in 2026.
The economic fissures most likely come from the same thing that has kept Russia afloat since its first invasion of Ukraine in 2022: the Kremlin’s big industry for its defense industry.
Russia’s huge spending in this sector will increase, and by 2025, defense and security spending will account for more than 8% of GDP and 40% of all public spending, Prokopenko said.
This comes at a cost to the economy as a whole. Budget allocations to non-defense sectors are declining, while increased tax revenues are directed almost exclusively to the needs of the military.
Industries that do not contribute to defense production are hesitant, such as commodity and agricultural producers. As global coal costs fall, Russia’s coal sector is suffering genuine losses for the first time in four years.
That’s a big deal, Prokopenko said—with thirty-one single-industry towns involved in the sector, a single shutdown can debilitate a whole community, forcing the government to step in with aid.
“But other struggling industries—automotive manufacturing, non-food retail, and housing construction—are also lining up for state assistance. Resources are stretched thin as stagnant oil and gas revenues, coupled with energy sanctions, limit budgetary inflows. While tax revenues have temporarily offset falling hydrocarbon income, they are consumed by current expenditures, leaving no surplus,” she wrote.
It remains to be seen how long the central government will be able to help, given the Kremlin’s bleak fiscal outlook. Prokopenko noted that the government’s National Wealth Fund for hard times has reached its lowest point since 2008, at $31 billion.
Energy expenditure has boosted domestic demand, thus posing twenty problems.
For one thing, no matter how much cash the Kremlin pumps into the economy, Russian industries are already generating at near-peak levels. Prokopenko said services are running at 81% capacity, while the lack of them has left around 1. 6 million jobs vacant. In some regions, wages are rising by double digits.
“In practical terms, the national economy responds to the need for competitive state and household spending, which requires greater dependence on imports. This, in turn, increases demand for foreign exchange, putting downward pressure on the ruble and fueling inflation. “, he wrote.
As inflation hovers near 9%, business profitability has suffered. While Russia’s central bank has raised the key interest rate to 21% to counteract price growth, results have been lackluster. Instead, higher borrowing costs have significantly bolstered bankruptcy risks among business leaders.
As the months go by, Prokopenko predicts that the Kremlin is approaching a tipping point with its population.
“The greatest losers in this overheated economy are Putin’s core supporters: public sector workers, including teachers, doctors, law enforcement personnel, and pensioners,” she wrote. “Their wages and benefits are tied to official inflation rates of 9 percent, but real inflation for many households exceeds 20 percent.”
A modest easing of defense completion after the war will not solve all the problems either.
Despite inflation, war spending increased the prosperity of low-income Russians, and military service helped increase the incomes of Americans and their families.
Prokopenko said Russia directly spends $16 billion to $23 billion in rubles to attract a shrinking pool of army conscripts. This excludes bills to wounded infantrymen or reimbursement to those killed in combat.
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