The picture of the Russian economy is contradictory. On the one hand, the state continues to pay salaries and pensions, the military industry is operating at a high pace, and the financial system has not collapsed. On the other hand, growth has almost come to naught, interest rates remain extremely high, energy revenues are falling, and available fiscal reserves are limited.
So the right question is not whether Russia is on the verge of a spectacular collapse. There is no sufficient evidence of such a thing. The essential question is how long it can sustain a war economy without gradually undermining its productive base, public finances, and future growth.
The resilience of a war economy: When the invasion of Ukraine began, many analysts predicted that Western sanctions would precipitate a rapid economic crisis in Russia. This prediction was not borne out. Moscow had significant foreign exchange and fiscal reserves, low public debt, revenues from hydrocarbon exports, and a central bank capable of imposing tight restrictions.
At the same time, the state has drastically increased defense spending. Orders for ammunition, drones, vehicles, and military equipment have boosted industrial production, created jobs, and strengthened some regions. In the narrow sense of GDP, a tank built and destroyed on the front is recorded as economic output. But that doesn’t mean it increases the country’s long-term wealth.
War production can therefore support the numbers of economic activity, while at the same time absorbing capital, labor, and raw materials that would otherwise be directed to infrastructure, technology, housing, and civilian industry. The economy appears active, but an increasing portion of its production does not improve living standards or create productive potential for the future.
Growth has almost stopped: Official data now reflects this slowdown. According to Rosstat, real Russian GDP in the first quarter of 2026 was 0,2% lower than in the same quarter of 2025. The World Bank forecasts growth of just 0,8% for the whole of 2026, while the Bank of Russia itself places GDP growth between 0,5% and 1,5%.
These numbers do not describe a collapse, but stagnation. And stagnation is especially worrisome when it occurs alongside massive government spending. Under normal circumstances, such a large fiscal expansion would cause a significant increase in aggregate output. The fact that growth remains so low suggests that the economy is approaching its productive limits.
Unemployment is at historically low levels, but this is not exclusively a sign of prosperity. Conscription, military losses, the emigration of young workers, and demographic decline have created serious labor shortages. Military enterprises and state-owned industries can offer higher wages, drawing workers from construction, transportation, health, and other civilian sectors. Thus, low unemployment coexists with limited productive capacity.
Inflation and expensive money: The second major sign of pressure is the cost of money. In June 2026, annual inflation was 6%, above the 4% target, while the central bank's key interest rate remained at 14,25%. The Bank of Russia also acknowledges that the economy is slowing and that significant inflationary risks remain.
The situation resembles a vehicle in which the state steps on the gas, increasing military spending, while the central bank steps on the brakes, keeping borrowing expensive. High interest rates limit demand, but they also burden businesses and households. Investment plans are postponed, financing for housing and equipment becomes more expensive, and highly leveraged companies face increasing pressure.
Rosstat data show that overall corporate profits in the first quarter of 2026 were down by about 26,5% compared to a year earlier. At the same time, the percentage of profitable companies has decreased. This reinforces the picture of a two-speed economy: sectors related to the state and defense are supported, while a significant part of the political economy is burdened by expensive financing and reduced returns.
The fiscal reserve is decreasing: Moscow entered the war with a significant security reserve. For years, part of its oil and gas revenues had been channeled into the National Wealth Fund. These funds allowed the government to finance deficits, support businesses, and absorb some of the impact of sanctions.
The reserve, however, is not inexhaustible. In April 2026, the Fund’s total assets were about 5,7% of GDP, but its liquid assets were limited to just 1,7% of GDP. Some of the Fund’s yuan and gold were sold to finance the budget.
At the same time, the federal deficit reached 4,58 trillion rubles in the first quarter of 2026 alone, already exceeding the initial target of 3,79 trillion rubles for the full year. The Finance Ministry attributed part of the gap to front-loaded spending. However, in the first half of the year, the deficit had widened to 5,73 trillion rubles, while oil and gas revenues had fallen significantly.
Russia still has a relatively low public debt and can borrow domestically. However, the growing reliance on domestic banks shifts risk from the state budget to the financial system. The more funds are forcibly directed to the state and war enterprises, the less is left for productive private investment.
The financial gap is being filled with higher taxes, spending cuts, more borrowing, and the constant sale of reserve assets, even the national gold reserve.
From European to Chinese dependence: Sanctions did not stop Russian trade. They redirected it. Russia increased its energy sales to China and India, while importing machinery, microelectronics, and dual-use goods through third countries.
China now accounts for approximately 35% of Russia's total foreign trade, versus just 16% before the war. This adjustment prevented isolation, but it created a new asymmetry. China now accounts for a much larger share of Russia’s foreign trade and has a stronger bargaining position. Moscow needs the Chinese market more than Beijing needs Russia. It can therefore continue to sell raw materials, but often at discounts and on less favorable terms. As Russia is forced to sell its exports at deep discounts, it becomes increasingly dependent on China for what it imports. China is diligently avoiding committing to investments in Russia (such as the Trans-Siberian Gas Pipeline No. 2) that would create future dependence, while at the same time flooding Russia with cheap Chinese products, threatening the viability of Russian businesses.
At the same time, European restrictions continue to target the Russian military industry’s access to advanced components. The fact that the EU is also imposing sanctions on third-country companies shows that circumventing the restrictions remains possible, but is becoming more expensive and complex.
Europe is increasing defense spending to 5% of GDP to confront Russia by making every territory so decentralized, so difficult, and so costly to conquer that no one will even want to attempt to capture it.
Collapse or structural exhaustion? Russia still has significant advantages: vast natural resources, domestic energy and food production, low public debt, strong state control mechanisms, and the ability to transfer resources from society to war. For this reason, a sudden economic collapse is not the most likely scenario.
But the costs are piling up. Fiscal reserves are dwindling, political enterprises are being squeezed, access to advanced technology is becoming more difficult, and dependence on China is deepening. Human losses and migration are weighing on an already unfavorable demographic environment. Infrastructure and civilian investments are taking a back seat in the hierarchy of state priorities.
The real picture lies in the overall functioning of the economy and the ability of a state to maintain its productive, military and social power over the long term. Russia spends huge sums on its army and yet it has not managed to take over Ukraine. Nuclear weapons cannot repel drones.
There is a danger of Russia being absorbed into China's sphere of influence as a supplier of raw materials and a strategic geographical bulwark for China. This would be a strategic mistake like the Ribbentrop-Molotov Pact, 1939-1941, where Russia provided Germany's war machine with abundant raw materials for two years. If it had not supplied Germany with raw materials for two years, Germany might not have had the resources to carry out such a large-scale attack and might not have attacked Russia itself after two years.
So the answer is clear: yes, Russia is facing serious economic problems, but not necessarily an immediate bankruptcy. It is more a process of structural exhaustion. The economy may still be financing the war, but it is consuming the reserves, production capacity, and development potential of the next decade.
A war economy can last much longer than its critics predict. That doesn't mean it remains healthy. It just means that real crisis doesn't always manifest itself as a sudden collapse. Sometimes it appears as a slow exchange of the future for the needs of the present.
photo rochogrape, https://pixabay.com
