The Cost of the War Against Ukraine. The Beginning of the Economic Crisis in Russia
The year 2025 was a turning point for Russia’s economy. After relatively dynamic development, it entered a period of general stagnation, and even recession in the civilian sector.
From January 2026, economic problems in the RF began to grow at an accelerated pace. In the near future, they are highly likely to lead to a large-scale crisis in the country.
As a result, Russia will not be able to continue the war against Ukraine, at least at the current level of intensity, which will force it to change its position in the negotiations and then agree to concessions.
What is more, due to the economic crisis, Russia may repeat the fate of the Soviet Union and soon disappear from the world map.
Despite some progress in negotiations to end the Russian-Ukrainian war, Moscow is not giving up its goals regarding Ukraine either at the strategic or operational-tactical levels.
For example, Russia’s strategic goal remains the destruction of Ukraine as an independent state. However, due to its inability to achieve this goal in the short term, it is currently attempting to capture the entire territory of the Donbas and advance to the city of Zaporizhzhia. It is in these areas that the Russian Armed Forces are currently focusing their offensive operations. Based on this, a fundamentally important issue for Ukraine is Russia’s ability to continue the war. As with any country, this depends on the readiness of its financial system and economy to support military operations.
As is well known, in 2025 Russia experienced significant problems that marked the beginning of its economic crisis.
Last year, Russia’s economy formally grew by no more than 1%, while in 2024 this figure was 4.2%. However, even this slight growth was achieved only as a result of an increase in the production of military products. Although even this was not easy. The civilian sector fell by about 5%. In other words, Russia’s real GDP did not increase, but rather decreased.
At the same time, the RF’s budget deficit has increased sharply. The initial level of this indicator for 2025 was set at 1.17 trillion rubles. In May last year, it was tripled to 3.79 trillion rubles, and in October – to 5.7 trillion rubles. Independent experts estimated it at 7-8 trillion rubles. Part of this surplus was shifted to 2026.
The reasons for these financial shifts are also known. The main one is certain actions taken by the USA and the EU to force Moscow to end the war against Ukraine and to make it give up its aggressive policy by undermining the Russian economy. Basically, this was achieved by limiting Russia’s oil and gas revenues, which account for the bulk of its state budget.
The USA played a key role in this by lowering global oil prices, which hurt Russia the most. The measures taken by the EU leadership to set price caps on the purchase of Russian oil by European countries also had significant negative consequences for Russia. In addition, the USA and the EU increased pressure on Russia’s partners to force them to give up imports of Russian energy carriers. To this end, countermeasures against Russia’s “shadow fleet” were also intensified. Other sanctions also played their part.
Against this background, Russia, intensifying combat operations on the front lines in Ukraine, was forced to increase military spending. According to Russian Defense Minister A. Belousov, it amounted to more than 6% of GDP or 32% of the state budget. In reality, military spending was higher, as part of it was hidden in other items.
All this forced the leadership of the RF to make severe budget cuts by reducing spending on support for the country’s civilian economy and social sector, including mortgage subsidies. In an attempt to curb inflation, the Central Bank of Russia maintained a high lending rate of 21% from 2024, which significantly worsened business conditions due to excessively high lending. As a result, the majority of enterprises in the civilian sector of the Russian economy found themselves in an extremely difficult situation. The crisis has had the greatest impact on the coal, metallurgical, forestry, automotive, aircraft manufacturing, and construction industries, as well as the production of agricultural machinery and rail transport. Only industries directly related to the fulfillment of military orders have maintained relatively positive dynamics.
Since the beginning of 2026, the crisis processes in the Russian economy, which began in the previous year, have accelerated. All the negative forecasts that had been predicted earlier have been confirmed. First and foremost, this refers to the sharp deterioration of the country’s financial problems. At this, the Russian government has effectively lost control of the situation in this area, as evidenced by the state budget deficit, inflation, and the activities of the banking system. These are directly related to the manufacturing sector.
According to official data from Russian statistical agencies, in January 2026, Russia’s state budget deficit amounted to 1.7 trillion rubles. Independent experts report an even higher figure – 1.8-2 trillion rubles. This is about half of the planned deficit for the entire year, which was set at 3.8 trillion rubles.
The main reason for this situation was a decrease in the RF’s state budget revenues by about 12% compared to December 2025. This was mainly due to a 12% drop in oil and gas revenues to 393 billion rubles ($5.1 billion). This is the lowest level since the peak of the COVID-19 epidemic in 2020. For comparison, in December last year, it amounted to 448 billion rubles, and in January 2025, it was 789 billion rubles.
In February this year, Russia’s oil and gas revenues continued to decline. Exact figures are not yet available, but this is evidenced by a significant drop in Russian oil imports by India.
Russia has no way of turning this situation in the oil and gas sector to its advantage. There are no real indicators for sustainable growth in world oil prices. The slight increase that occurred in January this year was a temporary market reaction to a possible US military operation against Iran. Moreover, oil prices will fall as Venezuelan oil begins to appear on the market. And if negotiations between the USA and Iran on the latter’s nuclear program end positively, the volume of Iranian oil entering the market will also increase.
At the same time, by the end of this year, Russia will finally lose the European oil and gas market. India and Türkiye will also reduce or completely stop imports of Russian energy carriers. China will remain Russia’s only powerful partner in the oil and gas sector, but it will also import Russian energy carriers only at significant discounts.
Therefore, by the end of 2026, Russia’s budget deficit may grow to over 10 trillion rubles, or 3.5-4.5% of GDP, which is 2-3 times higher than the planned level. Given this, the situation this year will be much worse than last year. Taking into account the deficits of regional and municipal budgets, the pension and social insurance funds, the total budget deficit in Russia will amount to 15-17 trillion rubles.
Finally, inflation is rising rapidly, and all attempts by the government to stop it are ineffective. Even according to official data, in January 2026, it stood at 2.11%, which was the highest figure since March 2022 at the beginning of the war. In annual terms, this amounts to 6.5%. However, in reality, it may be much higher. According to independent experts, in January of this year, it was no less than 5-10%, and for some types of goods, it exceeded 30%.
The same is happening in February of this year, and on an even larger scale due to a significant increase in the cost of utilities.
The government of the RF explains the jump in prices in January this year by an increase in value added tax from 20% to 22% and calls it a “one-off phenomenon”. However, prices have also risen for goods that are not subject to VAT. Therefore, the reason for the “spike” in inflation is more profound. The VAT increase has only accelerated the inflationary process in Russia.
Its main driving force is the issuance of unsecured funds by the Central Bank of the RF to cover the state budget deficit. Thus, during the four years of war, the ruble money supply in Russia has almost doubled, from 64 trillion rubles to 126 trillion rubles. During the same period, GDP grew by a maximum of 7.5% (taking into account the 2% decline in GDP in 2022). In reality, it is even lower. Therefore, as of early January 2026, the unsecured money supply in Russia was up to 40%.
It is obvious that this trend continued in January-February of this year. No data on the total money supply has been found. However, in January of this year, the cash supply increased by 2%. This is about 25% on an annualized basis, which is significantly higher than the expected GDP growth. Therefore, in 2026, real inflation in Russia will significantly exceed the government’s target of 6%. It is impossible to predict this indicator with certainty. However, in case of an acute crisis or default, prices may increase significantly.
Extremely complex problems have engulfed the banking sector. According to formal criteria, a banking crisis began in Russia at the end of last autumn. This is evidenced by the emergence of overdue or problem loans amounting to more than 10% of the total volume of lending.
In particular, in November 2025, the level of such loans in the consumer sector was about 13%, and in the corporate sector – 11.5%. The worst situation was in the housing construction sector, where overdue loans accounted for up to 70%, and in small businesses, where this figure was about 20% even before the VAT increase.
Since December 2025, information on the state of affairs in the banking sector has been largely closed. Only selected indicators are published. However, it is clear that the situation has not improved.
At present, it is impossible to deal with this issue. Therefore, the Russian Ministry of Finance recommends that banks restructure their debts, i.e., agree to defer their repayment terms. As of mid-February 2026, the total amount of revised loans was about 2.7 trillion rubles.
According to financial analysts, Russia’s banking system will be able to hold out until mid-autumn 2026 at most. However, it could collapse at any time if depositors start withdrawing their funds en masse, or if large companies go bankrupt and are unable to repay their loans.
The management of Russia’s banking system is preparing mechanisms to prevent a possible mass withdrawal of funds by citizens. One such mechanism is to give banks the right to block customer accounts under the guise of preventing criminals from accessing them. This is already being done on a fairly large scale. In addition, the option of replacing citizens’ bank deposits with long-term government bonds is being considered.
Since the beginning of 2026, negative trends have continued in all of the above-mentioned problem areas of the Russian economy. Besides, physical volumes of food production have declined for the first time. Due to the increase in VAT, small businesses have begun to close en masse. Only industries directly related to the fulfillment of military orders have maintained relatively positive dynamics.
The number of industries and enterprises that, due to their critical condition, began to turn to the government for help has increased, further exacerbating the burden on Russia’s state budget. “Russian Railways”, which is strategically important for Russia, is in the most difficult situation. As of early 2026, its total debt reached 3-4 trillion rubles. The reasons for this were miscalculations by the company’s management, a decline in export traffic, increased expenses, the negative effects of sanctions, and significant debt servicing costs (about 350 billion rubles in 2025).
At the end of last year, the management of JSC “Russian Railways” requested urgent support from the government in the amount of 200 billion rubles to stabilize the company’s operations. However, due to a lack of funds, the Ministry of Transport was unable to satisfy this request. The possibility of allocating only 65 billion rubles is being considered.
The total debt of Russian companies operating in the housing construction sector amounts to 700 billion rubles. This is mainly due to a sharp drop in demand for new housing following the government’s cancellation of mortgage subsidies. As a result, of the 116 million square meters of housing that were commissioned in 2025, more than 80 million square meters, or two-thirds, remained unsold.
Therefore, construction companies cannot repay their loans. This also applies to the largest of them, the development company “Samolet”. Its debt amounts to 350 billion rubles. The company officially appealed to the government for assistance in the amount of 50 billion rubles, but its request was denied.
Coal, metallurgical, and oil and gas companies, including Lukoil and Gazprom, are also requesting financial assistance, tax reductions, and various benefits. The government cannot support them, which is leading to an increase in bankruptcies.
Given these circumstances, many experts predict that Russia will face a full-scale financial and economic crisis as early as this summer. In this regard, the current situation in the RF is comparable to what happened on the eve of the 1998 default and the global financial and economic crisis in 2008, as well as in 2014 and 2022 after Russia’s first attack on Ukraine and the start of a full-scale war against it.
It should be noted that in the first case, Russia was saved by Western loans, and in the others, by financial reserves. Now, none of this is available. Neither the USA nor the EU nor China are providing loans to Russia. And there are virtually no reserves in the National Wealth Fund.
The economic crisis in Russia will objectively limit its ability to continue the war against Ukraine, at least at the current level of intensity. This is primarily due to the decline in the country’s military industry’s capacity to produce weapons and military equipment, which is already evident. In the summer of 2025, most Russian military-industrial complex enterprises had already exhausted their capacity to produce weapons. Previously, the problem of insufficient production capacity was solved by expanding it, including the construction of new enterprises. In the middle of last year, construction work began to slow down and has now practically stopped. This is evidenced by the reduction in the recruitment of new personnel in the military-industrial complex.
At the same time, since September 2025, there has been a decline in the production of weapons and military equipment, and in some areas, a physical decline in the volume of such products. The production of armored combat vehicles has slowed down the most, and the production of ammunition and artillery has decreased overall.
The production of control, guidance, and communication systems maintained positive dynamics but became unstable. The output of aviation equipment, which mainly included UAVs, remained at a high level, but in November 2025, its production rates began to decline. The increase in UAV production also explains the relative stability of the production of computer, electronic, and optical equipment, since a significant part of it is used in unmanned aerial vehicles and their control.
The main reason for these problems in the work of Russia’s military-industrial complex is the lack of funds in its state budget to ensure its proper financing. Therefore, the government of the RF had to reduce spending even on such protected items as “defense”. In particular, in November-December 2025, they were reduced by about 20%. As a result, the volume of funding for defense orders also decreased.
For the same reason, Russia’s military-industrial complex has become one of the main drivers of the crisis of non-payments in the country, including in the civilian sector. Military enterprises are forced to fulfill state orders. Therefore, they enter into contracts with subcontractors without guarantees of payment or with deferred payment. As a result, the latter also remain without funds and find themselves in the same situation.
In case of a full-scale economic crisis in Russia, the country’s military-industrial complex will inevitably suffer. This will result in a sharp reduction in the production of weapons and military equipment in the Russian Federation, which will lead to an increase in their shortage on the front lines. Therefore, the Russians will be forced to reduce the intensity of hostilities.
The only way out for Russia is to end the war. As noted above, Moscow cannot increase its oil and gas revenues. Therefore, it is trying to obtain funds to keep the economy afloat through taxes. But this only leads to the self-liquidation of businesses or to them going “underground”. Lowering the interest rate to 15.5% does not help either, as it should be no more than 6-7% for the economy to function normally.
In this situation, restoring peace will not resolve all of Russia’s problems, but at least it will allow it to reduce military spending and get rid of at least some of the sanctions. However, it will not be able to regain its position in the global energy market. Therefore, it will not be able to regain its main source of income. As a result, Russia will not be able to return even to its pre-war level. In the best-case scenario, it will remain a backward and underdeveloped country for decades. In the worst-case scenario, it will follow in the footsteps of the former USSR.
Thus, the results of 2025 showed that an economic crisis had begun in Russia. From January 2026, it began to accelerate and spread to both the banking and manufacturing sectors. The reason for this was a sharp decline in Russia’s oil and gas revenues and the undermining of the Russian economy as a result of measures taken by the USA and the EU to force it to end the war against Ukraine and abandon its aggressive policy.
The leadership of the RF has no way of resolving economic problems without ending the war and is therefore losing control over the crisis processes in the country. Therefore, a full-scale crisis in Russia may arise in the near future.
The deterioration of the economic situation in the RF is also negatively affecting the production activities of the country’s military-industrial complex. So far, the work of Russia’s military-industrial complex has made it possible to continue the war against Ukraine. However, the military-industrial complex is already forced to focus on the production of the most important weapons at present, namely UAVs, and to reduce the production of others, in particular armored vehicles and artillery.
In the long term, this will reduce Russia’s ability to continue the war in Ukraine, at least at the current intensity. Ultimately, it will not be able to launch a powerful attack on Europe.
Yurii Ilchenko,
Institute for Global Politics
Collage “Center for Countering Disinformation”
