Russia’s Economy As the Driving Force Behind the War
Part I. The State of Russia’s Economy and Its Dependence on Ukraine’s Operation to Compel Moscow to Make Peace
Russia’s ongoing war against Ukraine is speeding up the crisis in the Russian economy, which is no longer able to support the Russian army and is plunging into recession. Ukraine’s strikes on key Russian oil infrastructure facilities are bringing the crisis closer. The RF is already experiencing a shortage of liquid fuel. The next two months will be decisive. Ukraine may force Russia to suspend military operations. Otherwise, the RF faces an economic catastrophe that will threaten its very existence.
A country’s ability to wage war is determined by the state of its economy. At present, Russia’s economy still allows it to continue military operations against Ukraine. But this capability is steadily eroding. Indeed, as early as the second half of 2024, Russia’s economic growth rate began to slow down. Even then, however, that growth was largely driven by an increase in military production. As is well known, such production cannot generate real economic growth but only drains the economy, as it requires budgetary expenditures that are not recouped as revenue.
In 2025, the negative trends in the Russian economy became evident. Its growth rate began to decline. In other words, the economy entered a period of stagnation.
This demonstrates the vulnerability of the Russian economy in the context of war, which came as a shock to Russia’s ruling elite and to Putin personally. However, instead of ending the war – which was, in fact, the main source of Russia’s economic problems – he began resorting to command-and-control methods, ordering an urgent restoration of positive growth in the Russian economy. The government carried out this order and announced a 1.8 % increase in GDP for March of this year. It is possible that the Russian economy did indeed grow during this period. But the Russian government had nothing to do with it. GDP rose not as a result of any economic successes, but because of the military operation against Iran launched by the USA and Israel. This is precisely what led to a doubling of global oil prices from $54 to $100. Consequently, Russia’s oil revenues rose from $9.5 billion to $19 billion, and, in particular, state budget revenues increased from $4.5 billion to $6.9 billion.
The rise in GDP in March of this year partially offset its decline in January and February. At least, that is the official line. According to the International Monetary Fund, Russia’s GDP grew by only 0.6 % last year. The reason is the significant impact of Western sanctions and excessive spending on the war, including arms production.
Besides, in an effort to curb the rapid rise in war-driven inflation, the Central Bank raised the base lending rate to an extremely high level – 22 %. This temporarily slowed down the rise in prices but virtually halted investment in the economy, not to mention its development. Compounding this was a drop in global oil prices resulting from US President Donald Trump’s actions to establish American control over the global energy market. He also imposed sanctions on leading Russian oil companies. As a result, Russia’s oil revenues – which make up the bulk of the Russian budget – declined.
In early 2026, global oil prices fell even more sharply, reaching the break-even point for oil production in Russia. Moreover, due to Western sanctions, Russia was forced to offer discounts on oil. This dealt another powerful blow to the Russian economy. It fell into recession. In January of this year, Russia’s GDP fell by 2.1 %, and in February – by 1.8 %, compared to the same periods in 2025.
According to Rosstat, this allowed the country to limit the decline in gross domestic product in the first quarter of 2026 to just 0.3 % compared to the same period of the previous year. In April of this year, oil prices in Russia remained at March levels. Consequently, oil revenues and GDP growth remained roughly the same, although GDP growth slowed down slightly to 1.3 %. In May of this year, the situation for Russia took a turn for the worse. Although oil prices and oil revenues remained roughly at the same level, GDP growth fell to 0.3 %. Industrial production, meanwhile, declined by 0.7 %. In other words, the positive effect of rising oil prices on the Russian economy began to fade. This was primarily due to Russia’s increase in military spending by nearly 30 %. The goal was to speed up the advance of its troops on the front lines. This was particularly urgent for Russia given that combat operations had effectively shifted to a stalemate. This state of affairs derailed Moscow’s plans to capture the entire Donbas region, which was intended to demonstrate its success in the war.
Absolute data on Russia’s macroeconomic indicators for June 2026 are not yet available. However, it is clear that they will be even worse than in May of this year. As is well known, in June of this year, the USA and Iran reached a general agreement to end the war. This made it possible to reopen the Strait of Hormuz to tanker traffic. As a result, global oil prices fell by 20–22 % – that is, to a level lower than it was at the start of the war. Therefore, Russia’s real GDP growth for the past month was unlikely to exceed 0.1 %, and may even have been negative. Based on this, the Russian economy’s growth rate in the first half of the year will most likely not exceed 0.5 %. For the year as a whole, it could range from 0.4 % to 1 %. This is precisely the level projected by the Central Bank of Russia.
In early July of this year, the price of Russian oil fell even further – to about $44 per barrel – that is, to the level seen in January–February of this year, when Russia’s GDP began to decline. Subsequently, the USA and Iran resumed sporadic hostilities, but oil prices did not rise significantly. During the war in the Middle East, oil-producing countries in the region were able to adapt and increased pipeline shipments to bypass the Strait of Hormuz. This is especially true given that there are sufficient volumes of oil on the global market, and the rise in oil prices was speculative in nature.
However, the decline in GDP is merely the tip of the iceberg where it comes to Russia’s economic problems. The range of these issues is much broader and confirms that the country is plunging into a deep economic crisis. First and foremost, this concerns the fact that government spending exceeds revenue, leading to a critical increase in the budget deficit. As a result, there is an acute shortage of funds to continue the war and sustain the country’s vital functions. According to official data, in the first six months of 2026, Russia’s state budget deficit rose to 5.9 trillion rubles (2.5 % of GDP), which is 1.5 times higher than the projected figure of 3.79 trillion rubles. Tax increases allowed the government to boost state budget revenues by 5.8 % to 18.6 trillion rubles. However, war-related expenditures rose even more sharply – by 16.1 % to 24.3 trillion rubles. According to forecasts by independent experts, the deficit could rise to 10–12 trillion rubles by the end of the year – that is, three times the expected level.
The government will not be able to draw funds from the National Wealth Fund, as it has done in previous years. The fund has shrunk to 1.8 % of GDP, which is a critically low level. These funds are held as an untouchable reserve in case of an emergency. Therefore, the government is selling gold from the country’s international gold and foreign exchange reserves. However, the gold is subject to sanctions. As a result, only China is purchasing it in limited quantities and at lower prices, since Russia is forced to offer discounts.
Russia’s government cannot offset the deficit by increasing revenues from the country’s economy. As already mentioned, the economy is currently stagnating and showing signs of sliding into a recession. Oil prices are unlikely to rise significantly. In fact, they will only continue to fall. Consequently, oil revenues for the Russian budget will also decline. In the first half of the year, they had already fallen by 30 %. Tax increases have generated some additional revenue, but they have not fundamentally resolved the problem of funding shortages and are merely destroying small and medium-sized businesses. In the first six months of 2026, tax revenues fell short of projections by 6 trillion rubles. Meanwhile, 30 % of small and medium-sized enterprises have closed or are planning to close. Russia cannot secure external borrowing due to Western sanctions. China does not grant it loans, in accordance with its fundamental policy. Nor does it invest in the Russian economy. Funds are invested solely in China’s own projects within the RF, which are primarily carried out by Chinese nationals.
The Russian government is also unable to borrow funds on the domestic market on acceptable terms. For the past month, auctions for the sale of government bonds have been ending without any bids. The government is offering them at 14 % per annum, while potential investors are only willing to purchase the securities at 17–19 %. These rates are too high, as the government faces significant challenges in servicing its existing debt. Approximately 10 % of the budget’s expenditure side is already being allocated to debt service. This sets Russia apart from Western countries, which can take out foreign and domestic loans and repay them with relative ease.
Therefore, the shortfall in the RF’s state budget is mainly covered by the Central Bank’s issuance of unsecured funds. For example, from February through June 2026, an additional 1.9 trillion rubles were put into circulation. As a result, the Central Bank’s policy of curbing inflation by maintaining high interest rates has failed. According to official data, inflation stood at 4 % over the first five months, a level that had been projected for the entire year. In reality, however, the so-called “observed inflation” reached 14 %.
The Kremlin is trying to secure funds from oligarchs to continue the war. However, most of them are refusing to do so, even under the threat of repression. Such repression is already taking place in the form of corruption charges against certain big-business figures and the confiscation of their assets. The possibility of freezing the public’s funds, as was done in 1991, is being considered. In response, oligarchs are moving their money abroad, while the public is withdrawing their deposits from banks en masse.
A major problem is the sharp decline in investment in the Russian economy. In the first quarter, the indicator – which covers construction, purchases of machinery and equipment, as well as modernization and reconstruction – fell by 14.3 % year-on-year. This trend continued in the second quarter. Due to high tax rates, about 90 % of companies are refusing to invest in their own development.
The situation has worsened in many sectors of the Russian economy, especially those subject to sanctions. Specifically, in the first half of this year: steel production fell by about 10 %; coal production declined by 4 %, and oil production – by 5 %; timber harvesting dropped by 10 %. In fact, only the military-industrial complex, which is supported by state funding, is operating relatively stably. But even it is facing growing problems, mainly due to a payment crisis.
Under pressure from the Kremlin, the leadership of the Central Bank of the Russian Federation may lower the base lending rate, which would create more favorable conditions for investment and, consequently, for production growth. However, this would lead to a sharp spike in inflation, which would worsen these conditions. In other words, the situation is at a stalemate and will only get worse.
The crisis in the Russian economy may accelerate dramatically as a result of Ukraine’s strategic operation to force Russia to make peace by destroying key facilities in its oil and gas industry. This is discussed in detail in our article “Operation to Force Russia to Make Peace. Nature, Consequences, and Prospects”: https://igp.org.ua/en/publikacii/operaciya-z-primushennya-rosi %D1 %97-do-miru/. However, the situation is rapidly changing in ways that warrant attention. Indeed, Ukraine has, to one degree or another, already struck all major oil refineries located in the European part of Russia and in Western Siberia. As of mid-July of this year, 24 out of 33 large and medium-sized refineries in the RF had been targeted, with 43 % to 66 % of their production capacity taken out of service. As a result, oil refining in Russia has fallen to its lowest level since 2005 – 3.91 million barrels per day – while the petrol shortage has risen to over 30 %. There is no acute crisis with diesel fuel yet. However, on July 8 of this year, the Russian government banned its export. Therefore, a diesel fuel shortage will be felt in the very near future.
The problems with liquid fuel in Russia are becoming irreversible. Russia cannot protect its refineries because it lacks sufficient air defense forces and resources. It cannot import even the minimum necessary amounts of fuel from abroad either. It lacks both the capacity to transport it and suppliers capable of meeting Russia’s needs. Refinery owners have stopped repairs altogether, as there is no point in doing so. Currently, it is more profitable to export crude oil than to refine it domestically. Russian oil companies are currently doing this – or at least trying to. Recently, they have increased oil shipments to tankers to 4.1–4.2 million barrels per day – the highest level since 2022. However, this does not mean that Russian businesses or the country’s state budget are generating revenue from this. There is no significant demand for Russian oil. As a result, a large portion of it remains on tankers. However, EU and US sanctions are limiting even these opportunities for Russia. And once Senator Lindsey Graham’s bill to drastically tighten sanctions against Russian oil is passed in the USA, exports will cease entirely.
This operation involves actions by the Ukrainian Defense Forces to blockade Crimea and the occupied territories of Kherson and Zaporizhzhia regions. We have also written about these actions in our previous articles. In July of this year, another component was added to the operation, which involves the destruction or neutralization of Russian tankers and dry cargo ships in the Azov and Black Seas. This is part of the operation to blockade Crimea, aimed at thwarting Moscow’s attempts to establish maritime transport links with the Peninsula. Since the start of this phase of the operation on July 14 of this year, approximately 120 enemy vessels have been struck in the Sea of Azov, and more than 20 ships – in the Black Sea. As a result, Russia has not only failed to break through the blockade of Crimea but has lost about 25 % of its grain export capacity from the North Caucasus.
It is still difficult to fully assess the impact of Ukraine’s actions on the Russian economy. The only thing that can be said with certainty is that the harvest in Russia is being disrupted due to a shortage of petrol and diesel fuel. As of mid-July of this year, grain and legume crops have been harvested from only 1.3–1.5 million hectares, which is three times less than last year and amounts to 3 % of the target. The situation is most acute in the Krasnodar and Stavropol Territories, as well as in Rostov Region, where grain crops ripen earlier than in other regions. Meanwhile, in Altai – Russia’s second-largest grain-producing region – the harvest is at risk of being completely lost.
Prices for Petrol and diesel fuel, as well as for related goods and services (that is, practically all of them), are rising rapidly, accelerating inflation. Specifically, in the city of Rostov-on-Don and Rostov Region, prices have risen from 70 to 200 rubles per liter. In the Krasnodar Territory and in occupied Crimea, where petrol is practically unavailable, it is being sold by scalpers for 450–500 rubles per liter.
In some regions of Russia, delays are beginning to occur in the delivery of food products to shops. For now, this is mainly due to long lines at filling stations rather than a shortage of liquid fuel, but that will happen soon enough. As early as August of this year, the shortage of petrol and diesel fuel in Russia will increase dramatically. It will be roughly the same as what is currently happening in Crimea – or even worse. The autumn planting season will be disrupted because there will be no fuel left for it. Most transportation will come to a halt, and with it, logistics. It will be impossible to either produce or transport goods, components, and raw materials. People will also lose the ability to travel by public and private transportation. In other words, a severe economic crisis, an acute shortage of food and basic necessities, and subsequently chaos and the collapse of society and the state could ensue.
The deterioration of the Russian economy is also exacerbating social problems in the country. For example, since the beginning of this year, the purchasing power of the majority of the Russian population has fallen by 10–15 %, as inflation has outpaced wage growth. In some industries and businesses, wages are actually declining. People are cutting back on spending even on food, medicine, and basic necessities. Many are beginning to live on credit. Official Russian statistics report approximately 10.5 million people living in poverty (7.2 % of the population), but the actual number is significantly higher. Due to rapid inflation and the shift of the economy toward a war footing, approximately 18 million people have effectively fallen below the poverty line, and according some independent experts’ estimates, this figure reaches 40 % of the population.
Both open and hidden unemployment – the latter of which is not accounted for in official statistics – will rise. Currently, its main forms include reductions in the workday or workweek, as well as unpaid leave.
The intensification of socioeconomic problems in Russia and the prospect of their further escalation are changing public moods. A revolutionary situation has not yet emerged, but the threat of unrest is growing.
Putin’s approval and trust ratings in Russia are plummeting. According to data from the Russian state-funded VTsIOM, his approval rating has fallen to 66.0 %, while his open trust rating stands at 29.5 %. These are the lowest figures in the past eight years and since the start of Russia’s full-scale invasion of Ukraine.
At the same time, the proportion of Russian citizens who support continuing the war against Ukraine has fallen to a historic low of 24–25 %. According to opinion polls, up to two-thirds of Russians surveyed today support a transition to peace talks, whereas at the start of the invasion, one in two supported the aggression.
Russians have already moved from the “protests on knees” at the beginning of this year to open demonstrations of dissatisfaction with the Russian government. If the situation continues to develop at the same pace, protests against it could begin as early as this autumn. This is all the more likely in case of a global crisis. As mentioned above, an operation by the Ukrainian Defense Forces to disrupt Russia’s oil industry could serve as a catalyst for such protests. Right now it has already become a major factor in the escalation of social tensions within Russian society and the disintegration of the country’s unified economic complex. Indeed, queues for petrol and diesel fuel are becoming akin to anti-government rallies and demonstrations, and their participants are spreading a spirit of protest throughout society. At this, clashes in the lines could escalate into larger-scale riots.
In some regions of Russia, bans are being imposed on the export of liquid fuel beyond their borders, and checkpoints are being set up at administrative borders. In Rostov Region, negative attitudes to residents of the occupied territories of Ukraine’s Donbas have risen sharply, and in the Krasnodar Territory – to Crimean residents who refuel in their regions and deplete local supplies of petrol and diesel fuel. The governor of the Trans-Baikal Territory is even threatening to ban heavy-duty trucks bound for China from passing through the region, since they refuel on his territory and leave local residents without fuel. All of this is laying the groundwork for a resurgence of separatism in Russian regions, as was the case in the 1990s. Russia is steadily returning to that path.
So, after a period of improvement in Russia’s economic situation due to rising global oil prices, the situation is deteriorating once again. Moreover, the crisis in the Russian economy is accelerating. This is due to falling hydrocarbon prices, as well as the government’s increasing military spending, which is leading to a growing national budget deficit and undermining the civilian sector of the economy. Tax hikes are not offsetting these expenditures but are only making it harder to do business.
The catalyst for the spread of the crisis in the Russian economy is Ukraine’s operation to force Russia to make peace by striking its oil infrastructure. As a result, a shortage of liquid fuel has already emerged in the country, and it is becoming increasingly acute. According to different estimates, Ukraine has already disabled about half of Russia’s oil refining capacity. Russia is unable to prevent us from taking such actions. Therefore, the fuel crisis in the RF will reach a critical level by the end of this summer. And with it will come a catastrophe in its economy.
Yurii Mykhailenko,
Institute for Global Politics
