Russia's Economy Shows Resilience Amid Sanctions, But Faces Slowdown and Fiscal Pressures

Economic Growth Driven by Wartime Spending

The Russian Federation's economy has shown unexpected resilience in recent years, defying initial predictions of collapse following the imposition of extensive Western sanctions. Gross Domestic Product (GDP) grew by 3.6% in 2023 and an estimated 4.1% in 2024, surpassing initial projections and outperforming some major Western economies. This growth has been largely attributed to a massive fiscal stimulus, primarily channeled into military spending to support the ongoing war effort.

However, this period of robust expansion is projected to decelerate significantly. The International Monetary Fund (IMF) forecasts Russia's GDP growth to slow to between 0.6% and 1.5% in 2025 and 1.0% to 1.4% in 2026. Similarly, the World Bank anticipates growth of 1.6% for 2025 and 1.1% for 2026. This slowdown reflects an economy described by some analysts as 'overheated' due to the intense war-related expenditures.

Mounting Fiscal Pressures and Inflationary Challenges

The Kremlin's commitment to funding its military operations has reshaped the national budget. Defense outlays constituted over 40% of the federal budget in 2025, marking a historic high, and represented nearly 8% of the country's GDP. Estimates from the Stockholm International Peace Research Institute (SIPRI) placed planned military spending at approximately RUB 15.5 trillion, or about 7.2% of GDP, for 2025.

Despite this significant allocation, Russia faces increasing fiscal strain. Oil and gas revenues, historically accounting for up to 40% of the federal budget, are under pressure. In November 2025, oil revenues reportedly fell by 27% year-on-year. This decline is attributed to falling oil prices, tougher sanctions targeting Russia's 'shadow fleet,' and Ukrainian drone attacks on energy infrastructure. New US sanctions imposed in October 2025 on major oil companies like Rosneft and Lukoil have further complicated export logistics, leading to a reduction in imports by key customers such as India.

Inflation remains a persistent concern. Russia's annual inflation rate reached approximately 8.5% in 2024 and stood at 10.2% in April 2025, significantly exceeding the Central Bank of Russia's target of 4%. In response, the Central Bank raised its key interest rate to 21% in October 2024, later marginally reducing it to 16.5% in October 2025. These high interest rates are intended to curb inflation but are simultaneously suppressing investment and consumer spending.

Long-Term Outlook and Policy Adjustments

The liquid portion of Russia's National Wealth Fund, a key financial reserve, stood at just $31 billion by November 2024, its lowest level since its inception in 2008. To bolster state finances, the government is implementing tax increases, including a planned rise in the Value-Added Tax (VAT) rate from 20% to 22% starting January 1.

The labor market is experiencing historically low unemployment rates, around 2.3%, leading to labor shortages and wage increases that outpace productivity. While this indicates strong demand, it also contributes to inflationary pressures and structural imbalances. Analysts suggest that Russia's economy is transitioning from a phase of 'managed cooling' into potential stagnation, with a meaningful recovery not anticipated before 2027.