Russia’s wartime economy, once buoyed by military spending and redirected oil exports, is now flashing warning signs of a deep slowdown. Mounting inflation, falling industrial output, and budget stress are undermining President Vladimir Putin’s strategy to outlast Ukraine and the West.

After rapid GDP growth in 2023 and early 2024—propelled by defense contracts and oil revenue—Russia’s economy is now teetering. The first quarter of 2025 saw a GDP growth drop to 1.4%, down from 4.5% in Q4 2024. Manufacturing contracted at its fastest pace in over three years, and car sales plummeted nearly 30% year-on-year in June.

High military spending—over 6% of GDP—is squeezing the civilian economy. Around 40% of government expenditure now goes to defense and security. Companies like Rostselmash and Rosseti Sibir are slashing production and halting investments due to weak demand and financial strain.

The Russian central bank raised interest rates to a record 21% to combat inflation, but high rates have stalled private investment and pushed up corporate borrowing costs. Experts warn of growing risks to Russia’s banking system, particularly due to state-mandated lending to war-related industries.

A recent report by the Moscow-based Center for Macroeconomic Analysis forecast a “moderate” but rising risk of a systemic banking crisis in 2026.

Oil Revenues Drop, Sanctions Tighten

Russia’s oil and gas revenues—accounting for a third of its budget—fell to their lowest level since January 2023. With global oil prices softening and Russia’s crude trading below budget expectations, fiscal pressures are intensifying.

While Putin insists the economy is stable, Finance Minister Anton Siluanov has described the situation as a “perfect storm.” The Kremlin continues to project a budget deficit through at least 2027, suggesting a shrinking financial runway for sustaining the war in Ukraine.

Western Leverage and Strategic Limits

Western sanctions have yet to cripple the Russian economy but are clearly beginning to hurt. Analysts say if oil prices fall further or sanctions tighten, Russia could struggle to maintain war funding.

“The growth model based on military spending alone is broken,” said Janis Kluge of the German Institute for International and Security Affairs.

The economic headwinds challenge Putin’s assumption that Russia can outlast Western support for Ukraine. As internal vulnerabilities mount, the war economy may prove unsustainable without major structural adjustments or a change in strategic direction.