In June 2025, Russian President Vladimir Putin told the St. Petersburg International Economic Forum that Western sanctions had failed to isolate Russia. Instead, he argued, they had strengthened cooperation with “friendly” nations and supported positive economic momentum. Yet within two months, the Russian government revised down its economic growth forecast, exposing the fragility of a wartime economy and the widening gap between official rhetoric and economic reality.
At the forum, Putin highlighted strong growth in non-oil and non-gas revenues and claimed that unemployment and inflation were near historic lows. However, consumer price data released in July showed inflation running at around 9%, far above the 2.9% figure cited in his remarks. Although official statistics later suggested inflation eased to roughly 6.6% by November 2025, price pressures remain elevated, reflecting persistent structural constraints rather than temporary fluctuations.
Economic growth has slowed markedly. Forecasts from the International Monetary Fund (IMF) and other institutions now place Russia’s real GDP growth in 2025 at between roughly 0.6% and 1.5%, well below earlier expectations. Based on official data and Putin’s own year-end statements, full-year growth is likely to be close to 1%. Independent estimates show that GDP grew by only about 1.1% year on year in the second quarter, a significant deceleration from 2024.
A central factor behind this slowdown is the extraordinary expansion of military spending. According to the German Institute for International and Security Affairs (SWP), Russia’s military expenditure reached RUB 8.48 trillion (about USD 106 billion) in the first half of 2025, with non-public spending accounting for nearly half. Defense outlays now represent over 40% of the federal budget, a historic high. Compared with 2023, military spending has risen by 31%, and relative to 2022, it has nearly tripled. In effect, roughly one ruble out of every two in tax revenue is now allocated to military purposes.
This surge has fundamentally reshaped Russia’s fiscal structure. In 2025, military and security spending is expected to account for about 40% of total government expenditure, equivalent to nearly 8% of GDP. These funds finance not only domestic arms production and personnel costs, but also substantial payments to foreign partners, including Iran and North Korea, in exchange for weapons and operational support. Estimates from the Stockholm International Peace Research Institute (SIPRI) put planned military spending at approximately RUB 15.5 trillion, or about 7.2% of GDP. While figures vary slightly across sources, all confirm the dominant role of war-related expenditure in public finances.
Despite this massive fiscal commitment, broader economic performance has deteriorated. In August 2025, Finance Minister Anton Siluanov announced that the government had revised its GDP growth forecast for the year down from 2.5% to 1.5%. He cited weak credit demand resulting from persistently high interest rates. The Central Bank of Russia raised its key policy rate to 21% in October 2024 to contain inflation. Although the rate has since been marginally reduced, borrowing costs remain prohibitive, suppressing investment and consumption.
Recent data reflect this slowdown. GDP growth weakened sharply in the second quarter, and growth in July was only 0.4%, far below the pace seen a year earlier. Industrial output and retail sales have both lost momentum. Retail sales grew by just 2%, while food retail sales rose by 2.4%, suggesting that basic necessities now account for a larger share of household spending. This shift points to declining living standards. Corporate performance has also suffered. In the first half of 2025, aggregate corporate profits fell by 8.4% year on year, while profits in the oil and gas sector dropped by more than 50%.
These trends highlight growing structural distortions within the economy. A rapidly expanding defense sector is absorbing fiscal resources, labor, and capital at the expense of civilian industries. Mobilization and demographic pressures have intensified labor shortages, while supply-side constraints and logistics disruptions have added to inflationary pressures. This combination makes it difficult for the central bank to ease monetary policy, reinforcing a cycle of high inflation, high interest rates, and weak growth.
While military spending can provide short-term stimulus by sustaining output and employment in select sectors, its long-term economic costs are substantial. As defense outlays consume a rising share of GDP, productivity and competitiveness in civilian industries suffer. Capital is increasingly diverted into low-efficiency military projects, reducing investment in innovation and consumer-oriented sectors. Over time, this undermines growth potential and erodes economic resilience.
Russian economists increasingly warn that the marginal contribution of military spending to growth is diminishing. As labor and resource constraints persist, further increases in defense spending may have a neutral or even negative impact on overall economic performance, raising the risk of prolonged stagnation or recession.
These domestic economic challenges carry broader geopolitical and commercial implications.
First, Russia’s economic difficulties are likely to reinforce alignment between the United States and Europe on Ukraine. Although Washington has shown greater interest in promoting a negotiated settlement, recent high-level talks have failed to resolve core issues, particularly Ukrainian territorial sovereignty. The European Union continues to provide firm support for Kyiv. As Russia’s economic constraints become more visible, Ukraine’s resolve is likely to strengthen, reinforcing European unity and limiting the scope for a significant shift in U.S. policy.
Second, worsening economic conditions increase the likelihood of intensified economic nationalism in Russia. This presents growing risks for companies from countries like China that operate in the Russian market. Under economic stress, protectionist measures and demands for deeper localization typically intensify. In addition, fiscal pressures may lead to more aggressive revenue extraction from foreign firms and personnel, further complicating the business environment.
Third, a weakening macroeconomic environment directly undermines corporate profitability. As government finances tighten and household purchasing power declines, uncertainty surrounding the sustainability of foreign business operations in Russia will continue to rise.
As things stand, while Russia’s wartime economy has temporarily supported certain sectors, it has produced deep and increasingly visible structural imbalances. Even if the Russia–Ukraine conflict were eventually resolved, the Russian economy would still face elevated risks of stagnation or recession.
