Forty months is a significant duration for a conflict, especially for an economy already reliant on fossil fuels, which are expected to become obsolete in the coming decades. Nearly three and a half years after Vladimir Putin ordered the invasion of Ukraine, severing ties with the West, Russia finds itself in a complex situation marked by slow growth and rising prices, with annual increases in the double digits.
The St. Petersburg International Economic Forum, once a symbol of Russia’s global market strength, recently turned into a display of Putinism, albeit not a particularly cheerful one. “We are on the brink of a recession,” admitted Economic Development Minister Maxim Reshetnikov. Central Bank Governor Elvira Nabiullina noted that the reserves supporting the country’s finances in recent years “are depleted.”
The Russia of late 2021, when tensions with Kyiv were escalating, is barely recognizable today. In July 2025, the Russian Central Bank faces a paradoxical challenge: battling inflation while also contending with the Kremlin’s demands. It’s akin to dancing a waltz on a barrel of dynamite.
“The country is in a state of stagflation,” according to the Centre for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP). “Economic dynamics are declining rapidly, and there is a risk of a technical recession in the second and third quarters, but inflation remains high.”
Less than three weeks ago, the central bank, supposedly independent from government control, symbolically lowered interest rates from 21% to 20%. This fulfilled a long-standing demand from the Kremlin and marked the first rate cut since September 2022, the year of Russia’s invasion of Ukraine. This change broke from a cycle of interest rate hikes aimed at curbing rising prices.
However, the situation remains dire. Official inflation hovers around 10% year-on-year, although independent institutes estimate the real figure to be above 15%. With military spending still high, “risks remain skewed towards inflation,” warned Nabiullina. “Our rate cut approach requires greater caution.”
The contradiction facing the central bank reflects the current state of the Russian economy, which has dropped out of the world’s top 10 in terms of size. Even the Kremlin acknowledges that the economic boom driven by the war industry is ending, and pre-war savings are no longer sufficient.
Maxim Oreshkin, an economic advisor to the Presidential Executive Office, stated that the growth model of recent years has largely reached its limit before the St. Petersburg Forum. “We need to advance — not forward, but upward: to the next technological and organizational level.”
Russian propaganda continues to claim the country is performing better than the European Union, highlighting a minimal unemployment rate of just over 2%. Rosstat, Russia’s national statistics office, notes that the average monthly wage has surpassed the 100,000-ruble mark (about $1,300), a 40% increase compared to 2022.
Prices eroding wage gains
This snapshot is in nominal terms, not real ones. Even according to official figures, inflation has surged by 24% over that period. “The government and others are hiding the real inflation figures because if they reveal the truth, they would have to raise wages in the public sector, pensions, and other payments,” warned lawmaker Nikolay Arefiev a few months ago. “And they don’t want to spend the money.”
Russian authorities had hoped to close 2025 with a public deficit of just 0.5%, the lowest since 2021, when the war was beginning and high fossil fuel prices filled the state’s coffers. However, the costly fighting in Ukraine continues, and the lower house has revised its forecast to more than triple that figure, expecting a deficit of 1.7%, the same as in 2024. The Kremlin has less than four trillion rubles in liquid reserves left in its sovereign wealth fund, roughly equal to the projected deficit for this year.
The real rise in prices is eroding wage gains week by week, month by month. It’s affecting Russians’ finances and the national mood in a country at war: only one in 10 Russians say their financial situation has improved this year, according to the FOM sociological research center. One in five say it’s worsened.
The TsMAKP think tank is equally pessimistic about the Russian economy: “There is a trend toward an almost complete slowdown in activity: the stagnation of investment in machinery and equipment has been exacerbated by growing problems in the construction sector,” it warns. “And, most importantly, a crisis in consumption is looming, especially in the demand for non-food goods.”
After a period of economic overheating, signs of crisis are mounting. Despite government subsidies for the defense industry, overall credit growth has risen by just 1% this year. Seven out of 10 companies reported a collapse in consumer demand during the first quarter, according to a survey by the Stolypin Institute. Job vacancies have fallen to their lowest point since the start of the war, according to data from human resources firm Huntflow. Wage payment delays have tripled, while more than 8.8 million Russians are unable to repay loans that are less than 90 days overdue. Car sales have plummeted by 25% in the first half of the year, and clothing chains report sales down between 30% and 35%, partly due to the rising cost of other essential household expenses.
Military spending, the sole engine of the Russian economy since February 2022, alongside oil and gas exports, artificially boosted economic activity in 2023 and 2024, fueled by high demand for weapons and inflated salaries for conscripts. However, this wartime boom is now fading, partly due to Western sanctions but not solely because of them.
One year of breathing room
The flip side of the war is that the defense sector has drained vast resources from a real economy mired in recession. The civilian industry has been in decline since last fall, wiping out the growth accumulated during the early years of the war, which had been fueled by massive public spending. There’s a further complication: instead of replacing imports with domestic production, as Putin insists, the Russian market is increasingly dependent on other countries, especially China.
Excluding the military sector, Russian civilian production has grown by just 1.9% over the past four years, according to data from Rosstat and the Higher School of Economics. This growth is far less than other countries in its immediate region and almost certainly less than it would have grown had Russia not invaded Ukraine.
Vladislav Inozemtsev, co-founder of the Center for Analysis and Strategies in Europe (CASE), states that the Kremlin has a little over a year of fiscal room left to sustain its current level of military spending before needing to make major cuts. A looming question is what happens if peace breaks out. It’s hard to imagine soldiers, currently earning over €2,000 ($2,350) a month, a highly respectable salary in Russia, being willing to return to earning just a quarter of that once the fighting ends.
In this scenario, argues Maxim Mironov, a professor at IE Business School, Moscow may still have one card to play: further devaluing the ruble, even at the cost of importing more inflation. The government, which earns revenue in dollars and euros from hydrocarbon exports but spends in rubles, would benefit from a weaker national currency. So would most Russian companies, except importers, who are suffering from a painful loss of competitiveness.
Tailwind from the Middle East
That was the context in which Russia found itself when Israel launched a large-scale military campaign against Iran on Friday, June 13. As expected, the Kremlin condemned the attack on one of its key allies. However, beneath that official stance lay another reality — more complex and, in fact, more favorable to Moscow’s interests: the price of oil and natural gas, cornerstones of Russia’s export economy, surged sharply.
For a few weeks at least, Moscow was able to move past the recent slump in commodity prices, which had drastically cut its short- and medium-term revenue outlook. Those price drops, in the words of Elina Ribakova of the Peterson Institute for International Economics, had become “one of the largest, if not the largest” indirect sanctions on the Russian economy — even more significant than the formal sanctions packages passed by the G7.
Her numbers are striking: a $10 drop in the global price of crude oil slashes $17 billion from Russia’s public budget — about 0.8% of GDP, according to Ribakova. And, of course, the reverse is also true.
Given that military spending now consumes more than 40% of Russia’s (classified) federal budget, “every dollar gained or lost is one dollar more — or less — for the war,” says Ribakova, who is also a researcher at the Brussels-based think tank Bruegel. A swift resolution to the increasingly complex Middle East crisis would push prices back down — and “increase Putin’s incentive to negotiate,” says Sergei Guriev, rector of Sciences Po in Paris.
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