The Russian economy is entering a multi-year stagnation that, while enabling the Kremlin to sustain the war effort over the next 12 months, will steadily erode the fiscal, industrial and technological foundations required to keep fighting at current intensity beyond 2026. On Oct. 7, the World Bank released its ''Fall 2025 Economic Update,'' which projects that Russian real GDP growth will decline from 4.3% in 2024 to 0.9% this year, 0.8% in 2026 and just 1% in 2027. The report describes a war-distorted economy in which tight monetary policy, shrinking private credit and labor shortages have stalled civilian production and only defense orders keep output artificially afloat. The Russian economy's non-defense activity has contracted, consumption has slowed and investment has fallen under high borrowing costs. With military spending at a record high and a drop of 17% in oil revenues, the federal budget deficit grew to 1.7% of GDP in the first half of 2025 and is forecast to reach 2.6% by the end of the year. Against this backdrop, the Kremlin's newly submitted draft 2026-2028 budget continues this trajectory of channeling unprecedented resources into defense while proposing to raise taxes to sustain war-related spending.

• The draft federal budget allocates 39.5 trillion rubles ($477 billion) to defense over 2026-2028, nearly quadruple prewar levels. When combined with other parts of the security sector — such as the police, National Guard and other law enforcement and intelligence agencies — the military budget will account for up to 40% of total spending in 2026. The draft budget raises VAT from 20% to 22% starting in 2026, which is expected to generate 1.2 trillion rubles in new revenue to fund the military sector. Annual deficits are projected to exceed 3 trillion rubles through 2028, equivalent to roughly 2.5-2.7% of GDP.
• The government is tightening fiscal control over small businesses through new tax measures in the draft 2026-2028 budget. The finance ministry has proposed sharply restricting simplified tax regimes for individual entrepreneurs. The changes will lower the revenue threshold for the patent tax system from 60 million rubles to 10 million rubles and eliminate preferential regimes for key sectors such as retail and transport, affecting more than half of Russia's registered small enterprises. The reforms are designed to expand federal revenue collection and redirect private income toward financing defense and security spending.

The stagnation reflects the exhaustion of Russia's war-driven economic expansion, which is deepening domestic imbalances and heightening exposure to external pressures, particularly impacting crucial energy exports. While the recovery of the Russian economy in the wake of the 2022 invasion of Ukraine up until 2024 was fueled by extraordinary fiscal stimulus, import substitution and defense procurement that rerouted idle industrial capacity, these drivers are now fading. High interest rates introduced to rein in inflation, currently at 17%, have made borrowing significantly more expensive, leading to a 9% year-on-year decline in consumer lending. Households are taking on fewer new loans, which is beginning to weigh on domestic demand and private consumption. At the same time, worker shortages, worsened by mobilization, emigration and long-term demographic decline, are constraining labor supply and amplifying the broader slowdown in productive capacity. Falling oil prices and discounted exports to Asia have reduced Russia's foreign exchange earnings, cutting the government's energy-related revenues and forcing greater domestic borrowing. The state's reliance on quasi-fiscal lending through state-owned banks has increased credit risk and reduced efficiency, deepening distortions between the military and civilian sectors.

• Defense industries now absorb disproportionate labor and capital, reducing the resources that private businesses can use to invest. Defense-linked industries, especially armaments, aviation, logistics and other military transport, continue to expand rapidly, having grown 3-4% per month since the second quarter of 2025 and driving all aggregate, albeit incremental, industrial gains. However, when defense-heavy sectors are excluded, total industrial growth drops to 95.6% of 2024 levels, indicating a year-on-year contraction in non-defense production.
• Oil and gas revenues remain the primary budget anchor, constituting around 27% of the federal budget, but are increasingly volatile under sanctions and weaker demand for sanctioned Russian oil. According to the finance ministry, federal receipts from oil and gas sales fell by roughly one quarter year-on-year in September, with oil-related taxes down nearly 20% to about 483 billion rubles and combined hydrocarbon revenue declining to 582 billion rubles, the lowest monthly intake since 2020.
• The state-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting (CMASTF) has warned that Russia has entered a ''demographic pit,'' with the generation born in the 1990s entering reproductive age nearly half the size of the 1980s cohort. Between 2010 and 2024, the number of employed Russians aged 20-29 fell by almost 6 million, while those aged 50 and older rose by more than 4 million. The total population decline exceeded official forecasts by over 1 million people between 2021 and 2023, driven by the pandemic, war mobilization and outward migration of working-age people. Even in CMASTF's best-case scenario, Russia's population is projected to stagnate through 2036, implying long-term labor shortages and a shrinking base for both mobilization and domestic consumption.

Despite economic pressures, Russia will have sufficient resources to continue its current tempo of operations in Ukraine well into 2026, but Russia's flat growth trajectory will strain its war economy, narrow the Kremlin's strategic options and erode Russia's long-term economic, social and political stability. The European Union's new 19th package of sanctions, currently under deliberation, signals continued determination to tighten economic pressure on Moscow. Still, these steps are likely to have incremental effects, given Russia's entrenched barter-based trade networks, non-dollar payment systems and deepening reliance on other partners such as China and India. Moscow still has fiscal buffers through its National Wealth Fund, which will continue providing a modest cushion against revenue shortfalls and sanctions pressure. Russia also retains the ability to issue additional domestic debt. Though this may have undesirable second-round effects, such as raising inflation and tightening credit conditions, a lack of liquidity is not Russia's primary problem. At least well into next year, these factors, combined with record-low unemployment, all-time-high consumer confidence and elevated real wages, will keep domestic discontent muted. The Kremlin will continue to be able to project stability and prosecute its war in Ukraine despite the economic slowdown. Still, over time, further sanctions pressure and Russia's own internal challenges will deepen its structural stagnation and erode its industrial capacity, fiscal flexibility and technological competitiveness. As the fundamental pillars of Russia's war economy — oil receipts, credit availability and fiscal buffers — continue to erode, the Kremlin's room to maneuver in Ukraine will steadily shrink, constraining its ability to expand defense production, sustain recruitment incentives and offset battlefield losses with fiscal support. Absent a major policy shift or external shock such as higher oil prices or sanctions relief, Russia's ability to wage a prolonged, resource-intensive war will depend increasingly on coercive mobilization of manpower and tighter state control over domestic finance, which will buy the Kremlin time to prolong the war but entrench economic stagnation and accelerate long-term decline. Over time, Moscow will face harder trade-offs between sustaining military operations and meeting the social commitments that underpin political stability. Every additional ruble devoted to the war will come increasingly at the expense of pensions, wages and regional subsidies, eventually forcing a choice between painful social cutbacks or a shift to a lower-intensity, negotiated endgame in Ukraine.

• The European Union's 19th sanctions package, currently under negotiation between member states, expands existing measures targeting Russia's energy revenues, financial networks and sanctions evasion channels. It would tighten enforcement of the oil price cap, restrictions on Russia's ''shadow fleet'' of tankers, and broader trade and transit controls on dual-use goods and technology. Negotiations continue amid calls for coordination with any potential U.S. secondary sanctions on third-country buyers of Russian oil, with final approval requiring unanimity among the European Union's 27 members. China and India remain the dominant buyers of Russian oil, accounting for 85% of crude exports, 47% and 38%, respectively, followed by smaller shares from Turkey and the European Union at about 6% each.
• Russia's National Wealth Fund (NWF) rose by 20.5 billion rubles in September to 13.16 trillion rubles, equivalent to about 5.9% of GDP, according to the finance ministry. Of this, however, only 4.17 trillion rubles (roughly 1.9% of GDP) are in liquid assets, with the rest tied up in long-term or illiquid holdings such as yuan accounts and gold.
• Labor productivity in Russia remains far below that of Eastern European economies across most civilian sectors, which remain technologically outdated and structurally inefficient. According to CMASTF, output per worker in machinery manufacturing is 54% of the Eastern European average, in automotive production 35%, in construction 42%, in trade 48% and in light industry and wood processing only 45% and 30%, respectively.
• Real wages have risen more than 20% since 2022, largely driven by high demand in the defense sector, declining labor supply and state-directed wage increases. This surge has helped preserve consumer confidence and suppress public discontent, but it masks deep structural imbalances. Productivity has not kept pace, inflation remains above 8%, and labor shortages are intensifying as mobilization and emigration drain the workforce.
• Consumer confidence remains well above the 2022 lows, according to the Levada Center's August 2025 Consumer Sentiment Index. Younger Russians remain the most optimistic. 36% of those aged 18-24 reported improved household finances and 48% expect further gains next year. Optimism falls sharply with age, however. Only 12% of respondents aged 55 and older said their situation improved, while 31% reported deterioration. Regionally, residents of Moscow and other large cities were the most stable, with around 60% saying their finances were unchanged, whereas 33% of respondents in mid-sized cities reported worsening conditions, compared to 24% in rural areas.