How long can the Russian economy sustain funding the war in Ukraine? Despite facing US and EU sanctions and an impending recession, Russia's ability to fund the war remains resilient, according to experts. Vladislav Inozemtsev, a renowned economist, explains that the recession has minimal impact on Russia's economic and political stability. The Russian economy, bolstered by military spending, is currently navigating a challenging landscape. It is experiencing a combination of high inflation and a significant economic slowdown. Inflation peaked at 10.3% in March and decreased to 8% in September, still surpassing the Bank of Russia's 4% target. Despite this, the central bank has taken aggressive action, cutting its benchmark rate by 50 basis points to 16.5% on October 24th, a move that surprised markets anticipating a pause. High interest rates and a tight labor market (with an unemployment rate of 2.1%) have constrained growth. The economy expanded by 1.4% year-on-year in the first quarter of 2025 and 1.1% in the second quarter, a decline from the 4.1% annual growth in 2023 and 2024. Business sentiment is also weakening, with the S&P Global Russia Composite PMI falling to 46.6 in September, marking four consecutive months of private sector contraction and the lowest reading since October 2022. Oxford Economics predicts a weak growth rate of 0.2% in the third quarter. However, the Russian economy has adapted to the war and maintains a state of balance, according to a recent report by the Center for Analysis and Strategies in Europe (CASE). The report forecasts a prolonged period of political and economic stagnation in Russia, with limited development or prosperity over the next decade. The question arises: do sanctions work? In October 2025, the EU and US imposed new sanctions against Moscow, adding to the existing restrictions since Russia's invasion of Ukraine in 2022. The US targeted Rosneft and Lukoil, while the EU banned Russian liquefied natural gas (LNG) and oil imports from Rosneft and Gazprom Neft. The EU also implemented measures to prevent Russia from circumventing sanctions, investing in the country, and receiving certain financial services and infrastructure. These actions significantly increase pressure on Russia's war economy. However, the Kremlin believes these measures will have no impact on Russia's economy or war strategy. Analysts highlight Russia's challenging position due to its export of crucial commodities like oil, gas, fertilizers, wheat, and precious metals. Despite sanctions, Russia has found ways to circumvent them, including using a 'shadow fleet' of oil tankers and boosting exports to China and India. Experts debate whether sanctions will halt Russian war efforts, even if they push the economy into recession. Elina Ribakova, a non-resident fellow at Bruegel, notes that energy products, while important for the domestic market and exports, are not a significant revenue source for the war budget. CASE figures confirm a sharp decline in the federal budget's reliance on oil and gas, from over 50% in 2011-2014 to 25% by mid-2025. This decline is attributed to falling oil prices, reduced production, a strengthening ruble, and Western sanctions. Ukrainian drone attacks on Russian oil refineries have minimal impact on export volumes, as Russia sells both crude and processed oil. Income from hydrocarbon production continues to decrease due to declining prices. In September, the budget received RUB 582.5bn (€6.3bn), 25% less than the previous year. Inozemtsev argues that sanctions have little impact, as Putin's war expenses are funded by the Central Bank's printing of rubles or tax collections from Russian businesses, which increased by 13.2% year-on-year in October. In the long term, reduced purchases by India and China may threaten key revenue, but even a one-third decrease in Russian oil exports to these countries won't significantly affect the military for at least a year. Oxford Economics experts agree, stating that the war could last years, and Russia still holds a substantial sovereign fund. Government borrowing on the domestic market is a key source of income to finance the expected 2.6% GDP budget deficit, with national debt projected to reach 17.7% of GDP by the end of 2025. Inozemtsev concludes that private deposits in Russian banks are sufficient to sustain the military budget, currently five times its size. He advises against expecting a quick end to Putin's war due to decreased exports, suggesting we revisit this topic in late 2027. The future of Russia's exports remains uncertain, with Ribakova suggesting that Russia will likely continue exporting oil with larger discounts and through more intermediaries to obscure its origin.
