Five years into the full-scale war, the Russian economy has accumulated serious systemic problems. But that still does not mean it will collapse tomorrow: degradation takes time, and many of the mines that have been laid are slow to detonate. Economic indicators can genuinely be presented in an optimistic light as evidence of strength and resilience. But it is equally true that they conceal vulnerabilities and threats — above all for ordinary Russians. We break down what is happening in the economy through five examples: the budget deficit, slowing inflation, low unemployment, a strong ruble, and GDP trends.
The budget deficit is growing. But will the Middle East war fix it?
The war in the Middle East upended the government’s budget plans: spending cuts and a reduction of the cutoff price in the fiscal rule that had been under discussion since winter are now being shelved. The grim outlook brightened sharply as oil prices soared: in the first half of April, Russian Urals crude averaged $106.3 per barrel, against the $59 built into the budget.
Donald Trump’s decision to go to war with Iran and Tehran’s closure of the Strait of Hormuz swung the pendulum of Russia’s treasury sharply in the opposite direction. Anticipating additional oil and gas revenues, the government in March 2026 ramped up budget spending by 44 percent compared to March 2025 — 4.7 trillion rubles versus 3.25 trillion — and above both February (4.1 trillion) and January 2026 (4.1 trillion). Government procurement, including defense orders, grew by nearly 40 percent year-on-year in the first three months of the year.
At the same time, the Finance Ministry suspended purchases of foreign currency (yuan) and gold from oil and gas windfall revenues for the National Wealth Fund (NWF) from March 30 until May. Russian authorities allowed themselves to revert to the pro-inflationary wartime fiscal policy of spending money here and now.
The federal budget deficit for the first three months of 2026 reached 4.6 trillion rubles — 2.3 times the first-quarter 2025 deficit of 1.9 trillion. Oil and gas revenues for March are calculated on a February baseline, so the closure of the Strait of Hormuz has not yet shown up in those figures or in the deficit.
The first April data show that oil and gas revenues to the Russian budget in April (calculated on a March baseline) totaled 855.6 billion rubles — nearly 40 percent more than in March, but 21.2 percent less than a year earlier. A large portion of the gains from the Middle East war has so far flowed to Russian oil companies, as the government was returning money to them through the damper mechanism and through reverse excise taxes. The Russian budget ultimately received only an additional 21 billion rubles. The price of Russian Urals for tax purposes in April settled at $77 per barrel, against a baseline of $59; in May it is expected to reach $95. Finance Minister Anton Siluanov expects an additional 200 billion rubles in oil and gas revenues.
The deficit figures are large, but based on the current picture the government should be able to meet its budget plan, which provides for a deficit that Prime Minister Mikhail Mishustin has called “acceptable” — 3.8 trillion rubles, or 1.3 percent of GDP. The key question is what comes next: at what cost can the budget and the economy sustain another year of war? We will return to that below.
Inflation is slowing. But what happens if the central bank cuts the key rate?
A double-digit key rate, slowing economic growth, and weakening consumer demand have combined to produce a slow but real decline in inflation. Unfortunately for Russia’s central bank, inflation is tracking along the upper end of the regulator’s forecast — at around 5.5 percent — which narrows the room for further rate cuts, central bank Governor Elvira Nabiullina said following the regulator’s April board meeting.
Russia’s central bank cut the rate by half a step, to 14.5 percent annually, while raising the lower bound of its forecast for the average key rate in 2026 from 13.5–14.5 percent to 14–14.5 percent — a signal that cuts are already close to their limit.
The high rate is hitting civilian sectors hardest, as credit remains too expensive throughout the economy. Overdue debt among Russian enterprises has exceeded eight trillion rubles, equivalent to 3.8 percent of GDP, compared with 2.4 percent of GDP at the start of 2022.
Inflation expectations, according to central bank surveys, remain high and have consistently held at around 13 percent, meaning any easing of the key rate would trigger a rapid, nearly lag-free acceleration in price growth, said Oleg Vyugin, an economist and former deputy finance minister and first deputy governor of Russia’s central bank.
The head of Swedish military intelligence, Thomas Nilsson, claimed in an interview with the Financial Times that the Kremlin was systematically falsifying statistics and that the central bank was understating inflation, which he said was running at around 15 percent. But a price acceleration of that magnitude would need to be confirmed by other economic indicators: the ruble would be far stronger in that scenario, import figures would be higher, and retail trade would be contracting far more dramatically, argued Alexander Kolyandr, a researcher at the Center for European Policy Analysis (CEPA). “Inflation of that magnitude acts as a tax on household consumption, yet the physical volume of retail trade is falling only slightly — which is again consistent with a slowing economy, not one drowning in a double-digit price spiral,” he said.
Unemployment is at a record low. But does that actually help the economy?
Vladimir Putin regularly cites record-low unemployment as a sign of economic resilience. “The unemployment rate, despite the overall economic dynamics, continues to hold at a low level. Unemployment is currently at 2.1 percent. This also reflects the fact that our labor market is changing, with flexible, platform-based forms of employment developing,” he said at an economics meeting in mid-April. In reality, the extremely low unemployment figure reflects a severe labor shortage — a serious problem in itself — driven by the war, low birth rates, and a decline in migration from Central Asia that is not offsetting Russia’s natural population decline.
At the same time, the number of workers in vulnerable labor market positions — those employed part-time — is growing, analysts at the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) say. The decline in actual labor utilization is occurring alongside declining capacity utilization. According to calculations by Russia’s central bank, the number of workers employed part-time or placed on forced leave in the fourth quarter of 2025 reached 1.58 million — the highest level since spring 2020, when Russia introduced pandemic restrictions due to COVID-19.
Children not born because of men killed in the war, or for other reasons, will not enter the labor market in the 2040s and 2050s; the war has thus turned the labor shortage into a structural problem. The population continues to age, meaning demographic pressures will carry long-term consequences — up to and including the need for another increase in the retirement age, driven by insufficient funds to sustain pension payments without eroding their purchasing power. The NWF was formally established in 2008 to reduce the pension burden on the federal budget, but more pressing uses were found for oil and gas windfall revenues — covering the growing budget deficit caused by outsized military spending. The NWF’s liquid assets have shrunk from 9.738 trillion rubles as of March 1, 2022 to 3.889 trillion rubles as of April 1, 2026 — a decline of more than two and a half times.
The ruble remains strong. But why does that displease both exporters and banks?
The Russian ruble, buoyed by the suspension of currency purchases for the NWF’s sovereign reserves under the fiscal rule and by soaring oil prices, has strengthened from 82 to 75 rubles to the dollar since late March.
A strong ruble displeases the Finance Ministry — it reduces the ruble value of oil and gas budget revenues — and state banks alike. The equilibrium rate should be in the range of 98–105 rubles to the dollar, Sberbank chief Herman Gref believes.
The public, on the other hand, welcomes a strong ruble because it holds down the cost of imports and non-food inflation.
The Finance Ministry’s resumption of currency purchases from May will not cause a sharp weakening of the ruble — at most it will slow further appreciation, said economist Dmitry Polevoy. Regular operations under the fiscal rule absorb about two-thirds of the oil and gas sector’s revenue increase, leaving a third with the oil and gas companies. Combined with higher revenues from other exporters not covered by the fiscal rule, this should increase the supply of foreign currency on the market, he said. Demand for foreign currency, however, is unlikely to rise significantly given the weakening economy and, consequently, imports, as well as the effects of the high rate and sanctions restrictions.
“So the resumption of regular operations poses no threat to the ruble. Finance Ministry operations merely eliminate the risk of excessive ruble appreciation toward 70 to the dollar and below, but do not remove it entirely. If the external environment remains the same (a tax oil price of around $95–100 per barrel) through the end of the second half of 2026, the ruble could even briefly strengthen from its current 75–76 to the dollar in May and June,” Polevoy said.
The economy is slowing because of a ‘calendar factor.’ But why does no one believe that?
In the first quarter of 2026, Russian GDP fell 0.3 percent year-on-year, according to the Economic Development Ministry’s estimate. The government explained to Putin, and he repeated, that the cause was a calendar factor: “We know this well — in January of this year there were two fewer working days than last year, and in February there was one fewer working day.”
But the economy is not slowing because of two working days in January and one in February — and no one seriously believed that. Putin himself acknowledged as much, adding that “obviously, it is far from only those days that determine business and investment activity in the country,” without specifying what else he had in mind.
By 2025 it had already become clear that the economy was exhausted by the war, with its labor, financial, and material reserves running out. In industry, growth persists only in defense sectors generously supported by the state budget; most civilian production is stagnating or declining, with sectors oriented toward investment demand suffering the sharpest falls. In 2023–2024, GDP growth fueled by unchecked military spending — which drove inflation — held above 4 percent, a level not seen in the entire preceding decade except for the pre-war year of 2021. In 2025, the economy slowed to 1 percent growth.
For 2026, the Economic Development Ministry is for now maintaining its September forecast of 1.3 percent GDP growth. Russia’s central bank expects growth in the range of 0.5–1.5 percent. The IMF in mid-April, against the backdrop of soaring oil prices, raised its forecast for Russian GDP growth from 0.8 percent to 1.1 percent. Looking conservative by comparison is the updated CMASF forecast, revised from 0.9–1.3 percent in the March version to 0.5–0.7 percent in the April version, as the center’s report shows.
Mid-2026 will mark another bifurcation point, in the view of Vyugin — the former deputy finance minister and first deputy governor of Russia’s central bank: continuing the course of high budget spending primarily directed at financing the war in Ukraine “may leave no hope for even modest but sustainable economic growth in 2027, and the need to return to fighting inflation will become more acute than ever.” “This will no longer be a technocratic choice but a purely political one between continuing to finance the ’special military operation’ and a peace agreement,” he said.
Choosing to continue the war in Ukraine would, in Vyugin’s view, require another round of tax increases as part of the preparation of the 2027 budget. A further decline in the country’s economic potential would be inevitable, and restrictions on the use of assets in the civilian sector — meaning an expansion of state intervention in the private economy — would be highly likely, the former deputy central bank governor warned.
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Yulia Starostina
