Russia on the verge of economic collapse: how 40 months of war destroyed the Kremlin's financial stability

War not only redraws borders, but also breaks economies. Today, Russia, which a few years ago boasted of "stability", has found itself in a financial trap, where each new day of hostilities is another step towards the abyss. Depleted reserves, rampant inflation, stagnation in the civilian sector and the illusion of "victories" against the backdrop of rising prices - all this has become a new reality for a state that recently claimed the role of a global player. Why the Russian economy can no longer withstand the pace of war, how the Kremlin is trying to hide the crisis, and what awaits ordinary Russians - in a large analytical report.

Stagflation and the double trap: how war is eating away at the Russian economy

More than three years after the invasion of Ukraine, the Russian economy has found itself in a state that experts call “stagflation”: a combination of stagnant production and high inflation. The official rate of price growth is 10% per year, but independent researchers estimate real inflation to be much higher. The central bank, balancing between the Kremlin’s demands and attempts to contain prices, is forced to make compromises that only deepen the crisis. The latest cut in the discount rate to 20% was a concession to political pressure, but it did not solve any of the fundamental problems — the economic situation in Russia increasingly resembles a dance on a powder keg, According to analysts, the country is teetering on the brink of default..

The military boom and its limits: why the "war economy" no longer works

The first two years of the war, the Kremlin tried to compensate for losses through military orders, raising salaries for mobilized personnel, and stimulating the defense industry. This had a short-term effect: nominal incomes increased, and unemployment remained at a record low. However, by 2025 it became obvious that this “boom” had exhausted itself. Real wages were being eaten up by inflation, and consumer demand was falling. According to Russian research centers, seven out of ten companies experienced a sharp decline in demand for non-essential goods, and wage delays and loan defaults became widespread.

At the same time, military spending already exceeds 40% of the federal budget, and the reserves accumulated before the invasion have been effectively exhausted. The Kremlin’s economic advisor Maxim Oreshkin admitted that the model that ensured growth in previous years has “reached its limit” and requires a radical change. Even the Kremlin recognizes the end of the military boom, because further increases in spending are no longer effective. and this reflects a general crisis of strategy.

The illusion of well-being: why official statistics do not reflect the real situation

The Russian authorities continue to report on “historic” achievements: the average salary exceeded 100 rubles for the first time, and unemployment is the lowest in decades. However, even official statistics admit that prices have increased by 24% in two years, while real incomes have remained at the level of 2021. Sociological surveys show that only 10% of Russians have felt an improvement in their financial situation, while one in five believes that their well-being has worsened.

Experts emphasize that the government is deliberately underestimating inflation to avoid the need to increase salaries for state employees and pensions. This saves money, but leads to growing social discontent and a loss of trust in official data.

Budget deficit and depletion of reserves: how much longer will the Kremlin last?

When planning for 2025, the government hoped to keep the budget deficit at 0,5% of GDP, but in the middle of the year the forecast had to be revised - now the deficit is expected to be 1,7%. Liquid reserves in the National Welfare Fund are less than four trillion rubles - this is approximately equal to the expected deficit for the year. Economists warn: if the pace of spending does not decrease, in 12-15 months the Kremlin will be forced to either sharply reduce military spending or look for new sources of financing, in particular through the devaluation of the ruble.

At the same time, even high oil and gas prices, which temporarily supported the budget after the escalation in the Middle East, are not able to compensate for losses from sanctions and falling exports. Every $10 decrease in oil prices costs the budget $17 billion, which is equivalent to 0,8% of GDP. Therefore, even minor fluctuations in the energy market can be fatal for Russian finances. Russia's budget stability depends on external factors, and even government economists emphasize this in their forecasts for the coming year.

Stagnation of the civilian economy: what is happening outside the defense sector

The defense industry has remained the sole “engine” of the economy since 2022, but the civilian sector has long been in a state of recession. Investment in the production of machinery and equipment has stopped, the construction industry has shrunk, and the consumer market is in decline. According to analysts, the growth of civilian production over four years was only 1,9% — several times less than in neighboring countries. Car sales fell by 25% in half a year, and clothing stores are recording a decrease in revenue of 30–35%. Loan debt is growing, and salary delays have become commonplace for millions of workers.

At the same time, instead of the import substitution that Putin so often talks about, the Russian market is increasingly dependent on supplies from China and other countries that have not joined the sanctions. This makes the economy vulnerable to any changes in foreign policy and fluctuations in the ruble exchange rate.

Credit crisis and falling consumer demand: a signal for recession

Despite state subsidies to the defense sector, lending grew by only 2025% in 1. According to HR companies, the number of vacancies has fallen to a minimum since the beginning of the war, and salary delays are three times more frequent than in 2021. More than 8,8 million Russians cannot pay loans even for 90 days. Studies show that seven out of ten companies in the first quarter of 2025 recorded a sharp drop in demand for non-essential goods, and the car and household appliance markets shrank by a quarter.

These trends indicate the approach of not just a technical recession, but a deep consumer market crisis, which could trigger a larger economic downturn.

War and the budget: how military spending eats up the future

The military sector has become the main consumer of resources: more than 40% of the federal budget goes to defense, and the salaries of mobilized people exceed €2 per month. This creates the illusion of well-being for a part of the population, but at the same time deprives the economy of prospects for development after the war. Experts warn that if the fighting stops, the return of soldiers to the labor market could cause a social explosion, since most will not want to work for a quarter of their current salary.

In addition, rising military spending is forcing the government to cut spending on healthcare, education, and social programs, which are already being felt by millions of Russians.

Sanctions, oil and China: external factors of survival

Western sanctions are gradually reducing export revenues, and the fall in oil and gas prices in the first half of 2025 was a real shock for the Kremlin. Every $10 price drop reduces the budget by $17 billion, which is almost 1% of GDP. The escalation in the Middle East, which raised energy prices, temporarily helped to save the situation, but experts warn that this is only postponing the crisis.

Instead of real import substitution, the Russian economy is increasingly dependent on supplies from China, making it vulnerable to changes in geopolitics. If Beijing were to reconsider its position, the consequences for the Russian economy could be catastrophic.

Ruble devaluation and the risk of a new inflationary wave

One of the few tools the Kremlin has left is devaluation of the national currency. Devaluation of the ruble allows the budget to increase revenues from exports, but at the same time accelerates inflation and reduces the purchasing power of the population. According to analysts, the government may resort to another wave of devaluation in the coming months if it does not find other sources of financing the deficit.

Such a policy is beneficial to exporters and the state, but painful for ordinary Russians, who already spend most of their income on food and utilities.

Social consequences: growing dissatisfaction and loss of trust

Sociological studies record growing discontent among Russians: only 10% believe that their financial situation has improved, and 20% believe that it has worsened. Delays in wages, rising prices, and cuts in social programs are undermining trust in the authorities. Spontaneous strikes are increasingly common in large cities, and protests over cuts in medical and educational services are common in the regions.

Experts warn that if the economic situation does not improve, the risk of social upheaval will increase, which could challenge the stability of the regime.

What awaits the Russian economy: scenarios for the coming year

Analysts predict that if the war continues at the current pace, the Kremlin’s reserves will last another 12–15 months. After that, the government will be forced to either drastically reduce military spending or look for new sources of revenue — for example, through tax increases, a new wave of privatization, or another devaluation of the ruble. In any case, even if hostilities cease, the economy will face a painful transformation: the return of mobilized people to the labor market, rising unemployment, and the need to rebuild destroyed sectors.

The optimistic scenario involves a gradual recovery through investment and reduced military spending, but this requires political will and real reforms, which the current regime is not ready for.

Conclusion: War as an Economic Verdict

Forty months of war have transformed the Russian economy from a “fortress” into a shaky house of cards, where each new blow is another step towards collapse. Depleted reserves, growing deficits, stagnation in the civilian sector, and social tensions all indicate that the “war economy” model no longer works. The Kremlin may be able to maintain the illusion of stability for a while longer, but the cost of that illusion is rising every day. For millions of Russians, the war has already become not only a political but also a personal economic disaster.

Ahead lies a period of painful changes that will determine not only the future of the economy, but also the fate of the country itself. Whether Russia will be able to find the strength for reforms or will plunge into an even deeper crisis will be shown by the coming year.