Russia’s wartime economy faces uncomfortable reality check Analysis based on reporting by The Financial Times

This week, Vladimir Putin returned from China appearing triumphant: a handshake with India’s Narendra Modi, a “no-limits” partnership with Xi Jinping, and a landmark Moscow-Beijing gas pipeline deal. Yet behind the photo opportunities and diplomatic victories, Russia’s wartime economy is flashing increasingly urgent warning signs, suggesting that the Kremlin’s battlefield optimism may be colliding with fiscal reality.

In the early stages of the full-scale invasion of Ukraine, Russia’s economy defied expectations. Robust oil and gas revenues, combined with high military spending, buoyed wages and domestic demand. For a time, the government appeared able to channel abundant energy profits into social programs, sustaining a veneer of stability. But as The Financial Times reports, the combination of escalating military expenditures, slowing economic growth, a strong rouble, and fluctuating energy prices is forcing Moscow to confront hard fiscal choices.

Energy revenue, once the lifeblood of the state, has begun to contract. Between January and August, earnings from oil and gas dropped 20% compared with 2024. Analysts now forecast GDP growth of just 1.4% in 2025, down sharply from 4.3% in 2024, with projections indicating that Russia may struggle to exceed 2% growth over the next three years. The central bank has even warned that a severe recession is a plausible scenario. Aleksandra Prokopenko of the Carnegie Russia Eurasia Center highlights a stark shift: “When reserves and oil revenues were plentiful, Russia had the illusion it could plug any social problem with money. But now that money is no longer available at the same scale, so it’s time to set priorities.”

The budgetary strains are increasingly visible. The deficit for the first half of 2025 reached Rbs4.9tn ($61bn), more than four times the initial target, driven by a sharp rise in spending. Modest cuts are expected in non-military infrastructure, subsidies to loss-making enterprises, and other non-core areas, potentially freeing Rbs2tn ($2.5bn). The remaining shortfall is likely to be covered through borrowing, which has become more affordable after the central bank cut interest rates from a record 21% to 18%. Putin himself has insisted that debt levels remain “low,” signalling a preference for continued deficit financing rather than deep fiscal retrenchment.

Yet underlying challenges persist. Labor shortages, disrupted cross-border payments, inflation pressures, and sector-specific strains—particularly in coal, rail, and banking—highlight structural vulnerabilities. A strong rouble, while easing inflation, complicates exports and limits fiscal flexibility. Meanwhile, wartime spending priorities remain sacrosanct: military expenditures have nearly doubled in nominal terms since 2022, reflecting a continuation of Stalin-era doctrine prioritizing the front line above all else. Even a potential ceasefire would not instantly reduce these commitments, as armoured vehicle reserves are so depleted that factories would need years of full-capacity production to replenish them.

In essence, Russia’s economic picture is one of cautious pragmatism masked by strategic optimism. Diplomatic wins and energy deals provide temporary relief, but they cannot substitute for fundamental adjustments. The Financial Times paints a portrait of an economy increasingly constrained by its own wartime choices—a nation at a crossroads, balancing military imperatives with the harsh realities of fiscal and structural limits.

By Vugar Khalilov