Russia’s Wartime Economy Faces Long-Term Erosion

Russia’s wartime economy is coming under increasing pressure as massive military spending widens the budget deficit, while consumers and businesses are becoming more pessimistic and economic growth slows. However, economists cited in an Associated Press (AP) analysis said these developments do not currently signal an imminent financial crisis or economic collapse.

According to AP, Russia is still benefiting from strong oil export revenues as oil prices remain elevated amid the Iran war. Those revenues are allowing the Kremlin, at least for now, to secure enough money to finance its four-and-a-half-year invasion of Ukraine.

The AP report also noted that low unemployment and continued government spending and financial support in poorer regions are helping contain consumer dissatisfaction. The situation supports the Kremlin’s narrative of economic stability as Russia’s parliamentary election, which began Friday and concludes Sunday, gets underway.

But economists cited by AP warned that longer-term economic problems are gradually weakening the foundations of the Russian economy and could eventually contribute to a major crisis.

Consumers and Businesses Grow More Pessimistic

AP reported that indicators of consumer sentiment have declined from their peak in 2024-25, when increased military spending helped drive economic growth and wage increases.

More recently, consumers have faced higher gasoline prices and fuel shortages after Ukrainian drone attacks damaged Russian oil refineries, according to AP. The report also said many small businesses have lost inventory and customers following strikes targeting online retailers Wildberries and Ozon.

Economic growth has also slowed significantly. According to AP, Russia’s economy expanded by more than 4% annually in 2023-24, but the government now expects growth of only 0.6% this year. The economy contracted during the first quarter before recovering somewhat in the second quarter.

The AP analysis suggests that high oil revenues are providing Russia with important financial support for its wartime spending for now. But the combination of sustained military expenditure, a widening budget deficit, weaker economic growth and declining consumer and business confidence is creating growing long-term pressure on the Russian economy.

Source: The Associated Press (AP)