Russia’s Economic Slowdown: Could It Force Putin’s Hand in Ukraine?
From 2022 to 2024, the Russian economy benefited from increased government spending linked to the war effort, particularly through the growth of the defense industry. This was accompanied by wage increases in certain sectors, as well as significant payments of bonuses and allowances to military personnel and their families, helping to maintain consumption levels.
Shifting Economic Tides
Since 2025, this period of strong economic stimulus has waned, and several indicators suggest a more pronounced period of stagnation for the Russian economy. The progressive strengthening of Western sanctions, combined with falling oil prices, has led to a significant decrease in revenue.
Revenue from oil and petroleum product exports has more than halved since 2022. This resulted in a 24% decrease in tax revenues related to hydrocarbon sales in 2025. Budgetary revenues were approximately 7.5% below initial forecasts, while public spending exceeded projections by around 3.5%.
A Manageable, Yet Concerning, Deficit
This contributed to a rise in the public deficit, which reached 2.6% of GDP last year, compared to 1.7% in 2024. While seemingly moderate by international standards, Russia’s limited access to international financial markets restricts its funding sources.
Increased reliance on domestic savings comes with high interest rates: Russian ten-year sovereign bonds yield around 14.2%, four times more than those of France.
Policy Responses and Their Impact
Russian authorities aim to reduce the public deficit to 1.6% of GDP in 2026. Announced measures include a two-percentage-point increase in the VAT rate, which came into effect in January. This measure, increasing the tax burden on consumption, could weigh on economic activity in the short term.
Signs of Weakening Domestic Demand
Several indicators already signal a slowdown in domestic demand. Between January 1st and February 15th, household consumption expenditure in volume terms decreased compared to the same period last year, notably by 21% for electronics and mobile phones, 18% for building materials, 16% for furniture, and around 10% for household appliances and clothing, according to Sberbank data.
these expenditures are reportedly up 1.8% since the beginning of 2025. Even though, these volume data are calculated based on an official inflation rate of 6%, which is likely lower than reality.
Contraction in Real Estate and Credit
The real estate market also shows signs of contraction. In January, approximately 270,000 transactions were recorded on the secondary market nationwide, a volume about half that observed in 2022.
According to data from the Central Bank of Russia, household borrowing has decreased significantly. Businesses have also reduced their borrowing, despite an increase in orders in the arms sector.
Will Economic Pressure Influence Putin’s Decisions?
Could the marked deterioration in the economic situation ultimately influence the choices of the Russian leadership regarding the war in Ukraine, despite the tight control exercised over information within the country?
Last week, at the Munich Security Conference, Friedrich Merz stated: “My personal assumption is that this war will only end when Russia is at least economically, and perhaps also militarily, exhausted.”
Frequently Asked Questions
- What is driving the Russian economic slowdown? Western sanctions, falling oil prices, and a decrease in government stimulus are key factors.
- How significant is Russia’s public deficit? While seemingly moderate at 2.6% of GDP, limited access to international financing makes it a concern.
- What measures are being taken to address the economic challenges? A VAT increase has been implemented, but it could further dampen economic activity.
- Is consumer spending declining in Russia? Yes, data from Sberbank shows decreases in spending on various goods, including electronics, building materials, and furniture.
Pro Tip: Keep a close watch on oil prices and sanction enforcement, as these will be critical indicators of Russia’s economic trajectory.
Did you know? Russia’s ten-year sovereign bond yields are currently over four times higher than those of France, reflecting increased risk perception.
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