Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The Russian economy is balancing on the edge of recession and facing a new wave of US and EU sanctions, yet experts indicate these factors are unlikely to immediately curb Moscow’s capacity to finance the ongoing war in Ukraine. This assessment, published in late October 2025, highlights Russia’s economic adaptability despite internal challenges and external pressures. Vladislav Inozemtsev, co-founder of the Center for Analysis and Strategies in Europe (CASE), stated that a recession “means almost nothing for Russia’s economic and political stability these days.”
Russia’s Economic Outlook
Despite increased military spending, the Russian economy is showing signs of sliding towards recession or stagflation. Inflation remains high at 8% in September, double the Bank of Russia’s 4% target, coupled with a sharp economic slowdown. The central bank surprised markets by cutting its benchmark rate by 50 basis points to 16.5% on October 24, its fourth consecutive cut.
Growth has been constrained by high interest rates and acute labour shortages, with unemployment at 2.1%. The economy expanded by 1.4% year-on-year in the first quarter of 2025 and 1.1% in the second quarter, a significant decline from 4.1% annual growth in both 2023 and 2024. Business sentiment has also weakened, with the S&P Global Russia Composite PMI falling to 46.6 in September, marking the fourth straight month of private sector contraction.
Economists at Oxford Economics indicated that Russia has not yet officially entered a recession, defined as two consecutive quarters of contraction. However, they anticipate growth in the third quarter of 2025 to be as weak as 0.2% quarter-on-quarter. Inozemtsev expects a moderate recession in the coming months, forecasting flat annual growth for 2025 and a contraction of between 1% and 1.4% in 2026.
Sanctions and Their Efficacy
In October 2025, both the European Union and the United States imposed new sanctions against Moscow. The US directly sanctioned Russia’s two largest oil companies, Rosneft and Lukoil, and their subsidiaries. The EU adopted its 19th sanctions package, which includes a total ban on Russian liquefied natural gas (LNG) starting in 2027, and a ban on Rosneft’s and Gazprom Neft’s oil and gas imports into the EU.
Additional measures aim to prevent Russia from circumventing previous restrictions, prohibiting investment, certain financial services, infrastructure, and trade in critical war-supporting materials. While the EU stated these measures “substantially increase the pressure on the Russian war economy,” the Kremlin maintains they will have no impact. Experts question the effectiveness of sanctions given Russia’s crucial commodity exports and its ability to find alternative trade routes, such as a “shadow fleet” of oil tankers and increased exports to China and India.
Financing the War Effort
Experts suggest that while sanctions impact Russia’s energy revenues, these are not the primary source for funding the war. Elina Ribakova, a non-resident fellow at Bruegel, noted that energy products are not “a substantial source of revenues for the budget to continue the war.” CASE figures show that the federal budget’s reliance on oil and gas revenues dropped from over 50% in 2011–2014 to just 25% by mid-2025.
This decline is attributed to falling oil prices, reduced Russian oil production, a strengthening rouble, and Western sanctions. Inozemtsev highlighted that Ukrainian drone attacks on Russian oil refineries do not significantly impact export volumes, as Russia can simply increase crude oil exports. Despite hydrocarbon revenues being down 25% year-on-year in September 2025, Inozemtsev stressed that President Putin pays workers and soldiers in roubles, which the Central Bank can print or the tax service collects from Russian businesses, with collections up 13.2% year-on-year in October.
In the long term, reduced purchases by India and China could threaten key revenues, but experts from Oxford Economics agree that the military would not feel such an impact for at least a year. Russia’s sovereign fund, holding 5.9% of GDP in September (including 1.9% in liquid assets), and domestic borrowing are crucial for financing the budget deficit, expected at 2.6% of GDP. Russia’s national debt to GDP is projected to be 17.7% by the end of 2025, indicating a stable fiscal outlook.
Inozemtsev concluded that private deposits in Russian banks are substantial, estimated at “five times the entire military budget for 2025.” He cautioned against hoping that a decrease in Russian exports would soon undermine President Putin’s ability to wage war, suggesting such an effect might not be seen before late 2027. Ribakova added that Russia will likely continue to export oil, albeit with larger discounts and through more intermediaries to obscure its origin, particularly in transactions with China, which are challenging to monitor.
Key Takeaways
The consensus among analysts suggests that while Russia’s economy faces significant headwinds and potential recession, its ability to fund military operations is likely to persist for the foreseeable future. This resilience is attributed to a combination of economic adaptation, alternative revenue streams, and a robust domestic financial capacity, challenging the immediate efficacy of Western sanctions in halting the conflict.
