Wartime Erosion: The Quiet Crisis Brewing in Russia’s Economy

Russia’s economy is facing a more insidious threat than the war in Ukraine: long-term erosion from debt and military spending. Despite President Putin’s high approval ratings, economists warn that the country’s structural foundations are crumbling.

Growth has slowed to 0.6% this year, down from over 4% annual expansion in 2023-24. The government’s reliance on oil export revenues – bolstered by high prices from the Iran conflict – is a temporary reprieve at best. As Chris Weafer, CEO of Macro-Advisory Ltd., noted, “The economy is under strain – it’s stagnant to the effect that it’s stable but not growing.”

Stagnation has its consequences. Consumer and business sentiment have declined since 2024-25, with indicators showing a sharp drop in consumer confidence. The Levada Center’s consumer sentiment index fell to 94 over the summer, down from 116 in spring and summer of 2025.

The war may not yet be translating into widespread dissent or protests, but this complacency belies a deeper problem: the economy is being drained by the war effort. The government’s efforts to find new sources of money have led to increased borrowing costs – with interest rates on Russian bonds as high as 17%. This means that the Kremlin needs to borrow from domestic banks, exacerbating an already-strained budget.

The deficit has spiked higher, reaching 2.8% of annual economic output by the end of July. Western sanctions have deprived Russia of new investment, making its economy less productive over time. High spending, low growth, rising debt, and elevated borrowing costs are all combining to erode the country’s structural foundations.

As Torbjörn Becker at the Stockholm School of Economics noted, “The current trajectory is unsustainable.” Tougher measures against Russia’s sanctions-evading oil tanker fleet are needed to change this course – but so far, there’s little sign of progress. The war in Ukraine may be far from over, but the quiet crisis brewing in Russia’s economy is a more pressing concern.

The war has been good for some regions, particularly those with defense factories and enlistment bonuses. However, this largesse comes at a cost: the government is essentially printing money to fund its military efforts, fuelling inflation and draining resources from civilian companies. The central bank’s decision to keep rates high has also had a chilling effect on private sector growth – many small businesses are struggling to access credit due to privileged access being afforded to defense firms.

This creates a toxic cycle where the war effort is subsidizing itself at the expense of the broader economy. While economists warn that the timing of a crisis remains highly uncertain, it’s clear that Russia’s economy is walking a tightrope. The country’s reliance on oil export revenues and high borrowing costs makes it vulnerable to external shocks – including potential changes in global energy prices or even a recession.

The Kremlin will likely continue to rely on its compliant banks to fund the war effort, while keeping rates high to contain inflation. This may stave off immediate crisis, but at what cost? The public mood is shifting, with people increasingly concerned about their standard of living and affordability of basic goods. President Putin’s approval ratings may remain high for now, but the writing is on the wall: Russia’s economy is facing a long-term crisis that will only worsen if left unchecked.

The question is no longer if, but when – and what this means for Putin’s grip on power. As the war in Ukraine continues to dominate headlines, it’s time to focus on the quiet crisis brewing in Russia’s economy. The country may be able to sustain its war effort for now, but at what cost? A financial collapse is not just a possibility – it’s a growing probability.