Key Points and Summary – Russia’s wartime economy is showing severe signs of strain, teetering on the brink of recession as it grapples with a burgeoning budget deficit, falling oil revenues, and soaring interest rates.
-In the first quarter of 2025 alone, Russia’s deficit reached $25.5 billion, driven by a sharp drop in energy income and a 25% surge in government spending.
-The central bank is holding interest rates at a suffocating 21% to fight inflation, a move that is bankrupting key defense firms.
-While a total collapse is not imminent, these deteriorating economic indicators signal that Putin’s war is becoming increasingly unsustainable and nothing can be ruled out.
Just How Bad Is the Russian Economic Situation?
With sanctions on top of sanctions, oil price caps, trade barriers, and numerous other economic measures brought to bear against Russia, there is no end to inquiries about what the future holds.
The short answer is that economic conditions in Russia are likely to continue worsening, but a calamitous collapse is not imminent. But it can’t be ruled out.
The Russian economy’s greatest weakness is that it is famous for generating most of its earnings from exports, with the majority of those exports being energy-related.
Russia is a major player in global energy markets and is one of the world’s top three crude producers.
As such, it even competes with Saudi Arabia and the United States for the distinction of being the world’s top oil and gas exporter.
In 2021, export revenues from those commodities were responsible for up to 45 percent of Russia’s federal budget.
That same year, Russian crude and condensate output reached 10.5 million barrels per day and constituted 14 per cent of the world’s total supply. The People’s Republic of China, European nations, Turkey, and Brazil are among the largest importers of that same Russian oil.
The Kremlin’s major problem with oil exports now is that, for budget planning purposes, the Russian government had expected the Urals price, a Russian blend of oil that is traded at a discount to Brent, to average $69.70 per barrel in 2025.
However, due to the concerns over tariff wars, the price of Russia’s benchmark Urals brand has dropped below $50 per barrel for the first time since June 2023, according to reports in April from the Russian news website RBC.
Budget Deficits
Russia ended last year with a budget deficit of 3.5 trillion rubles or $34.4 billion, and its rainy-day fund has been depleted by over 50% since the start of the war.
The federal budget deficit for January to March 2025 was approximately $25.5 billion, which is several times larger than the deficit for the same period in 2024.
It is also larger than the planned deficit for the entire year of 2025.
This was because – not surprisingly – oil and gas revenues were down nearly 10 per cent from the same period last year, but expenses were up nearly 25 per cent.
The Telegram channel MMI that monitors Russian budget trends reports that 27.1per cent of the government’s planned annual expenditure was spent in the first quarter of 2025, an “all-time high.”
Government expenses surged in the first three months of 2024 as well, spending was more modest at that time, and the situation with revenues was much better, MMI added.
Another budget analyst, Pavel Ryabov, commented in his Spydell Finance blog that the situation with the Russian budget is not in a full crisis status yet. “Relative to budget revenues, the annual deficit is 14.5 per cent, which is in the dangerous ‘yellow zone,’ while in a budget crisis deficits balloon above 20% of revenues,” he said.
However, there are others warning that the combination of these trends could lead to a slowdown in Russia’s economic growth. A recession in the near future is a distinct possibility.
Collapse Is Possible: Russia’s Economy is Teetering
Economic Analyst Mark Sobel from OMFIF wrote late last year that in Russia, “the past decades were filled with geopolitical surprises in part triggered by weakened economies and corruption that caught intelligence officials off guard – including the fall of the Berlin Wall and the collapse of the Soviet Union,” he writes.
Predictions are difficult, particularly about the future, as Yogi Berra used to say.
However, burgeoning defense spending and manpower shortages in Russia are likely to create an increase in real wages and an employment boom, albeit artificially stimulated.
This kind of across-the-board government spending cannot be sustained indefinitely, and there is increasing evidence of economic difficulties ahead.
Some of the signs are that the major macroeconomic indicators are deteriorating and inflation is rising towards 9 per cent or greater.
Russia Might Have ‘Fatal’ Economic Problems
The value of the Russian ruble is dropping, and the official interest rate has risen to 21 percent.
This keeps the rouble from melting down completely, but it also discourages any investment and is killing major industrial firms, which cannot borrow at these rates and earn a profit.
In addition to these basic economic disparities, the rapid increases in defense spending mean that budget resources for social services, infrastructure, and education are being significantly reduced.
These are the kind of reductions in service that can prove fatal to a regime if they become more painful for the population at large.
Additionally, Western sanctions are creating significant pressures.
There are also increasing calls for Russian frozen accounts in European banks, which total some $300 billion, to be seized and given to Ukraine for reconstruction.
Russia Wants Sanctions Relief
If Russia ever agrees to sit at the negotiating table, its representatives will immediately ask for as much relief from sanctions as possible. As Sobel writes, the negotiators on the other side of the table “should remember that history has shown a remarkable tendency to discount the impact that economic failure can have in upending societies and fomenting upheaval.”
They should not give anything away that makes Moscow’s position easier without receiving something substantial in return.
About the Author: Reuben F. Johnson
Reuben F. Johnson is a survivor of the February 2022 Russian invasion of Ukraine and is an Expert on Foreign Military Affairs and Director of the Asian Research Centre with the Fundacja im. Kazimierza Pułaskiego in Warsaw. He has been a consultant to the Pentagon, several NATO governments and the Australian government in the fields of defense technology and weapon systems design. Over the past 30 years he has resided in and reported from Russia, Ukraine, Poland, Brazil, the People’s Republic of China and Australia.
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