Key Points and Summary – Russia’s economy is teetering on the brink of recession as the war in Ukraine continues to drain its resources.
-Top Russian officials, including the head of the Central Bank, have issued rare public warnings about the country’s dire economic situation.
Tu-95 Bomber from Russia. Image Credit: Creative Commons.
-The Kremlin is grappling with a ballooning budget deficit, a “bad debt” crisis fueled by a 20% interest rate, and a civilian manufacturing sector that has been “wiped out” by a massive shift in resources to the defense industry.
-While Russia’s arms production is booming, its overall economy is showing clear signs it cannot withstand the pressure of war and sanctions indefinitely.
Bad Debt and Defense Spending: How Russia’s Economy Is Faring in 2025
When Russian Minister of Economic Development Maksim Reshetnikov said at the St. Petersburg International Economic Forum in June that the nation’s economy was headed towards a recession, he argued that action from the country’s central bank could mitigate the damage.
“According to the numbers, yes, we’ve got a cooling down now,” Reshetnikov said, adding that “current business sentiment” suggests that Russia is “on the brink of transitioning into recession.”
The pessimistic outlook was echoed by the head of Russia’s Central Bank, Elvira Nabiullina, who said that the country was in dire need of a “new model for growth.”
Various economic indicators spell trouble for Russia as it continues its offensive in Ukraine and shows no signs of agreeing to a ceasefire, ranging from rising debt to domestic manufacturing woes.
Debt Problems
Amid record-high interest rates and a slowing economy, analysts in Russia are warning that the country faces a debt crisis that could result in a wave of bankruptcies. For the second consecutive year, Russia’s interest rates have reached record highs, with the Central Bank starting rate increases in July 2024, rising initially from 16% to 21%, and settling at 20% in June this year.
A report from Bloomberg, which cited unnamed Russian banking officials, revealed how insiders are concerned that the country could enter a banking crisis within the next 12 months, driven largely by rising levels of “bad debt.”
The Moscow Times reported this week that in the first quarter of 2025, Russian companies paid 3.73 trillion rubles – roughly $48.5 billion USD – in interest. It constitutes a 58% increase year-on-year.
The Soviet-designed Su-27 all-weather fighter-interceptor was created to counter the American McDonnell Douglas F-15 Eagle. This two-seat trainer version, designated Su-27UB, entered USSR service in 1986 and still flies with Russian forces and other nations. Its NATO name is Flanker-C. Image Credit: U.S. Air Force.
“According to the government-linked Center for Macroeconomic Analysis and Short-Term Forecasting, the share of overdue corporate debt rose by 11% between September 2024 and March 2025.
The most affected sectors include coal mining, machinery repair and installation, metallurgy, and rail, ship and aircraft construction,” The Moscow Times reports.
Defense Industry Draining Resources in Russia
A report from El Pais also describes how Russia’s defense sector “has drained – and continues to drain – vast resources from a real economy mired in recession.”
While Russia’s civilian industry has been declining since late last year. All economic growth accumulated during the early days of the war is now officially “wiped out.”
“If the military sector is excluded from the equation, Russian civilian production has grown by just 1.9% over the past four years, according to data from Rosstat and the Higher School of Economics,” the report explains.
And, instead of firing up domestic manufacturing plants to replace lost imports, Russia is becoming increasingly dependent on China – the largest manufacturing economy in the world.
Meanwhile, Russia’s domestic arms industry has boomed. According to the U.S. European Command, Russia is now capable of producing 250,000 shells per month, putting it on track to build a stockpile three times as large than that of the United States and Europe combined.
Russian Su-34 fighter-bomber. Image Credit: Creative Commons.
The news comes as Russia plows ahead with plans to increase defense spending by 25% for 2025 – the fourth straight year of defense spending hikes.
With civilian industry stagnating, defense production consuming more resources, surging food prices, a potato shortage, and labor woes, Russia’s economy is showing signs it cannot resist the pressure of war and sanctions forever.
It remains to be seen, however, just how long the Kremlin is willing to endure economic pain – or if more dramatic military action could be taken to secure victory in Ukraine. Even in the event of a surprise victory in Ukraine, however, it’s unclear just how easy it would be for the Russian economy to recover in the short term.
After all, U.S. President Donald Trump is already weighing new sanctions, and there are no signs existing sanctions will be removed any time soon.
About the Author:
Jack Buckby is a British author, counter-extremism researcher, and journalist based in New York. Reporting on the U.K., Europe, and the U.S., he works to analyze and understand left-wing and right-wing radicalization, and reports on Western governments’ approaches to the pressing issues of today. His books and research papers explore these themes and propose pragmatic solutions to our increasingly polarized society. His latest book is The Truth Teller: RFK Jr. and the Case for a Post-Partisan Presidency.
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