Western sanctions have proved highly effective in dismantling Russia’s economic resilience limiting access to Western technology and financial markets, constraining output and creating a “demand outstripping supply” scenario that fuels inflation. This cycle breeds rising deficits, inflation, and stagnation. Ending the Ukraine conflict could help break this cycle, but Putin’s current stance suggests he remains committed – at least for now.
Economic sanctions and internal hardships have curtailed Russia’s capacity for large-scale military operations.
Nonetheless, Putin can sustain “terrorist warfare” – missile and drone strikes, tactical advances, and propaganda, indefinitely with current resources.
Recent proposals to cede parts of Donbas through negotiations indicate an acknowledgment of military limitations. The upcoming 2026 federal budget will reveal whether Putin’s strategy remains sustainable under economic strain.
While Putin may cling to his current approach, the deepening crisis might force a strategic shift – potentially toward ending the war if international pressure and alternative options run out.
Economic stagnation: a new reality
Despite initial growth of 4.1% in 2023 and 2024, Russia’s economy hit a wall in 2025. Official forecasts have been sharply revised downward: the government’s September 2025 projection now estimates just 1.2% growth for the year, down from an earlier 2.5%.
The National Wealth Fund (NWF), established in 2004 as an emergency reserve, has shrunk from $116.5 billion in February 2022 to just $49 billion in September 2025. This is below the $53 billion federal budget deficit accumulated in the first eight months of 2025 alone (roughly 2% of GDP).
Experts project a budget deficit exceeding 9 trillion rubles ($110 billion) in 2025. As former Central Bank Deputy Chairman Oleg Vyugin warns, only monetary emission – simply printing money, can bridge this gap, risking further inflation.
Finance Minister Anton Siluanov admits that domestic borrowing remains prohibitively expensive, yielding only about $3 billion so far in 2025. Potential tax hikes, including raising VAT from 20% to 22%, threaten to increase inflationary pressures. Despite a brief dip to 8% annualized inflation in mid-September 2025 inflationary pressures remain high. Service prices and non-seasonal foods increased above 11% in August, with non-food goods prices climbing again after earlier Central Bank credit restrictions. Key drivers include the expanding budget deficit, a weakening ruble, and a severe labor shortage.
The Central Bank’s cautious rate cuts – from 21% in June to 17% in September, have been met with skepticism. Markets reacted negatively when the rate was only reduced by 1% instead of the anticipated 2%, reflecting concerns about fiscal stability and inflation. Since January 2025, the ruble has appreciated by about 33%, temporarily stabilizing the economy. However, this strength comes at a cost: it hampers exports and reduces government revenues.
Sanctions, war costs, mismanagement, and dwindling reserves are undermining its economic foundations.
While the Kremlin may cling to current strategies, the deepening crises suggest that significant adjustments – potentially including ending the war, may become unavoidable if external pressures intensify and internal challenges mount.