The Russian Federation’s invasion of Ukraine, now entering its fifth year as of February 2026, has evolved from a purported “special military operation” into a protracted conflict that has reshaped global geopolitics and inflicted profound damage on Russia’s own economic foundations.
What began as a swift campaign in February 2022 has morphed into a grinding war of attrition, draining Moscow’s resources at an unprecedented rate. Official estimates suggest Russia has allocated over 50 trillion rubles (approximately $580-600 billion) to military and security spending between 2021 and 2025, with projections for 2026 pushing defense expenditures to around 16.8 trillion rubles, or nearly 40% of the federal budget.
This relentless fiscal commitment to the war, coupled with intensifying Western sanctions, plummeting oil revenues, and structural domestic weaknesses, has propelled the Russian economy into a critical state. The stagnation turning into recession, with a potential banking crisis looming by mid-2026 is real.
While immediate collapse is not inevitable, the trajectory points toward an unsustainable model that could culminate in a full economic breakdown if the war persists indefinitely.
Prior to the 2022 invasion, Russia’s economy exhibited modest but stable growth, averaging around 2% annually from 2010 to 2019, underpinned by vast energy exports that accounted for 14% of GDP in 2021, with crude oil alone contributing 6%. Fossil fuel taxes formed the backbone of federal revenues, comprising 44% in the decade leading up to the war. This resource-dependent model allowed President Vladimir Putin to maintain social stability through subsidies, infrastructure investments, and a relatively low defense budget of 3.6% of GDP in 2021.
The invasion shattered this equilibrium. Initial Western sanctions in 2022 triggered a 1.2% GDP contraction, but Russia rebounded with 3.6% growth in 2023 and over 4% in 2024, fueled by a wartime boom in military production and redirected trade to Asia. By 2025, however, cracks emerged: growth slowed to around 1%, with the IMF downgrading forecasts to 0.6% for 2025 and 0.8% for 2026.
The economy’s pivot to war production plus defense and security absorbing 38% of expenditures – has crowded out civilian sectors, leading to what experts term “managed stagnation.” Agriculture and manufacturing showed some resilience in early 2025, but overall output in weapons and ammunition is projected to slow to 5-7% growth in 2026, down from 20-30% annually in 2023-2024.
This distortion mirrors historical precedents like the Soviet Union’s overinvestment in military-industrial complexes during the Cold War, which contributed to its 1991 collapse. Today, Russia’s economy faces similar risks: resource reallocation toward the war has limited civilian innovation, exacerbated by sanctions that restrict access to key technologies and inflate import costs. The result is an economy increasingly isolated from global markets, reliant on shadowy trade networks, and vulnerable to external shocks.
At the heart of Russia’s economic woes lies the astronomical cost of sustaining the war in Ukraine. By 2025, military spending reached 13.7 trillion rubles ($145-150 billion), surging to 16.5 trillion rubles in projections for that year – equivalent to 7.2% of GDP and nearly 40% of the federal budget.
Direct war-related expenses hit 11.1 trillion rubles ($137.9 billion) in 2025, accounting for about 5.1% of GDP, with broader defense outlays at 7.3%. For 2026, the budget allocates 13 trillion rubles to defense alone, a nominal decline from 2025’s 13.5 trillion but still symbolically high, with total defense and security at 16.8 trillion rubles.
These figures understate the full burden. Up to 84% of defense spending is classified, hiding costs for weapons production, soldier compensation (including bonuses and family payments), and logistics. War-related outlays spill into other categories like social policy, education, and infrastructure, potentially pushing total costs closer to 10% of GDP. The human toll amplifies this: Russian forces have suffered nearly 1.2 million casualties since 2022, including 415,000 in 2025 alone, necessitating billions in payouts.
To fund this, the Kremlin has resorted to deficit spending, borrowing, and tax hikes. The 2026 budget projects a 3.8 trillion ruble deficit (1.6% of GDP), but estimates suggest it could triple to 3.5-4.4% due to revenue shortfalls and overspending. VAT rises from 20% to 22% in 2026, alongside cuts to small business benefits, will squeeze households and firms. This “war tax” approach risks stifling domestic demand, as seen in 2025’s 25% increase in corporate bankruptcies and one-third of small businesses at risk of closure. Analysts warn that without peace, actual 2026 military spending will exceed projections, further distorting the economy.
Western sanctions, now in their 14th package as of late 2025, have inflicted “significant impact,” according to EU sanctions envoy David O’Sullivan. Designed to curb Russia’s war financing without spiking global energy prices, measures like the G7 oil price cap have redirected but diminished revenues. Russian crude exports remain stable at 4-5 million barrels per day, but discounts and evasion costs erode profits. Urals crude dipped below $40 per barrel in early 2026, with oil and gas revenues hitting historic lows at 22% of the budget.
Energy revenues fell 18% below projections in early 2026 estimates, driven by reduced Indian purchases and broader market surpluses. From $111 billion in 2025, revenues are expected to decline further, forcing tax increases and debt issuance. Sanctions have also severed access to international finance and technology, leading to a 25% drop in oil and gas revenues due to ruble appreciation and trade barriers. Ukrainian strikes on refineries – 371 confirmed in 2025 – have compounded this, disrupting production and exports.
Broader effects include labor shortages from emigration (a “brain drain” of skilled workers) and military conscription, with the economy needing 10.9 million additional workers by 2030. Demographic decline, with a shrinking population, exacerbates this, limiting long-term growth potential.
Key economic indicators signing of systemic strain:
GDP Growth: Stagnating at 0.8% for 2026 per IMF, down from prior estimates. World Bank projects 1% for 2026-2027, citing sanctions and energy prices.
Inflation and Interest Rates: Inflation at 6%, with central bank rates at 16% to curb overheating. This has led to rising defaults and “tactical poverty” measures by businesses.
Budget Deficit: January 2026 alone hit $22.3 billion, half the annual target. Reserves are dwindling, with think tanks predicting stagflation.
Trade and Reserves: Exports to Asia mitigated initial shocks, but effectiveness wanes; financial reserves shrink amid war demands.
These indicators reflect an economy “running aground,” with growth downgrades signaling exhaustion.
A deepening crisis is coming – recession by July 2026 if trends persist, with risks of banking and non-payments crises. Russian officials anonymously predict a financial meltdown by summer, amid spiraling inflation and layoffs, demographic woes, technological gaps and sanctions as materialized risks.
A sudden end to the war could paradoxically trigger short-term recession by slashing defense output, but long-term relief is possible. Without it, Putin may resort to money printing, asset nationalization, and further taxes to sustain the war through 2027. Yet, as O’Sullivan notes, the war economy may become “unsustainable” in 2026. Comparisons to the Soviet collapse abound, though Putin’s regime shows no immediate signs of implosion.
| Indicator | 2024 | 2025 Projection | 2026 Projection | Key Driver |
|---|---|---|---|---|
| GDP Growth | 4.1% | 0.6-1% | 0.8-1.4% | War spending slowdown, sanctions |
| Military Spending (% GDP) | ~7% | 7.2% | 7% | Sustained war effort |
| Budget Deficit (% GDP) | 2.6% | 1.6-3% | 1.6-4.4% | Oil revenue drop |
| Inflation | ~7% | 6% | 5-7% | High interest rates |
| Oil Revenues | $111B | Decline | Further drop | Sanctions, global surplus |
Russia’s economy stands at a precipice, its foundations eroded by the endless war in Ukraine. Massive military outlays, sanctions-induced isolation, and declining oil revenues have transformed a resilient system into one fraught with vulnerabilities.
While adaptive tactics have delayed collapse, the 2026 outlook – marked by stagnation, deficits and potential crises – suggests the model is fracturing. If unchecked, this could lead to a full breakdown, forcing Putin to confront the war’s unaffordability or risk domestic unrest. The global community must intensify pressure to hasten this reckoning, as Russia’s economic demise may be the key to resolving the conflict.