In this pool photograph distributed by Russian state owned agency Sputnik, Russia’s President Vladimir Putin chairs a meeting regarding the situation in the Kursk region, in his residence in Novo-Ogaryovo outside Moscow, on August 12, 2024. The governor of Russia’s Kursk region where Ukraine has launched an incursion told Russian President Vladimir Putin that 28 settlements with a population of around 2,000 people are controlled by Ukrainian troops on August 12, 2024. (Photo by Gavriil GRIGOROV / POOL / AFP) / Editor’s note : this image is distributed by Russian state owned agency Sputnik (Photo by GAVRIIL GRIGOROV/POOL/AFP via Getty Images)
POOL/AFP via Getty Images
This past Friday the US announced that it was moving forward with legislation to sanction buyers of Russian oil. By doing so lawmakers are hoping that this will have a ripple effect across Russia’s economy, deterring countries from trading with Russia as the US would place heavy tariffs on imports from nations that import Russian oil, uranium and natural gas. Whether these sanctions will be the tipping point remains to be seen, but this is an effort to hit Russia where it hurts. The Russian economy is totally dependent on its fossil fuel exports revenues, which earn Russia 734 million euros a day.
While Russia’s economy is still enormous– worth about $2.6 trillion–growth is slowing and its economy is shrinking each quarter. Growth rates are projected to be only 0.4% for 2026. This is even worse than 2025, when Russia grew by only 1%, and narrowly escaped a recession.
In 2022, Russia’s economy initially contracted when the sanctions first hit but then rebounded in 2023 as it forged new trading relationships with other countries, achieving 4.1% growth rates, according to the World Bank. But this growth would only last for so long as the wartime spending boom was exhausted, energy prices fell and the costs of the war spiralled.
Defence officials reportedly told Russian President Vladmir Putin this year that they would need billions more to fund the conflict, as the war was running at least $28 billion over budget. It was also projected that Russia would overspend on the conflict by a further $54 billion in 2027 and 2028.
This is certainly a huge increase. Russia spent about $47 billion annually on national defence between 2019 and 2021, but this year’s budget will require more than $158.5 billion. When taking into account all of the costs, research conducted by Stanford researcher David Henderson estimates that the conflict is reaching over $2.5 trillion.
Russia is essentially burning through its GDP to seize a section of Ukraine that covers 10% of the size of Texas—or 268,597 square miles. This means that it is spending about $90 million per square mile acquired, and gaining territory very slowly.
The Iran War Provides a Brief Lifeline
In 2025, the economic picture in Russia looked particularly grim. The sanctions were finally starting to bite and crude oil prices fell below $73 dollars a barrel. Russia’s budget revenues from oil and gas, halved in January 2026. With Russia’s fossil fuel export revenues reaching their lowest pre-invasion levels, the Iran war offered a lifeline. Oil prices skyrocketed and US President Donald Trump eased sanctions on Russian oil. At its peak, Brent crude surged more than 55% since the Iran war began, nearing $120 a barrel.
But the chaos of the Iran war has undermined Russia’s long-term energy and infrastructure projects in the Middle East. Two of Russia’s power plants in Iran have been put on hold, as has oil and gas exploration and ambitions to diversify Russia’s transit routes to link Russia to India via Iran.
Russia’s Economic Challenges
Though Russia was briefly getting a reprieve from the Iran war, it has struggled to turn its oil revenues into military power. One reason why is that it suffers from labor shortages with a growing number of casualties—now estimated to be above 1.4 million killed, wounded and missing. At the going rate, Russia is losing more troops than it can recruit. There is also a demand for military factory workers, but Russia is struggling to fill these roles as well. It’s also suffering from a brain drain as over 650,000 Russian citizens have fled the country.
Another problem for the Russian economy is inflation—which just hit a five-month high at 6%, with services reaching an inflation rate of 10.6%. Key consumer goods such as the cost of all food prices has gone up. Just from 2024 to 2026, there was an 18% increase on grocery items.
Unfortunately for consumers, the Russian economy does not generate enough revenues to help defray these types of costs. All its scarce resources are allocated to military production. And though it is trying to transform its economy into a war economy, this is much more challenging than it was during the Cold War. Today Russia pays market prices for inputs for military production, which mostly comes from foreign suppliers. This has made military spending much more expensive for Russia compared to even during the Cold War period, when military spending as a percentage of the Soviet Union’s GDP constituted about 20%.
Meanwhile Russia’s civilian sector is unravelling. Civilian companies are competing for labor at war-inflated wages, have had to borrow at rates near 20% and are selling to a market with low levels of consumer demand. Half of all civilian industrial sub-sectors are in decline. Outside of pharmaceutical and transport equipment, output is declining in 19 other civilian sectors. Thus, the Russians have a two-pronged problem: the military sector of the economy is overheated while the civilian sector is stagnating.
As mentioned, interest rates are another problem. The key interest rate sits at 14.25% now after a 25-basis point cut in June. While the Central bank of Russia is trying to loosen its monetary policy, borrowing costs remain incredibly high—on par with Ukraine.
In times of economic crisis, gold is often used as a safeguard to ensure economic stability. But in January it was reported that Russia had liquidated 71% of its gold reserves to finance the war effort. In just five years Russia is reversing all of the gains that it had made after the Covid-19 pandemic when it experienced a robust economic turn-around with its GDP rebounding by over 5%.
Today there is no doubt that Russia’s economy is under significant strain. While Russia can still finance its war with Ukraine in the near-term, tougher US secondary sanctions on countries and companies that trade with Russia could further squeeze export revenues and access to critical imports. Putin may not want to end the war until he gets what he wants—which is reportedly all of the Donbas– but it is certainly going to come at a huge cost to the Russian economy.