Russia's wartime economy faces long-term erosion from debt and military
spending
[September 18, 2026] By
DAVID McHUGH
FRANKFURT, Germany (AP) — The frictions in Russia’s wartime economy are
growing, as massive military spending balloons the budget deficit.
Consumers and businesses are gloomier. Growth has slowed.
None of that, however, signals an imminent financial crisis or economic
collapse, economists say. With crucial oil export revenues holding up
due to high prices from the Iran war, the government is able to find the
money to pay for its 4 1/2-year-old invasion of Ukraine, at least for
now.
Meanwhile, low unemployment and government largesse in poor regions help
keep a lid on consumer grumbling.
That picture suits the Kremlin’s narrative of stability ahead of
Russia's stage-managed parliamentary election that got underway Friday
and concludes Sunday.
But economists warn that longer-term problems are gnawing at the
foundations — and could one day result in a crisis.
Consumers and businesses are more pessimistic
Indicators of consumer sentiment have drifted down since a peak in
2024-25, when increased military spending was pumping up growth and
wages. More recently, consumers have coped with higher gasoline prices
and shortages due to Ukrainian drone attacks that knocked out
refineries. And many small businesses have lost inventory and customers
due to strikes against online retailers Wildberries and Ozon.
At the same time, growth has slowed from a peak of over 4% annual
expansion in 2023-24. The government foresees 0.6% this year, and the
economy shrank in the first quarter before rebounding somewhat in the
second.
The consumer sentiment index compiled by the Levada Center, an
independent Russian pollster, fell to 94 over the summer, down from 116
in spring and summer of 2025. Readings under 100 indicate that consumer
sentiment is more negative than positive.
People asked about the election in Moscow responded with mostly basic
concerns about pensions and prices.
Alexander Vertukhin, a 72-year-old retired military prosecutor, said the
government should be focusing on "a decent standard of living for
pensioners.”
As for his own situation, “I'm doing fine, both financially and in every
other respect,” he said.
“Overall I'd like housing to become more affordable, I'd like pensioners
to be able to live decently instead of merely surviving,” said Dmitry
Kirillin, 26. “I'd also like travel in our country to be more
affordable. Those are the main things that first come to mind, if I gave
it more thought I could probably name more."
He added, "I’d like prices to rise more slowly, if that’s possible in
the current situation."
The gasoline situation and Wildberries strikes have made the war more
visible to people but don't constitute a crisis, said Chris Weafer, CEO
of the Macro-Advisory Ltd. consultancy active across the former Soviet
Union. He described the economy as in a state of “tolerable stability"
and the public mood as “grumbling” but not protesting.
“The economy is under strain — it's stagnant to the effect that it's
stable but not growing,” Weafer said. “But it's not facing recession
either.”
Most people “are not that affected” by the Ukrainian strikes, he said.
“Just because your shopping habits are disrupted, that's not going to
change the public support for the Kremlin.”
President Vladimir Putin’s approval rating has declined in recent months
but remains higher than it was before the war started in 2022.
Russia's budget deficit has spiked higher
One key sign of stress is Russia's budget deficit and the government's
efforts to find new sources of money. Putin has resorted to increasing
value-added tax paid by consumers at the cash register, raising a raft
of other fees and tightening taxation of small businesses. But the
deficit has continued to climb.
By the end of July, budget data showed a deficit of 2.8% of annual
economic output — almost twice the original annual budget target.
Available resources in Russia's reserve fund have dwindled to 1.6% of
GDP, meaning the Kremlin needs to borrow from domestic banks.
That, however, means paying high borrowing costs, with interest rates on
Russian bonds as high as 17%, according to Janis Kluge, an expert on
Russia's finances at the German Institute for International and Security
Affairs.
[to top of second column] |
Russian President Vladimir Putin, center, visits the Uralvagonzavod
factory in Nizhny Tagil, Russia, on Thursday, Feb. 15, 2024. (Ramil
Sitdikov, Sputnik, Kremlin Pool Photo via AP, File)
 Budget stress is “adding to doubts
about how long Russia can sustain the war," he wrote in a recent
report. Russia's central bank has kept rates high to contain the
inflation caused by war spending. That stresses civilian companies
who don't get the privileged access to credit afforded defense
firms.
Another source of war funding has been increased private lending by
Russia's compliant banks to defense-related companies, meaning those
debts are not showing up in the deficit figures.
Some warn the endgame is coming for Russia's economy
Over the long term, Western sanctions deprive Russia of new
investment that would make the economy more productive.
And the risk factors — high spending, low growth, rising debt and
elevated borrowing costs — lead some economists to warn that while
Russia's economy has not collapsed, its structural foundations are
eroding dangerously.
The current trajectory is “unsustainable,” according to Torbjörn
Becker at the Stockholm School of Economics. Still, “the timing of a
crisis remains highly uncertain.”
Higher oil prices from the Iran war help Russia’s finances
Oil export earnings, which had fallen below $10 billion per month
ahead of the Iran war, rebounded to $15.8 billion by June and $13.8
billion in July.
Russia’s budget constraints “may effectively disappear for as long
as elevated energy prices persist,” Becker wrote.
To change that, tougher measures against Russia’s sanctions-evading
oil tanker fleet must be a priority, he argued.
War spending spreads cash to poor regions
Money for defense factories and enlistment bonuses has been a boon
to Russia's provinces, which are poorer than Moscow and St.
Petersburg. With factories often running full blast, unemployment is
2.2% nationwide.
The Uralvagonzavod tank factory in Nizhny Tagil in the Urals region
increased its workforce from about 20,000 to more than 38,000 since
the invasion of Ukraine as it launched 24-hour production, according
to a recent report from the Center for Strategic & International
Studies on Russia's defense industries. Kupol, which makes drones
and surface-to-air missiles, is the largest industrial enterprise in
the Udmurtia region on the Volga River and more than doubled its
output in 2025.
Shortages of skilled labor are restraining production in defense
firms and across the economy, compounded by the emigration of
several hundred thousand mostly younger people due to fears of
conscription and political repression.
The Kremlin says everything's under control
Kremlin spokesperson Dmitry Peskov said month-to-month deficit
figures were volatile and that “this is not a figure that should be
cause for concern. Macroeconomic stability is absolutely ensured.”
But the chief economist of Russia's state-owned VEB.RF state
development bank, Andrei Klepach, warned in a speech that due to
sanctions and economic isolation, “we're falling behind in the
technological and economic competition in the world,” and that “we
can't win the competition in this war of attrition.”
He was fired.
——
Dasha Litvinova in Tallinn, Estonia, contributed.
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