As Western sanctions become more stringent and military expenditures due to the ongoing conflict in Ukraine show no signs of abating, Russia may transition from a state of “managed cooling” to outright economic stagnation by 2026, with any substantial recovery unlikely to occur before 2027.
The initial boost from wartime military expenditure is waning, and the associated costs will likely be shifted to the public through increased taxation, as government revenues fall short due to declining oil prices and ongoing Western restrictions on Russia’s energy sector.
The year 2025 signifies the conclusion of Russia’s wartime economic growth observed during 2023-2024. Following two years of growth exceeding 4%, the GDP growth rate for 2025 is anticipated to decelerate to around 1% or lower, with similar challenges projected to roll over into 2026.
The economy has largely depleted the temporary factors that had fueled growth in 2023 and 2024. The rapid expansion in 2023 was primarily a rebound from the 2022 economic shock, during which the country had to swiftly adapt to produce for wartime needs.
In 2024, growth was driven by a significant upsurge in government spending. Federal expenses surged by approximately 25% that year, climbing from 32.35 trillion rubles ($404.4 billion) in 2023 to 40.2 trillion rubles ($502.5 billion), thereby injecting demand into the economy.
However, these stimulating factors will largely be absent in 2025, and there appears to be no clear catalyst to rejuvenate growth in 2026.
Government expenditure is expected to reach 42.3 trillion rubles ($528.8 billion) in 2025 and 44.1 trillion rubles ($551.3 billion) in 2026, remaining relatively stable when adjusted for inflation.
Coupled with interest rates around 16% aimed at controlling inflation, the outlook points to an economy trapped in stagnation, as policymakers in Moscow strive to balance growth with price stability.
As a result, many experts now foresee GDP growth to remain around 1% in both 2025 and 2026. The Economic Forecasting Institute of the Russian Academy of Sciences projects a growth of 0.7% for 2025 and 1.4% for 2026, with growth potentially increasing to about 2% in 2027. The International Monetary Fund predicts a growth of 0.6% in 2025 and 1.0% in 2026.
For the first time since the onset of the pandemic, Russia’s budget revenue in 2025 is expected to fall short of initial projections. When the 2025 budget was approved, projected revenues were set at 40.3 trillion rubles ($503.8 billion), but current forecasts anticipate actual revenues to be closer to 36.6 trillion rubles ($457.5 billion).
This change marks a departure from the preceding three years, including 2022, when revenue consistently exceeded initial expectations.
The revenue shortfall is partially attributed to weakened tax collection amid decreasing growth, coupled with falling oil prices and Western sanctions that necessitate higher discounts on Russian crude.
Oil and gas revenue projections for 2025 stand at 8.7 trillion rubles ($108.8 billion), significantly lower than the initially intended 10.9 trillion rubles ($136.3 billion). With growth decelerating and oil prices under strain, 2026 is likely to yield another weak year for budget revenues.
The World Bank anticipates a surplus in global oil supply will lower Brent crude prices from an average of $68 a barrel in 2025 to approximately $60 in 2026—the lowest rate seen in five years.
In response to the budget issues, the government is raising taxes to reinforce revenue. The value-added tax (VAT) rate will increase from 20% to 22% starting January 1, and more businesses will be included in the VAT system by lowering the revenue threshold for mandatory VAT payments from 60 million rubles ($750,000) to 10 million rubles ($125,000).
Additionally, the government intends to impose a duty on completed electronic products, including laptops, smartphones, and lighting devices.
Collectively, these strategies illustrate a post-spending hangover, with households and businesses facing greater tax burdens to replenish government resources as the energy industry grapples with sanctions.
Despite the economic downturn, Russian authorities have limited ability to reduce military expenditures as the conflict in Ukraine continues.
President Vladimir Putin has shown no indications of retracting his ambitious demands, consistently asserting Russia’s intent to maintain its efforts until it establishes control over the four Ukrainian territories it claims to have annexed.
Official estimates set national defense spending at 13.5 trillion rubles ($168.8 billion) for 2025 and 12.93 trillion rubles ($161.6 billion) for 2026; however, actual expenditures—including classified military spending—are anticipated to exceed these figures.
Russia does not fully disclose its military expenditure within the federal budget, revealing only planned figures.
Officials occasionally provide partial insights; for instance, Defense Minister Andrei Belousov noted that defense spending would account for 7.3% of GDP in 2025.
With GDP estimated at 217.3 trillion rubles ($2.72 trillion) for 2025, this suggests total defense spending of approximately 15.86 trillion rubles ($198.3 billion), significantly above the publicly available budget figures.
As the war persists into 2026, military spending will continue to weigh heavily on the economy and its recovery prospects.
Even as substantial funds are directed toward arms manufacturing and the military campaign, this spending does little to boost the availability of consumer goods, further intensifying inflationary pressures.
The longer the conflict endures, the less financial support will be allocated for civilian development, while tax rates are likely to continue rising to bridge the gap between spending and revenue.
