Ruminations: Russia's Teetering Conflict-Impacted Economy

"The upstream oil industry is sliding into a crisis, and the most recent sanctions are going to accelerate that."
"[The newly imposed U.S. sanctions represent] an aggressive move that spell more trouble."
"You can keep raising more taxes on average Russians or borrow still more to cover growing deficits. But you ask yourself: Is this making my negotiating position stronger or weaker?"
"It definitely makes Russia look weaker."
Craig Kennedy, Davis Center for Russian and Eurasian Studies, Harvard

"A banking crisis is possible."
"A nonpayments crisis is possible."
"I don't want to think about a continuation of the war or an escalation."
Anonymous Russian official

Vladimir Putin is under pressure from business elites (Image: Getty)

"Russia entered the war already facing a severe demographic and labor crisis. More than a decade ago, Russia’s statistical service created three population scenarios, dependent on various levels of migration into the country. Its most optimistic scenario required Russia to bring in 550,000 migrants every year just to keep the national population from shrinking. Even then, the size of the labor force was expected to shrink."
"The war has only worsened what was once called the “biggest political, social, and economic challenge for Russia” through 2050. This spring, unemployment hit a record low of 2.2 percent, signifying a tight economy and labor shortage. In 2024, Russian job site SuperJob reported that 73 percent of the country’s businesses were understaffed."

"Even Russia’s most stable and vital industries are feeling the strain; postings for oil and gas positions rose 24 percent in the first quarter of 2024 compared to the same period a year earlier. When the country’s most economically critical and traditionally resilient sectors struggle to staff operations, something is seriously wrong."
Lindsey Cliff, researcher, American Foreign Policy, Washington

The National Interest

The Kremlin, according to economists, has used most of its cash reserves and the borrowed funding used to fuel the surge in spending on its war in Ukraine -- Vladimir Putin's arch 'special military operation' --leaving it with a crushing headache of a steadily weakening economy. Russia was experiencing a labour shortage even before its invasion of Ukraine. The workforce depended on migrant workers, but even that element of its workforce that is Russian has been steadily shrinking as Putin has called upon Russians to answer the call of its battlefront need of more soldiers to bulk up its forces, in view of the high cost of life that special military operation has resulted in on both sides of the conflict.

The newly imposed tough sanctions on Russia's oil sector add to the cash squeeze that may portend a banking crisis in 2026, despite Vladimir Putin's hard line in negotiations ongoing to end the war, a farce he engages in to keep U.S. President Donald Trump on board. Meeting with his German and British counterparts in London this month, French President Emmanuel Macron spoke of the latest EU-imposed sanctions outlawing shipping oil weakening the Russian economy: "We must keep up this effort and maintain pressure".

"Sanctions can undoubtedly disrupt an economy. Consider the array of sanctions levied against the Russian oil trade in response to its illegal invasion of Ukraine."
"These actions substantially lowered the profitability of Russia’s export of crude oil and refined petroleum products, reducing the associated government revenues in the process. "
"Whether these and other sanctions changed the course of the conflict is unknowable, but it is without question that sanctions can impose higher costs on countries that violate international law."
Brookings Institute

Shutterstock / Photo Magistr

The October sanctions imposed by the U.S. Treasury on Russia's larges oil majors, Rosneft and Lukoil has been increasing pressure on the budget and energy sector, forcing Moscow to accept increasingly steeper discounts of over $20 per barrel of oil; much less than the $69 price the 2025 budget was drafted with, now discounted to $35 for its Urals blend. These oil and gas revenues are crucial for the budget, yet set to fall by 49 percent compared with the previous year, given the new sanctions, leading to deeper deficits while military spending climbed to $149 billion for the first 3/4 of 2025.

The Russian economy was heading toward recession even prior to the new sanctions, with its central bank compelled to raise interests rates to record highs of over 20 percent to rein in inflation following the first three years of war with high military spending, causing government to blaze through its reserves. A corporate lending boom resulted, even as a result of sanctions import prices soared. Company profits and cash reserves have been impaired, leading to stalled investment and plummeting output.

Once benefiting from positive factors such as high global commodity prices and a spending-driven boom, the Russian economy is now reeling. Independent Russian media outlet the Bell heard from economist Alexandra Prokopenko in a video conference, stating despite denials by the Russian leadership the economy is being enfeebled, sanctions biting. The economy, she said "is frozen and fundamentally it is looks to me unsustainable. The closest analogy would be like a car idling in neutral with the engine overheating. The car isn't moving forward or backward, but the longer it sits there, the more damage accumulates under the hood."

Problems have dug deep into the banking system resulting from Russia's massive expansion of corporate lending in the past three years, combined with its prolonged period of high interest rates. Defence sector loans represent close to a quarter of overall corporate ruble loans, totalling just over $202 billion. "It is a big black pool of poorly regulated, opaque debt, and it's sitting in the middle of the banking system", explained Craig Kennedy.

The bleak situation has begun to trickle down to Russian consumers. Belt-tightening is making its presence known, according to a report by Russian state bank Sberbank. People have cut their spending on clothing by 8.7 percent compared with the previous year; on household goods by 8.8 percent, and on health and beauty by 5.9 percent. Governments that bring their countries to war always keep an ear and eye out for citizens' unrest when conflict begins to etch deeply into their comfort zones of everyday living. Moscow has much to be nervous about in the coming year.