World
The Economic Cracks in Russia's War Effort
— 3 mins read
Moscow spent its way to a wartime boom on record defence budgets
Russia's economy grew by more than 4% in 2024, powered by record military spending. It has now slowed to around 1%, with borrowing costs peaking at 21%, according to official Russian data and independent forecasts.
Russia's ability to pay for its war in Ukraine depends on an economy that has adapted to sanctions better than many Western governments expected but the cracks are now showing.
A boom bought with the war budget
Russian GDP shrank by roughly 1% to 2% in 2022 after the full-scale invasion of Ukraine. It then rebounded strongly, growing around 4.1% in 2023 and between 4.1% and 4.9% in 2024.
That growth came almost entirely from the state. Military spending reached about 7.5% of GDP in 2025, roughly 16 trillion roubles (c.£142 billion), according to SIPRI figures. Defence now takes up around a third of the entire federal budget. Reuters reported that Moscow hiked national defence spending by 23% for 2025 alone.
Official unemployment sits at record lows of between 2.2% and 3.2%.
The bill arrives
If government spending made a country prosperous, Russia would still be booming, but it is not. Growth collapsed from over 4% to around 1% within a year, inflation has run between 6% and 9%, and the Central Bank of Russia was forced to raise its key rate to 21% in October 2024, the highest in years.
The war budget has also crowded out civilian business. Investment outside defence has withered, consumer demand has weakened, and manufacturing beyond the arms sector is under strain.
Moscow hiked national defence spending by 23% for 2025 alone.
Labour is the other pressure point. Estimates put the shortage at between 1.5 million and 4.8 million workers. Hundreds of thousands of skilled Russians, particularly in IT and finance, have emigrated since 2022, according to the George W. Bush Institute. Mobilisation and military recruitment have drained the workforce further.
Reuters reported in August 2025 that the Russian government itself cut its 2025 growth forecast to 1.5% from 2.5%. Independent estimates came in even lower.
Oil, discounts, and the shadow fleet
Russia has kept revenue flowing by redirecting oil once sold to Europe towards India and China. China now takes around 47% of Russian crude exports.
Russian Urals crude has traded at discounts of $10 to more than $30 a barrel against Brent at peak periods. To dodge the G7 price cap imposed in December 2022, Moscow assembled a shadow fleet of hundreds of tankers, according to research by VoxUkraine.
Sanctions have not collapsed the Russian economy, but their effect is cumulative. Access to advanced Western technology has been cut off, foreign investment has fled, and Russia's links to global finance have been disrupted. Iran and Venezuela adapted to sanctions in similar ways, with discounted oil sales and parallel imports, and both ended in long-term stagnation.
The Kremlin has reduced budget transparency since 2022 and faces no independent oversight of its spending. The source analysis omitted the Central Bank of Russia's 21% rate peak and the scale of the shadow fleet sustaining oil revenues.
The IMF forecasts Russian growth of around 1.1% for 2026, and the World Bank projects roughly 1%.
