Rear Still Robust
The eponymous chapter of the 2024 report expounded on the main reasons the Russian economy had withstood the war-induced shock of 2022. The ones we singled out included a market-driven economy, the adaptability of private businesses, the commodity-dominated exports, the domestic market size, the significant bulk of reserves, and the competency of the economic authorities. Most of these factors are still in play today. But we will provide a brief update on the most crucial ones.
In spite of a dip in crude oil prices and a slide in exports pertaining to other industries (in H1 2025, e.g., the exports of coal were only 67% of the H1 2021 numbers, of black metals 59%, and of pipeline-deliver natural gas 56% in physical terms1), Russia remains a country with a consistently positive trade balance and BOP, which amounted to $55.4 bn and $21.9 bn as of H1 2025 respectively.
1 — Media articles cited:
https://seanews.ru/2021/08/16/ru-jeksport-uglja-i-koksa-6-mesjacev-2021-vyvoztverdogo-topliva-rastet-i-v-obemah-i-v-dollarah/,
https://lenta.ru/news/2025/09/16/rossiya-stalaglavnym-postavschikom-uglya-dlya-odnoy-strany/,
https://www.steel-development.ru/en/news/ industry-news/883-news-09062020–114,
https://seanews.ru/2025/07/16/ru-jeksport-po-zhd-chernyhmetallov-6-mesjacev-2025/,
https://neftegaz.ru/news/transport-and-storage/687158-pochti-rekordgazprom-v-1-m-polugodii-2021-g-uvelichil-postavki-gaza-v-dalnee-zarubezhe-na-25–7/
Although by the year-end, the federal budget deficit will have been at least 150% of the projected target, even in the worst-case scenario, it will not be in excess of 3.0% of GDP, which is appreciably lower than that of many developed countries. As for the sources of borrowing funds, the finance ministry is faring markedly well as the interest that it scores its funds at is lower than the Bank of Russia’s ket lending rate. Over the entire war period, the ratio of Russia’s national debt to its GDP has mostly remained unchanged, with the finance ministry expecting it to be at 17.7% by the year-end 2025.
The federal budget’s safety margin is further bolstered by the raised tax rates. 2025 has seen an uptick in corporate and income tax rates. In 2026, VAT will follow suit. Importantly, the tax burden-to-GDP ratio in Russia has been on par with mean global figures at no more than 35%. If we bracket the oil and gas revenue, this statistic will go down to 31%, which is rather low compared with other countries2. It means that the potential for further tax rate hikes in Russia with no detrimental effect on the economy is far from exhausted.
2 — Op. cit.
Rejecting draft mobilization as a tactic to replenish the active-duty roster for the Ukraine war in favor of the contract-based recruitment campaign involving exorbitantly high pay has essentially turned the Russian military into a mercenary army, which has reshaped the war-related government costs. One may contend that this new structure is akin to the one prevalent in the Middle Ages. Indeed, between 35% and 40% of the costs account for the paychecks, including one-time contract-signing payments, injury compensations, and death gratuity money. From the budget expenditure’s standpoint, these costs can be equated with government transfer payments. The macroeconomic effect of these expenses is identical to that of the pensions or welfare benefits, while the fact that the recipients thereof only represent a narrow demographic transcends academic economic discourse.
As indicated by the steady rate of for-hire army recruitment, the Kremlin has apparently found the equilibrium price for human life. The contract service members are making the money that surpasses the median wages in their places of residence three- to fivefold. As for the death gratuity package, the compensation collected by the families of the deceased combatants amounts to 15 to 20 years’worth of their civilian wages.
Cynical as that may sound, the death gratuity compensation may prove to be neutral or even “profitable” for the Russian budgetary system in the long run. Under the Russian law, the citizens are guaranteed a minimum amount of retirement and welfare money on top of free services, e.g., healthcare. These include the individuals who have never been employed and have never paid taxes or social security fees. However meager these payouts may be on an individual level, the aggregate amount of such costs is fairly considerable in terms of the federal budget. The age of the Russian contract-based recruits averages approximately 45 years. Before the war, a significant share of these service members were either convicts or unemployed citizens. The odds were high that they would have otherwise been collecting welfare benefits for the rest of their lives. Just as many recruits had below-average income, and given their age, the taxes and fees they would have paid in the future by staying in their prewar line of work would have been outweighed by the government costs covering their welfare and retirement. Therefore, from the budgetary perspective, these death gratuity payments can be viewed as an investment in reduced future welfare disbursement. To reiterate, we owe the reader an apology for these unethical estimates.
But this math naturally does not apply to all of the combat fatalities. Both the forcedrafted conscripts and the recruits who voluntarily chose to enroll because of either pecuniary gains or their ideology include those whose premature death will take a toll on the future of the Russian economy. However, speaking about mercenaries on average, most of them have only a secondary education; tens of thousands have a criminal record; many suffer from alcoholism and mental disorders; and the situation with HIV, hepatitis C, and tuberculosis is regarded as a full-blown epidemic—even by the Z-aligned pro-war bloggers. The list of this demographic’s “peculiarities” could be extended, but the bottom-line is as follows. The quality of the human capital being used up in this war prevents us from viewing its removal from civilian life as a serious blow to the economy. Once the war ends, the reintegration of these individuals into society will, without a doubt, create numerous social, criminal, and possibly even political challenges. But these issues are beyond the scope of our discussion.
Over the past 20 years, the Russian economy has shown a trend toward maintaining investment in fixed capital at a relatively high level by post-Soviet standards (at certain points, the share reached 20.5%–22% of GDP1)—primarily directed toward large infrastructure projects and the production assets of vertically integrated corporations linked to commodities. Currently, even maintaining these investments at the levels of the last pre-war years seems excessive. Stepping up resource extraction is pointless amid declining exports. Consequently, no growth in rail freights can be expected. The construction sector requires constant government support. Moreover, many investment programs were significantly marred by corruption, and the cost of Russian “megaprojects”—from pipelines to sports facilities—exceeded global standards by orders of magnitude. If it becomes necessary to further increase military spending, the Kremlin can quite easily trade off this growth by cutting investment by 1.5%–2% of GDP without causing any noticeable economic problems, at least in the short term, that is. In fact, such a trade-off might not even be statistically noticeable.3
3 — An international methodology dictates that the government procurement of reusable armaments should be statistically accounted for as investments
Although the war is certainly taking a toll on Russia, it can hardly be described as deleterious for its economy. Even the overall size of Russia’s military budget (6.3%–6.5% of GDP) does not appear enormous when compared with Poland’s defense spending (4.7% of GDP) or the level that the U.S. president has urged NATO member states to attain (5% of GDP). Geographically speaking, for Russia, the hostilities are taking place on the country’s periphery, far from its major economic hubs. The enemy’s capacity to inflict devastating strikes is extremely limited: the total damage to the Russian economy from all Ukrainian drone and missile attacks throughout the course of the war amounts to mere tenths of a percentage point of GDP, at best. Moreover, the much-discussed fuel crisis is quite local and is just as much the result of seasonal factors and market asset redistribution as it is of the strikes on Russian oil refineries.
It is possible that a dramatic surge in strikes on Russian infrastructure could disrupt economic activity in some regions. However, Russian strikes on Ukrainian infrastructure have been going on for three and a half years. Far more drones and many more rockets of all types have been used in those strikes than the Ukrainian armed forces have deployed in the comparable attacks. The number of targets that would need to be destroyed to send Ukraine’s economy into disarray is several times smaller than there are in Russia. Nevertheless, no systemic breakdowns in the functioning of the Ukrainian economy have been observed so far.
Long-Term Trends
Russia’s current political trajectory gives no reason to expect any significant positive changes in its economy over the next decade regardless of whether or not the war in Ukraine ends. Last year’s report considered a much shorter time frame, so we did not address certain trends whose effects could be ignored in the short term. However, their long-term impact is far more substantial and, under certain circumstances, could negate the resilience factors listed above.
The main trend of this kind, in our view, is the “ultimate triumph” of politics over economics. Throughout Putin’s entire tenure, economic and financial factors—from the level of real household income and GDP growth rates to budget balance and the state of reserve funds—played at least a significant, if not crucial, role in political decision-making.
In recent years, however, economic decisions have been invariably driven by the logic of confrontation with the West. This is evident in the disregard for potential damage from sanctions (the start of the full-scale invasion occurred when Russian financial authorities were entirely unprepared for the U.S. and E.U. sanctions); in the decline of the traditional caution in managing macroeconomic and budgetary parameters (illustrated by the spike in budget spending in December 2024, as well as the secrecy surrounding the execution of the current budget and key figures of the 2026 budget at the very moment when the Bank of Russia, in September 2025, had to mull the key lending rate); and in the growing influence of the security apparatus over economic decisions (as frequently seen in cases involving the nationalization of major assets and the revision of the 1990s privatization outcomes).
Disregard for property rights; the rejection of effective technological solutions in favor of “politically reliable” ones (as in the case of the economically damaging ban on using Western software and communication systems in order to “promote” domestic alternatives); the emergence of a trend toward unequal treatment of businesses depending on whether they are affiliated with “patriotically-minded” entrepreneurs or investors from “unfriendly” countries—all of this undermines the stability of the private sector, the very foundation that provided the Kremlin with a solid “economic rear” in the early years of the war. Loyalty cannot replace competence, and this axiom will inevitably affect economic performance.
Another major factor that will be having a persistent adverse impact on economic growth in the coming decades is population statistics. None of the reputable forecasts for Russia’s population suggest any growth in the next 10–15 years. According to both Rosstat’s average-weighted forecast and the U.N.’s average-weighted projection, by 2035, Russia’s population will have declined by about 5 million from its current level, though this is expected to occur with little or no reduction in the workforce.
Moreover, Rosstat’s forecast actually predicts that the working-age population in Russia will increase by 3 million by 2035. However, population researchers from the academic consortium of Russia’s top-ranked graduate schools beg to disagree. According to their estimates, between 2025 and 2035, the labor force will shrink by about 700,000 employees4, slightly less than 1% of its current level.
4 — Center of Interdisciplinary Studies of Human Potential. Population Changes and Workforce Supply in Russian Regions. Scholarly Digest No. 5 (10), 2022
The stabilization of the workforce would result from the large cohorts born during the fertility upswing of 2007–2015, reaching working age in the mid-2030s. It should be noted, however, that these forecasts were made in mid-2022 and, therefore, do not account for wartime and emigration-induced losses. In any case, stagnation in the total size of the workforce will, at the very least, deprive the Russian economy of growth opportunities normally driven by this factor.
However, the overall size of the workforce is not the only demographic factor that must be taken into account in forecasts. The age structure of Russia’s population and the inherent patterns of populational development predetermine shifts in the age composition of the workforce, which will inevitably grow older. While in 2019, the share of over-40s was 52%, by 2030, it will rise to 62%–63%5. This will pose a serious challenge for the Russian economy, one that will overlap with the next stage of technological transformation in the global economy.
5 — Center of Interdisciplinary Studies of Human Potential. Population Changes and Workforce Supply in Russian Regions. Scholarly Digest No. 5 (10), 2022
Before the war, the employment rate (the percentage of the working-age population that is either employed or actively job-hunting) was circa 65%, with an increase to 67% in 2023 and 2024. This was driven by a steep rise in labor demand caused by the expansion of defense production, the mobilization drive of fall 2022, and emigration.
The labor shortage led to rapid wage growth, which in turn provided a strong incentive for the retirement-age Russians to postpone retirement or return to work. The decision to reinstate the indexed pensions for working retirees—canceled in 2015 when the Russian budget was rattled by the drop in oil prices and high inflation—also helped keep older workers in their jobs.
It can be assumed rather safely that after the end of hostilities and the reduction of government defense orders, wages in the military-industrial complex will decline, and a significant share of retirees will choose to end their careers.
It is possible that wage reductions as a reaction to an economic downturn will spread to other sectors as well, pushing the unemployment rate upward toward its typical pre-war level of 4.6%–4.8%.
Undoubtedly, a relatively higher level of development will help the Russian economy continue to attract the workforce, primarily from the Central Asian post-Soviet republics. Unless the Russian authorities introduce draconian anti-immigration measures, the inflow of foreign workers could offset the decline in the domestic labor force. However, one should bear in mind that those coming to Russia are generally lower-skilled workers, and therefore, an increase in their numbers will reduce the overall level of labor productivity in the economy.
The combined effect of the listed factors does not appear to be a major drag on the economy; rather, it indicates that it will operate under conditions of a stagnant—or, more likely, diminishing—labor force (by about 0.1%–0.2% per year). This means that increases in labor productivity will be necessary just to keep the economy from shrinking.
At the same time, the average growth of labor productivity in Russia from 2014 to 2024 amounted to only about 1%, which is an extremely low figure for a developing economy.6 Even during the less favorable period of 2008–2013—marked by a punishing economic slump—the average annual growth of labor productivity was around 2%.
6 — Importantly, between 2003 and 2007, the rate of annual labor productivity growth in Russia was 6.8%.
However, even the modest increase in productivity was largely the result of earlier technological modernization, which had taken place in Russia since the early 2000s with active involvement of Western capital and reliance on imported technologies and equipment. Today, apart from government ministers who are optimistic by virtue of their job descriptions, no one would seriously claim that the severing of economic ties with the West and the shift toward import substitution will promote faster productivity growth in either the manufacturing industry or the service sector.
An additional burden on the Russian economy will come from the revival of a Soviet-era tradition related to the territorial development of the economy. The Kremlin is increasingly speaking not only about a “pivot to the East” or a new development of Siberia (whether in the form of building cities with populations of over one million or resettling veterans of the Ukraine war), but also about greater attention to northern and hard-to-reach regions, such as expanding LNG production, extracting rare earth minerals in the Arctic, and developing the Northern Sea Route.
When floated by politicians, such ideas are an extreme gamble. Developing remote territories with harsh weather conditions requires far higher per-unit investment—especially in energy supply for such industries—leaving no real opportunity for the participation of profitdriven private business. Moreover, politicians are quick to approve grandiose plans but slow to allocate funds for their implementation, and by assigning oversight of these projects to state-owned companies, they make them even more expensive and delayed in completion.
A conspicuous illustration is the expansion of the so-called “Eastern Testbed,” a sweeping program to develop logistics infrastructure aimed at exporting Russian commodities through Far Eastern ports. When the plans were drawn up, they were based on projects assuming growth in coal production and exports to China, shipments that, it should be noted, are barely profitable for the railroad operators.
The implementation of the third and most expensive stage of the project—which envisions increasing rail throughput capacity from 180 to 270 million tonnes by 2032—began in the spring of 2024. By 2025, however, China’s coal consumption had plateaued, and the country began tapering down coal imports from other countries, including Russia. In 2024, Russian coal exports to China amounted to about 100 million tonnes. It is difficult to imagine how many decades—or even centuries—it would take to recoup the invested funds.
Another hassle for the Russian economy will be the costs associated with restoring and integrating the occupied territories of Ukraine (it is hardly realistic to expect that Putin will agree to return them). These territories will not pay off economically under any foreseeable circumstances.
After the annexation of Crimea, the Russian budget and state-owned companies spent about $5 billion a year to support the regional budget and implement investment programs on the peninsula, which had a population of 2.3 million. The territories occupied in 2022 now have a population of around three million, but their total area is roughly 70% larger than that of the peninsula, and the extent of destroyed infrastructure there is incomparably higher. The resources required to rebuild the damaged areas will amount to tens of billions of dollars over a decade-long horizon.
In other words, these geopolitical experiments—extending beyond the war itself— are taking Russia back from an era of economically justified regional policy to a new phase of expansion that runs counter to the country’s economic interests.
Summing up this section of the report, we will restate our main proposition.
Overall, the Russian economy has adapted to the war and remains in a state of balance. Although the resources for further economic growth have been exhausted, some economic indicators today appear even more stable and manageable than they did a year ago. That being said, the overarching policy pursued by the Russian government, which has implicitly shaped many aspects of Russian society since the early 21st century, has in recent years led to the subordination of economic factors and considerations to political ones.
The listed challenges do not constrain the Russian economy’s ability to function or significantly affect its capacity to sustain defense and social spending in the foreseeable future. However, economic stability is not the same as development or prosperity. Combined, the prevailing economic trends and the political climate are leading the economy toward a prolonged period of stagnation. Crucially, we are not envisioning an impending large-scale economic crisis that could jeopardize political stability—we are envisioning a long-term stagnation.