When assessing the prospects of the Russian economy through the end of the 2020s (as reliable forecasts over a longer term look problematic), it is more appropriate to focus not on quantitative metrics but on the trends that characterize the key trends developing under the influence of militarization and shifts in Russia’s relations with the rest of the world.
The state of the federal budget is crucial for the stability (or instability) of Putin’s economy. Throughout his decades in power, Vladimir Putin has adhered to principles of strict budget discipline and limited budget deficit. He likely remembers well the 1998 crisis, when he was appointed director of the FSB and witnessed from within how the crisis destabilized the state authorities and forced President Boris Yeltsin to hand over the key post of the Prime Minister to the opposition. Over a quarter-century in power, Putin has repeatedly faced pressure from various quarters, with arguments in favor of relaxing fiscal policy. However, the principled stance of Finance Ministers — first Alexey Kudrin and later Anton Siluanov — has always prevailed in any decision-making.
At the same time, when conditions justified fiscal stimulus, Putin was willing to pursue it: this was the case during periods of crisis — in 2008-2009, 2015-2016, 2020-2021, and 2022-2023. But nevertheless, it can be assumed that maintaining budgetary stability will remain one of the key principles of his economic policy.
The resilience of Russia’s budget infrastructure can be achieved not only through Putin’s strict stance but also through the modernization of fiscal policy. The government has been steadily increasing the tax burden on individuals and corporations alike. Starting in 2025, the flat personal income tax rate that had been in place for more than 20 years is being replaced with a progressive tax scale. Meanwhile, the corporate sector is facing annual increases in nominal tax rates, amounting to approximately 1 percentage point of GDP annually from 2023 to 2025.
The Kremlin, at the same time, hasn’t pursued a proactive fiscal policy — the average annual growth rate of budget expenditures from 2022 to 2025 will be slightly below 14 percent, roughly in line with the GDP deflator. But it should be noted, that a shift in the spending structure toward government purchases of domestically produced goods and services (such as weapons, ammunition, military uniforms, and transportation services)has significantly increased the fiscal multiplier. A similar effect was observed with payments to the military personnel — most mobilized soldiers and contract servicemen come from economically depressed regions with low personal incomes. Upon receiving additional money, their families were primarily concerned with improving the quality of their diet and purchasing essential goods, most of which were produced domestically. Subsidized mortgage programs also boosted demand for construction and finishing materials, the production of which has shown steady growth. Overall, such budget expenditures, in addition to stimulating domestic demand, generated additional tax revenue for the budget with a lag of 4 to 8 months.
As a result, in 2022–2024, federal budget revenues from domestic sources were growing faster than oil and gas proceeds, whose share has declined from 40–45 percent of overall revenues in 2014–2019 to 30–35 percent in 2023–2024. This does not mean Russia is “weaning itself off the resource dependency.” However, energy export revenues have become less predictable, prompting the Ministry of Finance to revise the parameters of the “fiscal rule” and abandon the use of a “cutoff price” in favor of a fixed minimal amount of oil and gas revenue. On the contrary, this shift suggests that restructuring budget expenditures reduces the government’s financial burden.
The budget draft for 2025–2027 envisions a steep increase in military spending. However, we do not believe this alone could justify the conclusion that Vladimir Putin intends to continue the war for the next three years1 — no one knows that for sure, not even Putin himself. At the same time, even if the active phase of hostilities ends and the Russian army undergoes partial demobilization, sharp cuts in military spending should not be expected. On the one hand, the Ministry of Defense will need to replenish its stock of military equipment, weapons, and ammunition — let us remind you of Putin’s statement that the defense industry will remain overloaded with orders for many years to come — which will sustain production levels at defense industry enterprises. On the other hand, if large masses of soldiers are discharged, tens or even hundreds of thousands will return home to find that the available jobs offer significantly lower income. Many may require medical or psychological care. Consequently, the government will need to establish a system of subsidies or compensation for these people, which could technically fall under different budget categories but will nonetheless play a certain role in supporting aggregate demand in the economy. A crucial unknown factor in assessing the future stability of the budget framework is the defense industry’s ability to continue increasing its output. Leading analytical centers have noted a halt in industrial growth since May–June 2024, but they are not prepared to say whether this is a temporary “pause” before a new surge or a “leveling off.” In the first case, the budgetary impact would be minimal and might not even appear in the statistics. In the second scenario, however, the Ministry of Finance could face an uncomfortable situation. So far, economic growth and inflation have both exceeded budget projections, resulting in revenue growth that has outpaced expenditures. If growth stalls, tax revenues will rise only in line with inflation and increased tax pressure, and eventually, the pressure to restore the inflation-eroded incomes of pensioners and public-sector employees could require a budget deficit beyond the Ministry of Finance’s target level of 0.5–1 percent of GDP.
1 — The 2024–2026 budget projected a reduction in military expenditures starting in 2025, leading some experts to speculate that the end of the war may be near. As noted earlier, the planned reduction in military spending appears to be a tool employed by the Ministry of Finance to demonstrate the stability of the budget framework.
It is important to note that, up to now, the Kremlin has refrained from monetary financing of the budget through the purchase of government bonds by the Central Bank of Russia2. An increase in the budget deficit by 1% of GDP in the medium term, fully financed through the Central Bank’s purchases of government bonds on the secondary market, is unlikely to impact macroeconomic indicators significantly. This provides the Kremlin with a substantial reserve to address potential issues in the country using a well-known and reliably effective method — allocating budget resources.
2 — In 2022–2023, the Ministry of Finance largely financed the budget deficit using monetary measures, including the reduction of fiscal reserves and the use of exchange rate gains arising from the ruble’s devaluation. However, the Ministry did not utilize either of these resources since late autumn 2023.
A significant shift during the war years was the change in the Russian economy’s balance between the shares of labor and capital in GDP. The period from 2011 to 2016, when the share of wages in GDP rose to nearly 50 percent, was followed by a period of sharp decline, dropping to below 40 percent in 2022, after which there was a “rebound” to slightly above 40 percent. This turning point appears to have been driven by the impact of three main factors.
First, the labor shortage caused by the mobilization of 2022 and the army’s constant need for new recruits3, combined with mass emigration4 and some outflow of migrant workers, has become a significant driver of wage growth5. Second, defense industry enterprises, facing a large-scale order for weapons production, had to switch to a three-shift work schedule, requiring them to recruit around 600 thousand skilled employees; the only effective tool for attracting these workers was offering higher wages. Given that the defense sector’s “appetite” is still not fully satisfied and there is a remaining labor shortage of 160 thousand laborers, it is easy to predict that competition for skilled employees between the private sector and the defense industry — and, consequently, the wage growth — will continue.
3 — In the fall of 2022, 320 thousand people were mobilized into the Russian army. Assuming a monthly recruitment target of 20 thousand contract soldiers set by the Kremlin for the regions (with Russian authorities stating an average of 25 thousand per month), it can be estimated that an additional 300 thousand men of prime working age may have joined the Russian army over 15 months. According to the Russian Ministry of Defense, the average age of contract soldiers is 35 years.4 — Experts estimate that up to 1 million people may have left Russia in 2022, of whom 35-40 percent have returned in 2023-2024 as fears of renewed mobilization subsided.5 — According to Rosstat estimates, the total labor force in Russia is 76 million people.
Such a shift will hardly meet resistance from entrepreneurs (who now have far less autonomy than ever) and will surely be welcomed by workers. They latter will associate the improvement in their financial situation with the ongoing war and, at the very least, are unlikely to express dissatisfaction with Kremlin policies.
After the defense industry, the domestic services market will remain the second most critical driver of economic growth and household income. This sector has already become the primary beneficiary of Western sanctions, government support for import substitution, and relatively liberal policies toward private entrepreneurs and the self-employed (whose taxes will not increase in 2025). Additionally, households have also become beneficiaries of the Central Bank’s interest rate hikes — despite a gradual reduction in the key rate throughout 2025, households could still receive interest income equivalent to about 3 percent of GDP.
Overall, the Russian Ministry of Economic Development’s estimate of a 7.1 percent increase in real household income in 2024 appears conservative; growth is more likely to be closer to 10 percent. However, assuming current external market conditions persist, this growth will likely moderate in the coming years, slowing from 6 percent in 2025 to no less than 3 percent annually in subsequent years. Of course, the distribution of income gains across the population will be uneven; it is worth noting that around 60 percent of households lack financial savings and, therefore, aren’t able to benefit from elevated deposit rates. Nevertheless, in general, the combination of military payments channeled into economically depressed regions and more targeted social assistance from the budget means that the coming period, in terms of income growth, could be comparable to the best times for the Russian economy — the mid-2000s. Both economically and politically, this will be a significant factor in bolstering Kremlin support and a key resource for maintaining the much-touted “stability.”
The shift in foreign trade structure and mechanisms is another significant trend transforming the Russian economy.
Before the war, Russia consistently maintained a positive foreign trade balance, averaging 8.9 percent of GDP from 2000 to 2021. While Western sanctions have undoubtedly had some impact on reducing opportunities for commodity exports, the Russian state has simultaneously generated additional domestic demand, both directly and indirectly. Part of it has come from the needs of the standing army, which requires equipment, weapons, ammunition (metals and chemical products), and fuel (oil products). Another part has arisen from government-funded infrastructure projects or construction programs (such as initiatives to stimulate residential construction).
Prior to the war, the Russian authorities had consistently formalized trade and investment relations with the outside world, requiring suppliers to standardize their products, comply with Russian consumer protection standards, and ensure the legal rigor of supply contracts. Since 2022, however, there has been a shift in the opposite direction: both imports and exports (as well as the use of Western intellectual property) have become mainly areas of lawlessness and circumvention of existing regulations.
The export of sanctioned goods (or those restricted by Western authorities) has now been almost entirely redirected from Europe to China, India, and other “Global South” countries, facilitated by a “gray fleet,” informal deals, and quasi-currency transactions. “Parallel imports” have allowed Russian firms to bring thousands of non-certified products into the country without the manufacturer’s consent, accounting for at least 20 percent of all imports to Russia since this practice was legalized. Within Russia, intellectual property rights are largely disregarded — from the “suspension” of patents and franchises to the unauthorized reproduction of audio and video content, as well as pirated use of software, including its export abroad.
Overall, this creates a trend that is alarming for the West and highly significant for Russia: Russia is not simply “falling into China’s embrace” (which has already become evident, as China accounted for 33.8 percent of Russia’s foreign trade turnover in 2023 — a share comparable to that of the EU in the mid-2010s). Rather, Moscow is transforming into a center of an “alternative model of globalization,” operating outside the frameworks of Western-controlled institutions and established rules.
This trend could prove far more dangerous than the much-discussed “export of corruption” to Western countries, for which Russia was often blamed in the 2000s and 2010s. Unlike corruption, which was “exported” with the direct involvement and approval of Western banks, law firms, and sometimes even governments — allowing some avenues to combat it — the current trend is explicitly aimed at undermining the Western-led world order rather than integrating into it. As recent years have shown, the use of unconventional payment systems, the export of pirated products, and the smuggling of goods from Western companies — all of these practices are much easier to implement than previously assumed.
This “rule-free trade” is still burdened by significant transaction costs (such as processing banking payments under the sanctions regime). Still, these costs are likely to decrease as alternative payment systems are developed. Even intense pressure from the United States has not led to a collapse in Russia’s trade with China. On the contrary, from March to September 2024, trade turnover has grown month by month following a noticeable dip at the start of the year caused by the psychological impact of the U.S. Treasury’s acts announced in December 2023.
Viewing all of this as merely a way to circumvent sanctions is extremely shortsighted, as the Kremlin has set its sights on fundamentally undermining the existing system and has reasonable grounds for hoping to succeed. In our view, this is also a key foundation of Russia’s current economic resilience, as it enables the Kremlin to attract a number of countries and political leaders who are unhappy with Western dominance over global rules and institutions and who believe that rejecting them could yield positive outcomes.
Even Russian officials have identified labor shortage as the most challenging potential constraint on economic growth, but the issue does not yet appear insurmountable. First, for many years, Russia has tended to create “excess employment” (evident in the workforce size, revenue, and productivity of large domestic corporations). In the current environment, should these corporations optimize their staffing, an estimated 1.5-2 million workers could be freed up.
Second, millions of jobs that are considered redundant in a “normal” economy — such as security guards, drivers, and low-level bureaucratic roles. By simply improving the efficiency of existing labor resources without requiring radical technological upgrades to production facilities could be sufficient to address this issue. This increase in labor productivity would not require significant new investment but would instead involve reallocation and more effective use of the current workforce.
Moreover, the Russian authorities are initiating at least two important changes in this area, which are likely to impact the country’s labor resources balance. On the one hand, the Kremlin has hinted at an impending shift away from the easy accessibility of higher education. There has been talk of nearly compulsory redirection of individuals into technical colleges to secure employment at industrial enterprises, changes in educational curricula, and even shortening the duration of schooling and university programs. On the other hand, there are signs that the Kremlin is considering reorganizing migration policy along the lines of models used in certain Arab countries, where immigrants are employed as temporary labor without a pathway to naturalization. The first step in this direction has been the introduction, as of autumn 2024, of a limit on the enrollment of children of foreign parents in schools, capped at 10% of the total student body. The aim is evident — to make permanent relocation to Russia less appealing for young families while keeping the chnaces for foreigners to come for shortterm job assignments. In this way, Russia can sustain its extensive economic development model without incentivizing long-term immigration.
Finally, elevated inflation, which has recently drawn widespread attention from experts predicting its possible acceleration, is unlikely to pose a severe threat. Rather, it should be regarded as the new normal. This phenomenon should not be surprising. In a market economy, price fluctuations serve as an inherent mechanism for adapting to changing conditions. Given that the Russian economy is market-oriented and faces a series of often unexpected and unpredictable imbalances or constraints, a higher level of inflation should not be surprising.
In nearly three years of war, Russia’s financial system has undergone sweeping changes that few could have predicted: companies have abandoned the use of dollars and euros in transactions, foreign currency trading on exchanges has ceased, and the government has imposed numerous internal and external restrictions on the ruble’s convertibility and capital movement. For a country where, before the war, 30 percent of food resources and nearly half of the non-food market relied on imports — meaning that prices were directly tied to the ruble exchange rate — the sharp depreciation of the national currency in the initial days of the war, and again in the first half of 2023, inevitably led to heightened inflationary pressure.
However, since August 2023, the ruble has stabilized and even slightly appreciated. The ruble’s accumulated devaluation since the war started only slightly exceeds the cumulative increase in consumer prices over the same period. It can be confidently stated that the inflationary impact of the ruble’s devaluation has proven to be relatively limited — experts agree that the pass-through effect of devaluation on consumer prices is constrained to a coefficient of 0.1 — and it has long been fully reflected in current prices.
Many experts argue that further inflation growth in Russia is inevitable, driven by solid budgetary support for demand amid constrained supply (with domestic production growing slowly and imports, at best, stagnating).
However, this prediction is not reflected in the statistics6. Setting aside the potential manipulation of inflation data by Rosstat, an alternative explanation can be offered for why inflation in Russia has stalled around the 10 percent mark and is, if anything, showing signs of declining rather than rising further.
6 — We are willing to offer arguments regarding the inadequacy of current price statistics — for example, the slower growth in prices of non-food goods, despite rapidly rising incomes, which should theoretically drive increased demand for these products. However, without Rosstat’s involvement, any discussion on this topic would lack substance.
The periods of highest inflationary pressure — aside from the initial weeks of the war — were May to October 2023 and March to June 20247. These were times roughly 4-6 months after waves of intense budgetary spending, financed by drawing on fiscal reserves and revenues from the ruble’s devaluation, i.e., through monetary issuance. Since the spring of this year, however, the Russian Ministry of Finance has been financing expenditures in line with actual tax revenues, meaning that the budget is no longer introducing new money into the economy with an inflationary effect but is instead redistributing financial resources from the corporate sector and households into government consumption.
7 — When inflation rates exceeded those recorded in the same month of the previous year.
This policy can still exert some inflationary pressure, as a significant portion of financial resources is redirected toward private consumption. However, the effect is much less intense and is not concentrated within short timeframes. This approach, therefore, contributes to inflation at a slower and more dispersed rate, reducing the risk of sudden inflation spikes.
Although inflation has exceeded the target parameters set by the Central Bank of Russia (around 4 percent per year), it would be incorrect to say that it is out of the monetary authorities’ control. Notably, the aggressive policy of raising the key interest rate has so far failed to curb credit growth in the economy or increase the personal savings rate. Inflationary expectations among the public continue to rise. Yet, short-term inflation indicators (annualized inflation over the past three months) have remained within a range of 7.5 to 9 percent over the past 12 months, showing an evident slowdown in September and October.
It can be argued that the Central Bank of Russia’s policy of combating inflation through interest rate hikes is ineffective, as current inflation is primarily driven by fiscal policy and the increasing complexity and cost of logistics — factors beyond the Central Bank’s control. Moreover, the high interest rate leads to a sharp increase in the cost of borrowing, a decline in investment activity, and a drag on economic growth. However, in general, the current level of inflation represents a new normal for the Russian economy, allowing it to maintain a state of equilibrium.
All of the above provides no reason to believe that inflation will become genuinely dangerous in the next few years, creating budgetary difficulties for the Ministry of Finance and socio-political challenges for the Kremlin. The experience of many countries shows that inflation often builds up its potential gradually but then, at a certain point, can erupt suddenly. This scenario may also await Russia, but no indicators suggest its realization in the coming months. Inflation remains a “background” phenomenon, exceeding the target range desired by the Central Bank of Russia, but without severely impacting the economic situation or consumer sentiment.
Overall, the medium-term future of the Russian economy is best described as growth without development. Both the Kremlin and foreign analysts remain focused on quantitative growth, which is likely to persist due to the high level of militarization in the economy and sustained military expenditures in the budget. Another factor supporting this growth will be rising household incomes, driven by labor shortages and interest income from bank deposits. This income will be directed not only toward current consumption but also into areas such as residential construction8.
8 — As in many countries, the COVID-19 pandemic in Russia accelerated the trend of individual housing construction. In 2021, volumes advanced by 30 percent compared to 2019-2020 levels, with individual housing accounting for more than half of all residential construction for the first time in history. In 2022-2023, the volume of individual housing construction increased by 15 percent over 2021 levels, and it is projected to grow by at least another 20 percent this year.
The expected GDP growth of 3.8-4 percent in 2024 will likely trigger euphoria in the Kremlin and surprise in the West. The anticipated slowdown to 3 percent in 2025 and 2.5 percent in 2026 is unlikely to disappoint Putin, as he can still claim it is better than the performance of “unfriendly” Europe. However, it is crucial to recognize that, in qualitative terms, the Russian economy is slowly degrading and falling behind in technological development relative to “unfriendly” countries and “friendly” China.
This quantitative growth is achieved by intensifying the use of existing equipment, allowing for increased output of traditional goods but not enabling a transition to a higher level. Traditionally, new technologies and innovations entered Russia alongside Western investors, whose return is now unlikely. The Kremlin’s hopes for “pivoting to the East” are not being realized in any substantial direct investment or modern equipment supplies from China. Even in sectors where Chinese companies could potentially enhance the current technological level of Russian industry, such as mobile communications or electronics, imports from China are barely noticeable, as Chinese companies fear secondary sanctions. This scenario does not necessarily imply a sharp economic slowdown, but in the long term it points to Russia falling out of the mainstream technological trends, which will be the main economic cost of the current war.
All of the above does not mean that Russia is not currently facing, or will not face, severe crises in the future. The de-modernization of the economy, the catastrophic depletion of human capital, dependence on Asian economies that are secondary in terms of global technological progress, the breakdown of institutional frameworks, and the erosion of legal foundations for engagement with the rest of the world — these will all eventually be recognized as key elements of the economic degradation set in motion by Vladimir Putin.
However, it is essential to keep in mind that the current situation embodies a kind of “bicycle principle”: for the full extent of the flaws in the present course to become apparent, the momentum of its implementation would need to come to a halt — and there are no signs of that happening anytime soon.
Thus, in the context of a war of attrition on its current scale, and for the purposes of assessing its immediate prospects, Russia’s economic resources should be considered unlimited: even if the country faces greater economic difficulties than it does at present, the burdens will be shifted onto businesses and the population, without constraining the continuation of military operations and their logistical support.