Russia’s war economy nears breaking point
Russia was forced to raise its key interest rate above 20% (Photo: Photo by Stanislav Kondratiev from Pexels)
Russia’s economy is sliding toward a deep recession and faces the risk of a systemic banking crisis amid falling oil revenues, mounting Western sanctions, and the depletion of financial reserves, The Washington Post reported on Dec. 22, citing economic analysts and official Russian data.
Although President Donald Trump claims that Russia has the upper hand in its war against Ukraine, economists say that the country’s position is weaker than ever. The Kremlin has burned through most of the cash reserves and borrowed money that fueled its wartime spending surge, and greater problems lie ahead.
Signs of economic deterioration were evident even before Washington introduced a tougher round of U.S. sanctions against Russia’s energy sector in October.
To rein in inflation driven by nearly four years of massive military spending and rising import costs, the Central Bank of Russia was forced to raise its key interest rate above 20%. Although the rate has since been cut to 16%, it continues to squeeze corporate profits and suppress investment. Output has stalled in several sectors, while corporate debt levels have surged.
Reuters estimates that Russia’s oil and gas revenues in December 2025 will be 49% lower than a year earlier. Sanctions imposed by the U.S. Treasury on Russia’s two largest oil companies, Rosneft and Lukoil, are increasing pressure on the budget and the energy sector as Moscow is forced to accept ever steeper discounts of more than $20 per barrel of oil with its Urals blend at $35, much less than the $69 price the 2025 budget was initially drafted with.
The Russian economy “was benefiting from many positive factors like high global commodity prices and the spending-driven boom. And most of these factors have disappeared, and this is why Russia is right now in the worst situation since the war started,” said Janis Kluge, an economist at the German Institute for International and Security Affairs.
Official data from the Central Bank show non-performing loans at 5% of total lending, but these figures exclude much of the defense sector, where reporting requirements are relaxed. Analysts estimate that military-related lending now accounts for roughly a quarter of all corporate debt, exceeding $202 billion. Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, has acknowledged that many companies are in a “pre-default situation.”
The Kremlin-linked Center for Macroeconomic Analysis and Short-Term Forecasting warns that a systemic banking crisis could erupt by October 2026 if bad loans continue to rise and depositors begin withdrawing funds en masse.
Major state-owned companies are already under strain. Gazprom reported a loss of $12.9 billion, while its reserves have fallen from $27 billion at the start of 2022 to just $6–8 billion. Rosneft’s net profit dropped by 70% to $3.6 billion in the first nine months of 2025.
According to Russia’s statistical agency, Rosstat, in October the total of unpaid wages had almost tripled year-on-year, reaching more than $27 million, with more than 26,000 complaints to Russia’s labor agency this year.
The Kremlin’s policy of prolonged aggression against Ukraine has pushed the Russian economy to the brink of systemic collapse.
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