Although Zelenskyy describes the sanctions as a “painful blow” for Putin, is the Russian economy really suffering?

This week, US President Donald Trump placed broad penalties on Rosneft and Lukoil, two massive companies that provide over half of all Russian oil exports, in his first direct action against Russia since retaking office in January. Ukrainian President Volodymyr Zelenskyy referred to them as “one of the most painful blows for Putin” on Saturday.

However, the economic data from Russia presents a more nuanced picture.

It doesn’t seem like Russia’s war economy is going to collapse. Although it has dropped somewhat in 2025 after two robust years, growth is still respectable. After initial turbulence, the ruble has stabilized, but experts anticipate further depreciation. Additionally, energy exports to China, India, and other Asian consumers continue to provide crucial cash even when Western markets are blocked.

Is Vladimir Putin’s economy in a state of silent collapse, or has it adjusted to survive? Let’s examine the actual state of the Russian economy in 2025.

Is Russia Still Able to Avoid Sanctions?

After Russia launched a full-scale invasion of Ukraine in February 2022, Western countries targeted banking, commerce, and technology imports with some of the most severe sanctions in modern history. Numerous early predictions called for an economic collapse akin to the 1990s post-Soviet recession. That didn’t occur.

Russia’s GDP shrank by 1.4% in 2022, but it recovered with growth of over 4% in 2023 and 2024, according to a Chatham House analysis. According to the same research, by the middle of 2025, growth had slowed to around 1% annually as production started to be impacted by inflation, rising interest rates, and borrowing costs.

This surprising resilience may be attributed to structural changes that began years ago. The Kremlin has lowered its debt and amassed foreign currency reserves of more than $600 billion since 2014. Together with the money from oil exports, these reserves gave the government adequate room to cushion the first shocks of the sanctions.

But there has been a significant shift in the makeup of growth. According to a survey by the Free Russia Foundation, almost one out of every four industrial workers are now working in industries related to the manufacture of weapons. Due to state contracts, plants in industrial hubs like Tula and Nizhny Novgorod have continued to run at full capacity, increasing employment and earnings in those areas.

Wartime demand has helped these sectors, while import restrictions and rigid monetary policies have hurt civilian businesses and consumer markets. According to the Chatham House analysis, state-directed investments in infrastructure and defense have accounted for a large portion of the increase since 2023, while private financing and consumption have remained muted.

In conclusion, Russia has avoided a financial catastrophe and maintained development, but this stability is mostly reliant on military output and state expenditure rather than a widespread recovery.

The Defense-Driven Boom: Actual Development or a Myth?

The current economic stability in Russia is really a wartime delusion. It is evident from the proposed federal budget for 2026–2028 that the conflict is now the main pillar of Moscow’s development strategy. Together, defense and internal security spend about 40% of federal spending, or 8% of GDP, which is a record for Russia in recent history.

On the surface, this expenditure has given the impression of a recovery in the economy. Construction sites are busy, industrial output is still robust, and employment is close to all-time lows. However, the activity is limited to industries that support the state, such as machinery, metallurgy, logistics, and weaponry manufacture.

Consumer goods and the automobile sector are among the civilian sectors that are still stagnating. Private sector has been displaced and investment flows have been warped by the same governmental directives that maintain military industries.

This is referred to by analysts as a controlled war economy, which sustains production by substituting government expenditure for market demand. A Carnegie Politika analysis claims that even in cases where nominal defense budgets seem to be declining, they are counterbalanced by increased spending on law enforcement and national security. These categories together continue to be at wartime highs, indicating that the Kremlin’s financial priorities have not changed.

There is increasing tension underneath this seeming steadiness. The majority of Russia’s sovereign wealth fund has been exhausted, and in order to cover the shortfall, the government is taking out large loans from local banks. Real earnings outside of defense centers are still declining, interest rates are still high, and credit to consumers and small businesses has dried up. Russia’s economy is essentially powered by borrowed energy.

The present growth is referred to by economists as a “defence bubble” since it maintains production without generating long-term prosperity. The state can keep mobilizing resources and printing orders, but a large portion of the industrial impetus will be lost once that expenditure stops. Although the boom is genuine, it is based on presumptions that will not hold up after the war.

Black Hole in the Budget: Where Is The Money Coming From?

Russia’s military economy depends on a banking system that has become more intricate and opaque. Officially, Moscow’s 2024 budget deficit was 2.6% of GDP, but when emergency and off-book military expenditures are taken into account, the deficit is substantially worse. The genuine deficit for 2025, according to a Free Russia Foundation assessment, is expected to reach nine trillion rubles, the largest level in over 20 years.

The Kremlin has used a mix of domestic borrowing, additional levies, and the reallocation of secret reserves to close the shortfall. Starting in January 2026, the value-added tax would increase from 20 to 22 percent, according to the proposed federal budget for 2026–2028. Small and medium-sized business subsidies will also be reduced. Although they place more of the burden on private companies and consumers, these policies are expected to lower the budget deficit to around 1.6% of GDP.

According to a Carnegie Politika assessment, this is a “tax-financed war economy,” with increased taxes taking the place of stimulus funding year since 2023. The government is borrowing domestically rather than from outside sources. The Central Bank’s balance sheet is still growing with state paper, which might lead to inflation in the future, and Russian banks are compelled to purchase high-yield government bonds.

The diminishment of openness is equally important. Nearly one-third of all budget expenditures are now classified, and money may be transferred between ministries without legislative permission, according to a research by the New Eurasian Strategies Centre. The way this funding is organized shows how the war’s expenses are being re-allocated.

Ordinary people, small enterprises, and domestic lenders are now underwriting what was formerly a state-funded mobilization. That transfer is reflected in inflation, which is now close to double digits.

Is Oil Russia’s Lifeblood?

The most crucial element sustaining Russia’s economy is still oil. Moscow still exports millions of barrels of crude oil each day in spite of the US, EU, and G7 imposing unprecedented sanctions.

Russia shifted its energy flows eastward after losing access to Western markets. China and India are now the largest consumers of Russian oil, sometimes via intermediaries or “shadow fleet” ships that operate outside of the official price-cap system.

Although the budgetary effect of sanctions has been lessened because to this agreement, Moscow’s long-term income base has also decreased. Profits have decreased despite consistent export quantities. According to a report by the Free Russia Foundation, energy sanctions have had a modest but long-lasting impact, gradually reducing the Kremlin’s financial flexibility but not having the disastrous outcome that was anticipated.

Stasis in Russia’s gas and liquefied natural gas (LNG) industries exacerbates the issue. Western limitations on liquefaction technology and shipbuilding inputs have caused several delays in projects like Arctic LNG-2 and Baltic LNG. By the end of 2025, Europe’s imports of Russian pipeline gas have decreased by about 80% compared to pre-war levels. Although some production has been moved to Asia, the extent of this is limited by pipeline infrastructure limitations.

The domestic tax system that turns oil earnings into budget income and crude exports have become increasingly important to the Kremlin as a means of making up for this. However, even the 10% currency depreciation predicted in Russia’s own budget estimate hardly increases collections since global oil prices have been stable rather than rising. According to the New Eurasian Strategies Centre, oil and gas will provide around 22% of government income in 2026, which is a figure that indicates stagnation rather than collapse. Oil has kept the economy from collapsing so far.

Is Russia’s Daily Life Returning to Normal?

The war economy has produced an odd dual reality for the majority of Russians. Employment and incomes are still strong in places with defense manufacturing, and until 2024, consumer sentiment momentarily increased. However, such steadiness conceals mounting pressure in other places.

The cost of housing and food is still rising more quickly than salaries, and inflation has remained tenacious, averaging between 8 and 9 percent this year. Due to the decline of Western brands and the inadequacy of local alternatives, consumer credit is stagnating, imports are limited, and the cost of ordinary products has increased dramatically.

Data from the Carnegie Politika research indicates that over 40% of Russians now depend on government assistance or remittances. Despite the fact that official employment is still strong, real discretionary earnings have decreased for the third consecutive year. Many families have a hectic and fragile existence that is supported by government funding but depleted by inflation and dwindling opportunities.

Has the West Lost Control Over Shadow Networks and Sanction Evasion?

In part. Although sanctions have hampered Russia’s access to cash and technology, they haven’t completely cut it off. Moscow continues to purchase a large portion of its supplies via parallel imports through Turkey, Kazakhstan, the United Arab Emirates, and Armenia. About 70% of the foreign parts used in Russian missiles and drones in 2025 were produced in the West and obtained via middlemen and gray supply chains, according to a research by the Free Russia Foundation.

The payment system has also changed: MIR and UnionPay have supplanted SWIFT in domestic circulation, and transactions are increasingly made in yuan and rupees. The impact of Western financial restrictions has been lessened as a result.

So, is the economy of Russia really suffering?

Where you look determines this. The stats seem to be in good shape: robust production, low unemployment, and solid growth. The foundations are crumbling below. Private investment is declining, productivity is declining, and capital flight is subtly increasing.

According to the Chatham House assessment, Russia’s real GDP is nearly 12% less than it would have been in the absence of the conflict, with total losses exceeding $1.6 trillion and over $400 billion in foreign assets frozen. For a nation that might have continued to modernize, it is a huge void.

As a result, while paychecks are being paid and the lights remain on, Russia’s economic situation is becoming worse. Investment is declining, consumption is fueled by government subsidies, and growth is now reliant on conflict. The sanctions have subtly changed the Russian economy from a market system to one intended for the war, even if they haven’t completely destroyed it.

According to history, authoritarian governments are seldom stopped by economic sanctions alone. North Korea and Iran have all adjusted to decades of limitations. With a wider range of resources and a worldwide network that is still open to commerce, Russia is following suit.

Sanctions have caused pain. They have put pressure on Russia’s finances, hindered its ability to develop in the future, and banned important technology. However, they haven’t shattered the Kremlin’s hold on power or halted the conflict.