Russia’s Economy Is Under Strain, but Analysts Say It Is Unlikely to Force Talks

Moscow, Russia  (Journos News) – Russia’s economy is facing mounting pressure from high inflation, widening budget deficits and heavy military spending, but analysts say these strains are unlikely to compel President Vladimir Putin to negotiate an end to the war in Ukraine in the near term.

Economic growth has slowed sharply after an initial wartime boost, and state finances are increasingly stretched by defense outlays and falling energy revenues. Even so, most experts agree that Russia can continue fighting for several more years at the current intensity, despite Western sanctions and fiscal headwinds.

“The economy is not in great shape, but it is not at a breaking point,” said Maria Snegovaya, a senior fellow for Russia and Eurasia at the Center for Strategic and International Studies. “It’s manageable, and it’s unlikely to be the decisive factor in forcing negotiations anytime soon.”

A slowdown, not a collapse

Russia entered the war with substantial financial buffers and an economy heavily oriented toward energy exports. While sanctions have disrupted trade and access to technology, oil and gas sales continue to provide the Kremlin with a steady source of revenue.

As long as Russia is able to sell oil at prices that cover production and transport costs, analysts say the government can continue funding both the war and basic domestic obligations. Richard Connolly, a senior fellow at the Royal United Services Institute in London, said sanctions have raised costs but have not yet altered Moscow’s strategic calculations.

“They’ve got enough money to muddle along,” Connolly said. “It’s not a rosy picture, but the economy is not yet a constraint on Putin’s decision-making when it comes to the war.”

Historical precedents suggest Russia is more likely to accept unfavorable peace terms during periods of deep economic crisis, such as at the end of World War I or during the final years of the Soviet war in Afghanistan. Analysts say current conditions fall well short of that level of distress.

War costs shift to society

What has changed this year is the fading of the early economic stimulus created by massive military spending. That surge boosted output and employment in defense-related sectors, but its effects are now waning, according to economists.

To sustain record defense budgets, the government has raised corporate and income taxes and increased the value-added tax. Consumers are also facing higher prices, particularly for imported goods, as sanctions and currency pressures filter through the economy.

Inflation, however, has long been a feature of post-Soviet Russia. The International Monetary Fund expects average annual inflation of about 7.6% this year, lower than last year’s levels. Analysts say this reduces the risk of widespread social unrest, especially in a political environment marked by state control over media and public dissent.

NATO Secretary General Mark Rutte said this month that Russia is spending close to 40% of its budget on the war, reflecting estimates that vary but point to a sharp rise in military expenditure. Data from the Stockholm International Peace Research Institute show Russia’s defense spending rose nearly 40% last year compared with 2023.

Winners, losers and muted discontent

Heavy military spending has created clear winners inside Russia. Defense contractors, arms manufacturers and industrial workers tied to the war effort have seen wages rise, in some cases sharply. Research by Ekaterina Kurbangaleeva, a visiting scholar at George Washington University, suggests pay for certain manufacturing jobs has increased several-fold since before the invasion.

The war has also injected cash into poorer rural regions, where high salaries for soldiers and compensation payments to families of the dead or wounded have boosted local incomes. Analysts say this has helped the Kremlin recruit volunteers and avoid politically risky mass conscription.

“Russian soldiers today are paid more than at any point in the country’s history,” Connolly said, noting that military wages often far exceed civilian opportunities in depressed regions.

These dynamics have limited public protest, despite heavy casualties. Estimates published by CSIS suggest Russian losses could be approaching one million casualties, including about 250,000 deaths. Unlike during the wars in Afghanistan or Chechnya, families of soldiers have not mobilized large-scale opposition.

The absence of visible unrest reduces pressure on the Kremlin as it weighs its options, analysts say.

Long-term risks and shrinking buffers

Over time, however, sustaining the war is becoming more costly. Russia has drawn heavily on its National Welfare Fund, once a key cushion against economic shocks. According to the Kyiv School of Economics Institute, the fund’s liquid assets have fallen by more than half since the invasion began.

An Atlantic Council analysis warned that continued depletion of the fund will force difficult choices, making it harder to maintain current levels of defense spending without cutting social programs in ways that would be visible to the public.

Sanctions evasion is also proving expensive. Recent measures imposed by the United States and the United Kingdom on major oil producers have increased logistical and financial costs, according to Kimberly Donovan of the Atlantic Council.

Russian companies have been forced to reroute exports through intermediaries and smaller firms, raising transaction costs and reducing efficiency. Analysts say tougher enforcement, combined with pressure on major buyers such as India and China, could gradually narrow Moscow’s room for maneuver.

“The more pressure that is applied, the more expensive it becomes for Russia to keep evading sanctions,” Donovan said.

Negotiations still distant

Even with these mounting pressures, most analysts see little evidence that economic factors alone will drive the Kremlin toward compromise in the next few years. Some argue that a sudden peace could even create new domestic challenges, including the reintegration of large numbers of veterans with limited job prospects and significant medical needs.

From that perspective, prolonging the conflict may appear less risky for the leadership than ending it abruptly.

For Ukraine and its Western backers, the assessment underscores a difficult reality: while Russia’s economy is under strain, it remains resilient enough to sustain a prolonged war, absent a sharper economic shock or a significant shift in political calculations in Moscow.