Russia’s Economic Balancing Act: Collapse, Control, or Contraction?

As the war in Ukraine grinds through its third year, Russia’s economic resilience is facing mounting internal and external pressures. While the Kremlin has spent two years defying Western forecasts of imminent collapse, new reports from inside Russia suggest that the façade of stability is cracking. The State Duma (Russia's parliament) is reportedly preparing legislation providing for dramatic tax increases, both for individuals and corporations, while insolvency rates among private businesses are soaring. These developments have revived a pressing question: is the Russian economy approaching collapse—or entering a new, more repressive phase of wartime mobilisation?

Official Stability versus Emerging Crisis

At face value, Russian economic data suggests the country is managing. The IMF suggested there had been 3.2% GDP growth in 2024, based on available data. The ruble, though weakened, remains tradable. Employment is nominally high, and military-industrial production is expanding. But these numbers mask a distorted reality:

• Much of the growth is militarised GDP—linked to arms production, logistics, and state procurement.

  
  

• Inflation has been rising steadily, with core goods increasingly unaffordable for ordinary Russians.

  
  

• The ruble’s stability is tightly managed by the Central Bank, which is burning through reserves and maintaining high interest rates (currently at 16%).

  
  

• The budget deficit is widening, with oil and gas revenues underperforming due to price caps and sanctions circumvention costs.

The Kremlin’s economic strategy has depended on three legs: energy exports (especially to China and India), capital controls (preventing money from leaving the country without government permission) and massive state intervention. But all three are now straining under their own weight.

Taxation as a Red Flag: Desperation or Restructuring?

Recent leaks from Russian government-linked economists and business figures suggest that the Duma is preparing sweeping tax reforms aimed at shoring up the federal budget:

• Personal income tax (currently 13% on incomes up to 5 million rubles (US$61,728 at today's exchange rate of US$1 to 80 rubles); 15% thereafter; 30% for non-residents on Russian-sourced income; 4-6% of turnover for self-employed persons) could rise sharply, especially for upper-middle earners and expatriates.

  
  

• Corporate profit tax (currently 20%) may increase to as much as 30–40% for private companies not engaged in state defence contracts.

  
  

• Value-Added Tax (VAT) could be raised from 20% to 25%, which would be the highest level in Russian post-Soviet history.

The tax hikes, framed by officials as part of a “fair contribution to the national effort”, reflect deep fiscal strain. In wartime economies, tax increases are not unusual—but this particular set of reforms disproportionately targets the shrinking pool of private businesses and consumers still outside direct state control.

It is also politically dangerous. A VAT increase would hit consumers hardest, while corporate tax hikes could accelerate bankruptcies and capital flight (Russians generally export money avoiding capital controls in cash), especially among already-fragile SME's (small and medium-sized enterprises).

Private Sector on the Brink

One of the starkest indicators of economic peril is the spike in reported insolvency filings among private firms. According to independent Russian analysts and leaked regional data:

• Up to 35% of non-state-affiliated companies are either insolvent or in critical distress.

  
  

• Retail, services, and light manufacturing have been battered by inflation, labour shortages, and restricted imports of parts and goods.

  
  

• The Kremlin’s focus on military-industrial consolidation has diverted capital and skilled workers away from civilian sectors.

  
  

• Wartime requisitioning (i.e. de facto nationalisation) of factories and logistics companies—legalised under Russia’s “partial mobilisation economy”—has further destabilised regional markets.

In effect, Russia is experiencing a creeping de-marketisation of large parts of its economy. Profitable firms are either nationalised, contracted to the defence sector, or pressured into politically convenient mergers. Those unwilling to comply face regulatory harassment, financial audits, or taxation on punitive terms.

In other words, Russia is returning to a Soviet-era, communist command economy.

Sanctions, Shadow Markets, and Systemic Fragility

Despite circumventing Western sanctions through shadow fleets (hydrocarbon-exporting tankers using false documents to disguise vessel and cargo origins), third-country trade (i.e. with non-sanctioning countries) and currency swaps (a derivative instrument in finance used as a method of exchanging rubles to US dollars, effectively unregulated if undertaken via third country markets), the cumulative effect of sanctions is showing:

• High-tech imports for everything from car manufacturing to medical equipment remain deeply restricted.

  
  

• Banks have been cut off from dollar and euro liquidity, forcing reliance on unstable yuan-based reserves (particularly unstable due to the current US-China trade war).

  
  

• Russia’s “parallel imports” scheme for sanctioned goods, in particular those necessary for military equipment, works, but at inflated prices, and is vulnerable to further secondary sanctions which the US has said it is considering. The EU may follow suit.

Western efforts to target Russian oil revenues, particularly through the G7 US$60 per barrel oil price cap and shipping insurance restrictions, have had limited—but rising—impact. Budget figures show growing dependence on Chinese and Indian buyers, who are now demanding deeper discounts, exploiting Russia’s lack of alternatives.

Is Collapse Imminent?

It is unlikely that Russia faces a sudden, total economic collapse. Instead, the situation points toward a structural degradation of economic vitality, masked by state statistics and temporary military demand. The real danger is a long-term descent into wartime autarchy—where consumer markets shrink, private enterprise is extinguished, and the economy becomes a command-driven supply system for war and elite survival.

However, several indicators could signal collapse or crisis in the near future:

• Public unrest over food prices, housing costs, or tax hikes.

  
  

• A sharp drop in oil and gas revenues, especially if China reduces purchases.

  
  

• A cascade of bankruptcies in sectors like retail, construction, and agriculture.

  
  

• Failure to maintain the ruble’s value, despite capital controls and interest rates.

Geopolitical Implications

For Western policymakers, the Russian tax and insolvency crisis presents both a warning and an opportunity:

• Economic strain may increase Russia’s aggression, as the Kremlin seeks distraction or coercion from weakness.

  
  

• Alternatively, financial instability could undermine regime cohesion, leading to internal fractures.

  
  

• Secondary sanctions on Chinese and Indian intermediaries could amplify existing vulnerabilities.

  
  

• Support for Ukrainian economic resilience and transparency becomes even more critical, as a contrast with Russian economic decay.

Conclusion: Controlled Burn or Systemic Collapse?

Russia’s wartime economy has reached a critical juncture. Tax increases and business failures are not just financial events—they are symptoms of a regime under duress, struggling to maintain the illusion of economic strength while centralising ever more control. Collapse is not yet inevitable, but the cost of maintaining stability is rising fast, and the social contract existing in Russia since 2000 - whereby the middle classes have enjoyed increasing living standards in exchange for living under authoritarianism - is beginning to fray.

Whether Russia’s economy collapses, implodes, or simply ossifies into a permanent war machine, its trajectory is downward. The questions now are how fast, how far, and at what cost—to the Russian people, to her neighbours, and to the wider world.