Russia’s Economic Brinkmanship: Assessing the Signs of Collapse in 2025

In recent months, claims that the Russian economy stands on the brink of collapse have gained momentum. These assertions come amid alarming legislative proposals in the State Duma to raise personal income tax, corporate tax, and value-added tax (VAT) to unprecedented levels. Coupled with a rising insolvency rate among privately owned businesses, this paints a picture of economic stress with serious implications for both Russia’s domestic stability and its war-making capacity.

This article summarises the Russian economic collapse in 2025, using the best data available.

Table: Key Russian Economic Indicators – 2025

Indicator	2024 Actual	2025 Estimate/Trend	Notes & Implications
GDP Growth	+1.4%	-0.9% to -1.5%	Contracting due to declining industrial output & sanctions.
Inflation Rate (CPI)	12.2%	10–14%	Driven by weak ruble, tax hikes, and shortages.
Unemployment Rate	3.3% (official)	6–8% (real est.)	Masked by military mobilization and informal labor.
Personal Income Tax Rate	13% (flat)	Proposed: 20%	Risk of reduced disposable income and mass discontent.
Corporate Income Tax	20%	Proposed: 30%	Could accelerate SME closures and capital flight.
VAT (Value-Added Tax)	20%	Proposed: 25%	Regressive; hits consumption hard.
Defence Spending (% of GDP)	7.8%	8.5–9%	Absorbs major portion of state budget (~40% including security).
Oil Exports (barrels/day)	7.6 million	6.9 million (projected)	Reduced by sanctions & discounts to China/India.
Natural Gas Exports to EU	60 bcm	<30 bcm	Severely cut; EU diversification nearly complete.
Ruble-to-Dollar Exchange Rate	93:1 (end 2024)	110–130:1 (volatility expected)	FX volatility impacts imports, foreign reserves strained.
National Wealth Fund (NWF)	$125 billion	<$70 billion (Q4 2025 est.)	Rapid depletion to finance deficits and war expenses.
Private Business Insolvency Rate	~20%	>35% (forecast)	Collapse in SME sector due to taxes, import bans, and credit.
Capital Flight (unofficial est.)	$60 billion	>$80 billion	Driven by elite hedging, sanctions, and poor investment climate.
Foreign Direct Investment (FDI)	-$17 billion	Negative	Net divestment by Western and even some Asian investors.

Rising Fiscal Pressures: A Tax Shock

The proposed tax increases are sweeping:

• Personal income tax is poised to rise from 13% to 20%.

  
  

• Corporate tax is expected to jump from 20% to 30%.

  
  

• VAT may be increased from 20% to 25%.

These hikes, if enacted in legislation, reflect not only a growing state need for revenue but also the absence of other reliable income sources. The direct burden on citizens and businesses threatens to throttle consumption and investment during a period of stagflation and persistent capital flight.

Business Sector at a Breaking Point

Unofficial estimates suggest that up to 35% of small and medium-sized private enterprises are now functionally insolvent. Sanctions, lack of imported machinery and components, credit scarcity, and arbitrary regulatory changes have driven a wedge through the business climate. A large-scale wave of bankruptcies would:

• Worsen unemployment.

  
  

• Shrink the tax base.

  
  

• Further weaken domestic consumption.

Foreign investors have largely withdrawn, and domestic capital is being hoarded or relocated to more stable offshore zones such as the UAE, Armenia or Kazakhstan.

The Military-Industrial Weight on the Budget

Russia’s 2025 federal budget allocates over 8% of GDP to defence, with defence and internal security spending combined consuming nearly 40% of the national public budget. This unsustainable military Keynesianism is financed by:

• Heavy extraction from the National Wealth Fund.

  
  

• Issuance of domestic bonds with inflation-adjusted interest.

  
  

• Direct transfers from profitable state enterprises like Gazprom and Rosneft.

However energy revenue is no longer reliable. Price caps on Russian oil, declining pipeline gas exports to Europe and increased competition in the Asian energy market have squeezed margins. It has been estimated that crude and refined oil products currently amount to between 35% and 45% of government revenues, which is presumably why Ukraine is focusing her strikes on Russian territory upon oil transport, storage and refinery logistics and infrastructure.

Legislative Panic and Fiscal Desperation

The Duma’s urgency in discussing these tax reforms reflects a critical shift: the Kremlin no longer believes that current fiscal arrangements are tenable. A rise in personal tax and VAT is typically regressive, hurting lower- and middle-income citizens. These moves are politically dangerous and suggest that elite options for financing the war—such as voluntary “patriotic donations”—are exhausted.

Additionally, tax increases at this scale are likely to:

• Accelerate capital flight.

  
  

• Increase underground economic activity.

  
  

• Undermine already-weak consumer confidence.

External Debt and the Illusion of Sanctions Resilience

Despite efforts to paint the economy as “sanctions-proof”, Russia’s increasing isolation from Western technology, capital, and logistics networks has created structural decay. Key vulnerabilities include:

• A shrinking, ageing, and mobilised labour force.

  
  

• Critical shortages in semiconductors, advanced machinery, and software.

  
  

• Banking sector fragility amid growing defaults and inflationary lending.

Any loss of confidence in the ruble—especially among China and India, which currently trade with Russia in local currencies—could trigger a currency crisis. Domestic retail price inflation remains well above 10%, despite official efforts to obscure real cost-of-living increases.

A Controlled Demolition or a Collapse?

While Russia may not face an immediate economic implosion, it is unmistakably drifting towards a managed form of systemic crisis. The Duma’s proposed tax rises are not signs of strength, but rather signals of fiscal desperation. Combined with widespread private sector fragility, these measures could drive a feedback loop of declining revenue, weakening demand, and increasing repression.

Western policymakers must now prepare for two possible scenarios:

1. A desperate Kremlin doubling down on militarisation and natural resources extraction.

   
   

2. An economically weakened regime forced into negotiation due to internal collapse.

Either outcome would reshape the geopolitical balance in Eastern Europe—and perhaps bring the long, bloody war in Ukraine closer to a turning point.