The Breaking Point: Assessing the Worsening Russian Economy in July 2025 and the Costs of War

As of July 2025, the Russian economy stands in a state of profound deterioration, warped and exhausted by over three years of full-scale war against Ukraine, and a decade of increasingly aggressive foreign policy that has triggered repeated rounds of Western sanctions, capital flight and strategic isolation. While outward appearances have been masked by Kremlin propaganda and creative accounting, the underlying economic fundamentals now suggest a system under escalating strain. The war has become not merely a military quagmire but an economic death spiral: one in which short-term stability is maintained only through unsustainable levels of state intervention, coercive resource extraction, and increasingly desperate geopolitical partnerships. Here we assess the current state of the Russian economy and considers how much further it can sustain the burden of a protracted war of aggression without collapse or irreversible stagnation.

Macroeconomic Indicators: Surface Stability, Underlying Fragility

At first glance, Russia’s GDP contraction in 2024—estimated by independent economists to be between 3.5% and 5%—may appear modest given the scale of the war. Official Russian statistics, predictably, report a shallower decline or even flat growth, but these figures are manipulated by reclassification of military production as economic output and by disconnecting reported statistics from international verification. What is more telling is the breakdown of that GDP.

Over 35% of Russian economic activity is now directly tied to the war effort—through military-industrial output, state procurement contracts, occupied-territory administration, and conscription-related employment. This is not genuine growth, but rather militarised spending that yields no productivity gains and generates no civilian surplus. Inflation, although officially reported at 6%, is closer to 12–14% in real terms, especially in food, fuel and imported goods sectors, which disproportionately affect ordinary Russians.

The rouble, having stabilised for much of 2023 thanks to capital controls and artificial demand (such as mandatory rouble-conversion of export earnings), has begun to slide again in 2025. As of late June, the rouble hovers at over 120 to the US dollar on informal markets, and hard currency reserves are increasingly difficult to access due to Western asset freezes and the Kremlin’s own restrictions on private foreign exchange transactions.

Budget Deficit and War Financing: A Black Hole of Spending

Russia’s federal budget is now running a deficit estimated at over 6.5% of GDP and rising. Oil and gas revenues, traditionally the cornerstone of Russian fiscal stability, have weakened despite high global prices. Western sanctions and a European embargo on seaborne Russian oil have forced Moscow into heavy discounting to Asian buyers—primarily China and India—who now enjoy leverage to demand below-market prices. The once-lucrative European market, which paid in euros and dollars, has been largely replaced by complex barter deals, renminbi-denominated trades, or opaque financial mechanisms with poor liquidity.

To plug the fiscal gap, the Russian Ministry of Finance has resorted to extensive domestic borrowing, drawing down the National Wealth Fund and forcing state-owned banks and pension funds to purchase low-yield sovereign bonds. However with internal debt markets drying up and foreign capital long since departed, this model is becoming unsustainable. The regime is now turning to quasi-forced levies on oligarchs, direct appropriation of private enterprise revenues, and monetisation through the Central Bank—effectively printing money.

Military spending has exceeded 9 trillion roubles annually (roughly $100 billion at current market rates), a staggering 7–8% of GDP. This figure excludes off-budget items such as Wagner-type mercenary contracts, arms deliveries to foreign proxy forces, and clandestine payments to pro-Russian political actors abroad. The war has become a black hole of fiscal absorption, consuming state capacity in every domain.

Industrial Decline and Technological Regression

The most damaging long-term consequence of the war and sanctions has been the de-modernisation of the Russian economy. The withdrawal of Western firms and the severing of global supply chains have gutted Russia’s access to high-tech components, precision manufacturing equipment, semiconductors, avionics, and even basic inputs for oil refining and industrial machinery.

The Russian automotive industry, once symbolised by Lada production lines in Tolyatti, has collapsed to less than 30% of its 2021 capacity, now relying on Chinese knock-down kits and stripped-down models. Civil aviation is functioning precariously, with aircraft cannibalised for parts, Western-supplied engines failing without replacement, and domestically produced jets such as the SSJ-100 unable to fly internationally.

Even the defence-industrial complex, once considered Russia’s industrial crown jewel, is beginning to cannibalise its own stock. Shortages of imported ball bearings, microchips, thermal optics, and drone components have limited production capacity and degraded quality. Western export controls have proved increasingly effective despite Russian evasion tactics via Central Asia and the Middle East.

Labour Force and Demographic Collapse

Russia’s war economy suffers not only from material shortages but also from a human capital crisis. Estimates suggest over 1 million working-age men have been killed, wounded, or permanently disabled in the war. A further 1.5 to 2 million, including many of the most educated and globally connected citizens, have fled the country since 2022. The resulting brain drain has hollowed out Russia’s IT, legal, academic, and scientific sectors.

The domestic labour force is shrinking rapidly. To fill manufacturing jobs and replenish losses, the Kremlin is turning to coerced labour, including prisoners, conscripts and migrants, under conditions often bordering on slavery. Even state media now acknowledge labour shortages in key sectors including agriculture, construction and metallurgy.

The demographic time bomb that has haunted Russia since the 1990s—low fertility, high male mortality, and regional disparities—has now been accelerated by war. Russia is becoming older, poorer, and more dependent on coercion to keep its economy functioning.

Coping Mechanisms and the Limits of Economic Repression

The Putin regime has relied on a mixture of coercion and propaganda to maintain economic morale: restricting independent reporting, banning the publication of negative macroeconomic data, and threatening business owners who question war-related requisitions. But even in a closed economy, price signals and informal trade networks do not lie.

In July 2025, the black market in goods—from Western consumer electronics to spare car parts—thrives in most Russian cities, but prices are sky-high. Supermarket supply chains are breaking down in poorer oblasts, and anecdotal reports of rationing, medical shortages, and mass emigration from rural areas to Moscow and St Petersburg are increasing.

The social compact of the Putin era—stability and consumer comfort in exchange for political passivity—is broken. What remains is fear, enforced loyalty, and a growing awareness that the war is not bringing prosperity or glory, but hunger and debt.

How Much Longer Can It Last?

The Russian economy is not on the verge of imminent total collapse, as some early Western prognoses mistakenly predicted in 2022. But it is slowly entering a phase of irreversible degradation. The war economy model is inherently parasitic: it draws on the past reserves of capital, manpower, and trust that Russia accumulated in peacetime, but offers nothing in return. Like a parasite that eventually kills its host, this model has a natural time limit.

That limit is not measured in weeks, but perhaps in months or a few years. Three plausible scenarios emerge:

• Short-Term Holding Pattern (6–12 months): Russia continues financing the war through internal borrowing, repression, and increased dependence on China. Economic life becomes harsher, but no immediate financial collapse occurs.

  
  

• Structural Disintegration (12–24 months): Key sectors—particularly energy, defence manufacturing, and logistics—face system-wide failures due to technological decay and manpower depletion. Inflation surges, and real incomes plummet.

  
  

• Political-Economic Crisis (2+ years): Economic conditions begin to catalyse political instability, regional disobedience and elite fragmentation. Capital flight accelerates. The system becomes ungovernable except through martial rule and widespread purges.

An Empire Devouring Its Own Economy

Russia’s war of aggression against Ukraine has become, economically, an act of national self-harm. By attempting to reassert imperial control over a sovereign neighbour, the Kremlin has invited systemic decline—technological, fiscal, and demographic. The longer the war continues, the narrower the Kremlin’s options become: to stop is to admit defeat, but to continue is to risk economic implosion.

There remains no plausible pathway for Russian economic renewal while the war endures. Nor can China or the Global South provide substitutes for Western capital, technology and demand. Russia’s economic model—once predicated on oil exports and European trade—is now dependent upon coercion, concealment, and scavenging.

The Russian Federation may continue to function on paper for some time yet. But beneath the surface, the wheels are grinding without oil, and the machine is shaking apart. The economy of war is no longer a means to power—it is a trap, and Russia is running out of ways to escape.