Drafted on 2 September 2025, updated on 30 June 2026
Let’s start with these assumptions:
1) Italy’s GDP is higher than Russia’s.
And that of the Russian Federation is eight times lower than that of the European Union.
2) Hit by falling oil revenues and Western sanctions, Russia’s growth is slowing and its budget deficit has soared.
Why the Russian economy is starting to falter
By Marie Jégo and Benjamin Quénelle
The war in Ukraine is beginning to take its toll on the Russian economy, which is facing a sharp slowdown due to falling oil revenues and Western sanctions. It is “on the brink of recession”, acknowledged Economy Minister Maxim Rechetnikov at the St Petersburg forum, the “Russian Davos”, in June.
This remark was immediately dismissed by Vladimir Putin, who was quick to praise Russia’s resilience in the face of sanctions. But the figures do not lie. In July, the International Monetary Fund cut its growth forecast for the country from 1.5 per cent to 0.9 per cent for 2025. This figure is a far cry from the staggering 4 per cent growth rates achieved in 2023 and 2024, when the state had devoted all its financial resources to the war.
Another worrying sign is the surge in the budget deficit, which reached 4.9 trillion roubles (around 56 billion euros) at the end of July, according to the Ministry of Finance, exceeding the government’s annual target by 30 per cent. The economic slowdown, the fall in oil and gas revenues, and the depletion of reserve funds – which have been virtually exhausted by three years of war – constitute a new reality: cuts are on the cards. The Ministry of Finance will find it difficult to make cuts to defence and security, which account for just over 40 per cent of expenditure. The government will therefore have to reduce social security contributions, as well as support for civilian industries.
Exporting at rock-bottom prices
Whilst total budgetary expenditure is rising (by 20.8 per cent in one year), revenue is falling. Consequently, revenue from oil and gas sales, which accounts for around a third of federal revenue, fell by 18.5 per cent in the first seven months of the year. The reason is the price of a barrel of oil, which is trending downwards on the world market (US$66.40 at the start of August, equivalent to around €51.80), with the price of Russian crude oil falling even more sharply due to the $47.60 price cap imposed under the 18th package of sanctions recently adopted by the European Union. Faced with the West’s refusal to buy its oil, Russia has redirected its sales towards China, India and Turkey, but is exporting at rock-bottom prices; circumventing the sanctions is costly for producers, who are forced to increase the number of intermediaries.
For now, life in Moscow and other medium-sized cities across the Russian Federation remains appealing, with restaurants, theatres and luxury shops bustling with customers, but a combination of factors – falling revenues, high interest rates and persistent inflation – suggests that the economy is in crisis. Whilst the defence industry, fuelled by state contracts, “runs like a Swiss watch”, according to Sergei Aleksashenko, former deputy governor of the Central Bank of Russia (1995–1998), the civilian sector is struggling.
In the first seven months of 2025, entire sectors of the civilian economy – metallurgy, mining, construction and the automotive industry – saw their output decline. In the metallurgical sector, MMK, the Magnitogorsk Combine – one of the world’s largest steel producers and a leader in the Russian ferrous metallurgy industry – reduced its output by 18 per cent in the second quarter. Between January and June, its net profit plummeted by 88.8 per cent compared with the same period in 2024.
The coal industry is in serious trouble: production is falling, export revenues are declining and debts are rising. Even the largest companies are in the red. The net loss for the entire sector in 2025 could reach between 300 and 350 billion roubles (over 3 billion euros), warned Dmitry Lopatkin, deputy director of the Ministry of Energy’s coal industry department. As a direct consequence of the war and sanctions, this sector is struggling to compensate for the loss of European markets, to which it was one of the main suppliers. Reorienting towards the Asian market, where competition is fiercer – particularly from Australia, Indonesia and South Africa – is no easy task.
The use of ‘cannibalisation’
Especially as China, Moscow’s main trading partner, increased its imports by 14 per cent in 2024, but reduced its imports from Russia by 7 per cent. Finally, sanctions have made it difficult for Russian companies to access equipment and components from Europe, the United States and Japan, which they traditionally relied on. Having failed to overcome their dependence on Western equipment, they are forced to resort to “cannibalisation”, that is, dismantling several units to assemble a single, functioning one.
The automotive industry has also been particularly hard hit. In the first half of the year, car production fell by 28 per cent and lorry production by 40 per cent, and several factories are set to switch to a four-day working week. This is the case for the lorry manufacturer KamAZ, the car factories Avtovaz and GAZ, and the tractor plants in Chelyabinsk and St Petersburg. This reduction in working hours will result in a 20 per cent drop in wages for workers and staff at the affected factories, helping to curb consumption ( in 2026, a stark warning comes from the ‘humble’ cucumbers, a staple food on every Russian table, whose price has doubled since December 2025).
For months, industrialists and bankers have been calling for a cut in the Russian Central Bank’s key interest rate, which has been kept high to combat inflation, estimated at 10 per cent. For businesses and households, this means being able to take out loans and consumer credit once again. On 25 July, the bank lowered the key interest rate from 20% to 18%, a level insufficient to stimulate lending. With rates this high, companies find it difficult to take out loans for investment. In July, Alexei Krapivin, CEO of the construction giant Natsproektstroy, stated that many companies are unable to sustain their ongoing projects or service their debts. Over 55 per cent of loans granted to businesses are at variable rates and, with interest rates remaining high, many companies find themselves in a pre-default situation.
toxic mix
Furthermore, banks are concerned about the rapid growth in non-performing loans. From the start of 2022 to May 2025, corporate debt to banks has almost doubled. At the end of June, Bloomberg, citing banking sources, sounded the alarm over the growing risks of a systemic banking crisis. Banks have granted low-interest loans to support the Kremlin’s war effort and are now threatened by ‘non-performing loans ’. Almost half – 48 out of the 100 largest Russian banks – saw their financial results deteriorate in the first half of the year compared with 2024. Fifteen of these were making a loss.
“Having full access to the banking system’s data, I can say with confidence that fears of a banking crisis are unfounded,” Elvira Nabiullina, Governor of the Russian Central Bank, reassured on 3 July …
but this article in *Le Monde* fails to take into account the war and the Ukrainians’ latest move: the attacks on refineries, which, according to *The Wall Street Journal*, have severely reduced Russia’s production capacity, leading to petrol rationing.
The US newspaper cites a figure of 13 per cent, whilst the Corriere puts it at 17 per cent.
Below: a potato shortage in May 2025; now, however, there is talk of massive price hikes for cucumbers. Both are staples of the Russians’ daily diet.
And *Repubblica* confirms the difficulties:
Fuel prices on the domestic market have reached record highs and several petrol stations have already run out of fuel, particularly in Crimea and Siberia, where there are reports of queues of motorists at the pumps and price rises of up to 50 per cent.Reutersanalystsbelievethat the bombings have reduced the capacity to process crude oil into petrol and diesel by 17 per cent, at a time of extremely high demand: the recent holiday period has boosted travel, adding to the needs of agricultural vehicles for the grain harvest and demand for winter heating.
The air strikes are proving more precise and devastating. Engineers in Kyiv have refined the drones’ guidance systems; thanks to more powerful engines, they can now carry more explosives. Russian footage shows unmanned aircraft travelling 700–1,000 kilometres before striking the most critical facilities and destroying them. A year ago, it took just seven to ten days to get them back up and running after the raids; now it is estimated that repairs will take at least a month, perhaps two, affecting fuel production…
The Ukrainians are not limiting themselves to targeting refineries, but are also targeting the infrastructure that underpins the sale of crude oil and gas abroad: the resource that drives Russia’s war economy…
Below: Russian military spending (FT, September 2025) has exceeded $200 billion over the last eight years and is ‘out of control’, whilst Putin is reportedly considering ‘allowing’ 12-year-olds to work to make up for labour shortages in factories, fields, etc. Federico Fubini points out that the Ukrainian army has struck 160 production sites in Russia in recent months. And *Le Monde* – on 26 June 2026 – estimates Russia’s loss of oil production capacity at between 25 per cent and 33 per cent.
Then, in the Financial Times on 29 June 2026: Putin states that Russia risks a fuel shortage due to Ukrainian drone attacks on refineries. The president’s remarks represent the first admission that Kyiv’s long-range attacks have damaged production.
Also worth noting arethe queues for fuel in Crimea (The Wall Street Journal, 29 June 2026) and the fact that Russia is forced to import petrol due toUkrainian attacks (Politico, 30 June 2026)
The underlying problem is that Trump could have delivered the final blow in the war against Vladimir Putin’s Russia and brought it to its knees, but instead he chose to remain “our man in Washington”: Trump in the hands of the Russians.
P.S.: despite mounting pressure, the Russian authorities have stuck to Joseph Stalin’s Stalin-era approach of “everything for the front, everything for victory”, with wartime spending having almost doubled in nominal terms since the start of the large-scale invasion
Thanks to Damiano Paternò
Below: yet another confirmation of the trend in the Russian economy from AF, 16 February 2026, and Le Monde, April 2026: Russian GDP at -1.8% (January and February).
