Stalling growth, falling oil prices, and the civilian sector sacrificed

Meduza’s top five takeaways on the Russian economy heading into 2026

The state of Russia’s economy has been one of the most difficult topics to assess during the wartime period. Contrary to apocalyptic forecasts by experts, the country weathered the sanctions shock of 2022 and even returned to economic growth — driven largely by ballooning military spending, but also by high energy prices and, in some cases, a successful reconfiguration of disrupted supply chains. Those buffers, however, were not unlimited. By 2025, accumulated risks had reached a critical point. Growth has all but stalled, oil prices have fallen, and the Kremlin is finding itself increasingly short on funds to finance its war in Ukraine. The government has turned to unpopular measures, including higher taxes on businesses and households. Even so, the economy is not yet on the brink of collapse. Meduza lays out five key takeaways from the past year — and the trends that could shape developments in 2026.

Takeaway #1

After two years of war-fueled growth, Russia’s economy is slowing to near zero

Annual GDP growth fell from 1.4 percent in the first quarter of 2025 and 1.1 percent in the second to just 0.6 percent in the third. A modest contraction is likely in the fourth quarter, and a technical recession could follow in early 2026. Still, the economy may narrowly remain in positive territory in the first quarter, posting GDP growth of around 0.5–0.6 percent, a senior economist at a Russian analytical center told Meduza.

This hovering around zero doesn’t signal an economic collapse. Rather, it reflects a return to the economy’s underlying growth potential after two years of overheating fueled by military spending. In 2023 and 2024, GDP growth exceeded 4 percent — a level not seen at any point in the previous decade, with the exception of 2021.

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Because the Russian government is spending on the war as if there were no tomorrow, inflation is being continually stoked and is declining far more slowly than the Central Bank would like. To prevent runaway consumer prices, the regulator has been forced to keep its key interest rate at exceptionally high levels.

As economic growth cooled in 2025, the Central Bank began to cut the rate very cautiously. According to the bank, as of December 15, annual inflation stood at 5.8 percent and is expected to come in below 6 percent for the year — still above the bank’s 4 percent target. Meanwhile, household inflation expectations for the year ahead climbed to 13.7 percent, returning to early-2025 levels.

At its final board meeting of 2025, the Central Bank managed to cut the key rate only slightly, to 16 percent. It now forecasts GDP growth of 0.5–1 percent for 2025 and between 0.5 percent and 1.5 percent in 2026.

Takeaway #2

Rapid military-sector growth has come at the expense of the civilian economy

In 2025, Russian industry split even more starkly into two unequal sectors: a growing military economy, prioritized for budget funding, and a civilian sector that is stagnating — and in some industries already in steep decline — as high interest rates imposed by the Central Bank choke off access to credit.

Output in the civilian core of the manufacturing sector has remained nearly 5 percent below its December 2024 level for the past three months, according to a November review by the Center for Macroeconomic Analysis and Short-Term Forecasting.

Roughly two-thirds of the sharp increase in industrial output recorded in October came from sectors dominated by the defense industry. According to Rosstat, total industrial production jumped 3 percent month-on-month in October, driven largely by defense-related manufacturing.

At the same time, production of construction materials and glass has been declining for about a year, with output of basic building materials down roughly 11–12 percent over that period.

The downturn in the auto industry has been broad-based, affecting all major product categories. In October, vehicle output fell 8.9 percent compared with the previous month and plunged 61.6 percent compared with October a year earlier.

Even the headline growth in the category of “other transport equipment,” which rose 41 percent year-on-year, masks sharp divergence within the sector: aircraft production surged 86 percent, while railcar manufacturing collapsed by 33.7 percent. As Russian Railways scaled back investment programs under the weight of nearly four trillion rubles ($52.6 billion) in debt, real capital investment in freight rail transport fell 26.5 percent in the first half of 2025, while investment in passenger rail dropped by 47.6 percent.

Preferential budget financing for the defense industry has widened the federal budget deficit and fueled inflation, leaving Russia’s Central Bank unable to cut interest rates significantly. With the key rate still in double digits, credit remains prohibitively expensive — a burden borne first and foremost by civilian industries.

Interest payments are also consuming a growing share of corporate income. By the third quarter of 2025, companies were devoting a record 38 percent of their profits to servicing debt.

Meanwhile, labor shortages have become chronic. Losses from the war, emigration, and a sharp decline in migrant inflows from Central Asia have left Russia facing an acute shortage of workers. Official unemployment remains extremely low, at 2.2 percent, but analysts at the Center for Macroeconomic Analysis and Short-Term Forecasting say this likely masks problems being pushed “inside companies,” where they take the form of hidden unemployment through reduced working hours.

Takeaway #3

The budget deficit is at a record high as reserves shrink and public debt grows

The federal budget deficit for 2025 is expected to reach a record high for modern Russia: 5.7 trillion rubles ($72 billion), or 2.6 percent of GDP — far above the 1.17 trillion rubles ($15.2 billion), or 0.5 percent of GDP, originally planned.

As of December 1, the liquid portion of Russia’s National Wealth Fund stood at 4.115 trillion rubles (1.9 percent of GDP), or about $53.4 billion. In absolute terms, that is less than the projected federal budget deficit for 2025. To avoid depleting the fund entirely, the government increased domestic borrowing this fall by 2.2 trillion rubles ($28.3 billion), bringing total planned borrowing to nearly seven trillion rubles ($90 billion). Of that amount, 1.42 trillion rubles ($18.3 billion) will go toward servicing existing obligations.

Under the budget law passed for 2026, the federal deficit is set at 3.8 trillion rubles ($48.9 billion), or 1.6 percent of GDP — but that projection appears optimistic given current oil-price dynamics. The government based its forecast on an average Urals crude price of $59 per barrel next year, one dollar higher than this year’s assumption. This raises the risk of a shortfall in oil and gas revenues. Under Russia’s fiscal rule, any such gap would have to be covered using the National Wealth Fund. A senior economist at a Russian analytical center told Meduza that the shortfall in oil and gas revenues could amount to roughly 0.5 percentage points of GDP relative to the approved budget.

In 2026, the government plans to raise an additional 5.5 trillion rubles ($70.7 billion) on the domestic market. Nearly four trillion rubles ($51.4 billion) of that would go toward financing the budget deficit, with the rest used to service existing debt. The main buyers of government bonds have been state-owned banks — Sberbank alone has purchased about 25 percent of outstanding federal loan bonds. This method of financing is among the most inflationary, akin to “printing money” (a dynamic explored in more detail by The Bell). “The more we borrow, the less room the Central Bank will have to lower interest rates,” Russia’s finance minister, Anton Siluanov, acknowledged in September.

The result is that in 2026, nearly half of all federal spending will go either to the war and security agencies (38 percent) or to servicing public debt (8 percent). Military spending, like a malignant growth, absorbs resources that could otherwise be directed toward productive uses — education, health care, science, and infrastructure. It supports employment and output in certain industrial sectors, but undermines human capital, innovation, and the prospects for development in the civilian economy.

Takeaway #4

Oil and gas revenues are falling as oil prices decline

Everything points to oil and gas revenues falling even further in 2026 than in 2025. The main driver is not so much a decline in export volumes due to U.S. sanctions on Rosneft and Lukoil, which together account for roughly half of Russia’s oil production, as the fact that Russian crude has become even cheaper — caught between sanctions-related constraints and a broader global slide in commodity prices.

“Despite the sanctions, despite announcements that India and China are cutting purchases of Russian oil, despite attacks, shipments of Russian crude are increasing — as, broadly speaking, they should under the OPEC+ [decision],” said Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center in Berlin. As planned, Russia increased output to 3.54 million barrels a day of crude exported by sea, he added.

The pickup is visible in the data. In October, growth in extractive industries reached 0.7 percent, up from an average of 0.2 percent a month in the third quarter. That increase was broad-based, affecting all major product groups.

The decline in oil prices has been driven by a surge in supply — above all from OPEC+ countries led by Saudi Arabia, which spent much of the year rapidly ramping up production that had been frozen after the pandemic. Beyond OPEC+, output has also been rising in the United States, Brazil, Guyana, Argentina, and Canada. As a result, the global oil market could face a record surplus in 2026. Analysts at the International Energy Agency estimate that with an oversupply of four million barrels a day, the average Brent price next year would be about $55 per barrel. For comparison, prices paid by Indian buyers for Russia’s Urals crude — factoring in shipping and insurance — have averaged around $57 over the past month.

“Oil prices have fallen globally, and the discount on Russian crude relative to benchmark grades at destination ports has widened by another $3–4 per barrel,” Vakulenko said. “Right now, most tankers leaving Russia’s Atlantic ports are heading not to India or China, but to Egypt. From there, of course, a tanker can change its declared destination again and say it is now sailing on an Egypt–India or Egypt–China route.”

Each additional layer of obfuscation — intermediaries that assume legal and financial risks, ship-to-ship transfers at sea, and other mechanisms used to anonymize Russian oil — comes at a cost, Vakulenko noted.

According to data from Argus Media, the average discount on Urals crude currently stands at around $27 per barrel, though it shrinks to roughly $7.5 by the time it reaches India. How much of that difference ultimately goes to Russia is unclear. What is clear is that the cheaper the oil, the stronger the temptation for buyers to look the other way when it comes to sanctions.

Takeaway #5

The economy can endure another year of war — at the cost of further degradation and falling living standards

Starting in January, the Russian government will raise the value-added tax to 22 percent, primarily to help finance military spending. At the same time, utility tariffs are set to continue rising: in 2025, household utility costs increased by nearly 12 percent nationwide on average, and further hikes are planned in 2026. A new levy on imported electronics is also being introduced, while the tax burden on small businesses is being sharply increased. All of this comes on top of earlier changes, including the increase in the corporate profit tax from 20 percent to 25 percent and the introduction of a progressive personal income tax with a top rate of 22 percent starting in 2025 — and government pledges not to raise taxes further before 2030.

“All of this comes at a cost to the economy,” a senior economist at a Russian analytical center told Meduza. “Higher taxes discourage civilian industries, reduce investment and consumption, and ultimately lower average living standards relative to what would otherwise be possible.”

Even after higher levies on households and businesses, military spending — assuming it does not grow further in real terms — still cannot be fully covered without running a deficit. And that gap could widen simply as a result of unfavorable conditions in oil exports, the economist added.

Even if the war were somehow to end tomorrow, Russia’s economy would be paying for it for years to come.

bonus

What about the ruble?

Despite sanctions, falling oil prices, and forecasts of decline, the ruble has remained strikingly strong. Since the start of the year, it has gained about 45 percent and is trading near 78 rubles to the dollar. The currency has been buoyed by a drop in imports and the Central Bank’s high interest rate, which together have reduced demand for foreign currency. At the same time, a large share of Russia’s foreign trade is now conducted in rubles: in October, 59.5 percent of exports and 56 percent of imports were settled in the currency.

Countervailing forces, however, include falling oil prices and easing interest rates. If those trends persist, the ruble is likely to weaken in 2026.

Russia’s Economic Development Ministry projects an average exchange rate of 92.2 rubles to the dollar next year. Analysts surveyed by the Central Bank in December expect the rate to average 90.3 rubles in 2026. Alexander Isakov, who heads macroeconomic research at Sber, forecasts that the ruble will weaken to around 90 per dollar by mid-2026 and to roughly 94 by year’s end. Analysts at Alfa Investments similarly expect the exchange rate to reach 92–94 rubles to the dollar by the end of 2026.

Explainer by Yulia Starostina

Photos: Getty Images; Pavel Simakov / TASS / Profimedia; Alexander Nemenov / AFP / Scanpix / LETA; Andrey Rudakov / Bloomberg / Getty Images; Kirill Kukhmar / TASS / ZUMA Press / Scanpix / LETA