More than four years into the war in Ukraine, Russia’s economy is no longer a single story. It is a two-tier system, with military industries thriving while much of the rest of the country faces rising prices, costly credit and the fallout from Western sanctions.
Alex Kolyandr, director for Europe at consulting firm Eurasia Group, described the divide in stark terms. “If you are lucky and you’re employed by a tank production company, then everything’s good. Otherwise, you are probably facing problems,” he told CNBC.
The pressures have come into sharper focus in recent weeks as Ukrainian long-range drones struck Russian oil refineries and delivery warehouses, threatening a key source of funding for the Kremlin.
Russia’s economy has defied many early predictions and is even growing slowly, according to recent official figures. Analysts, however, say the numbers mask deeper troubles, including the state’s heavy reliance on military spending, higher taxes and subsidized bank lending.
Kolyandr warned that the worsening situation could push President Vladimir Putin toward escalation rather than negotiation. “If I were Putin, God forbid, I would probably decide that it is in my interest to escalate now and try to finish the war on my terms, than wait until the money ends sometime in the future,” he said.
The Russian Embassy in London and Russia’s Foreign Ministry did not immediately respond to CNBC’s request for comment. Kolyandr said the Kremlin could balance its books with what he called “bookkeeping acrobatics,” but the economic problems “will not go away and are still mounting.” He added: “It has already started, through inflation, through the slowdown in the non-military economy, through higher interest rates.”
Official data published this week showed Russia’s gross domestic product expanded 1.3% in the April to June period from a year earlier, the first quarterly growth since 2023. For the first half of the year, GDP increased 0.6%, and both readings beat government and central bank forecasts. The figures suggest that state spending on the military industry, together with a recent rise in oil and gas prices, has helped support the wartime economy.
Charles Lichfield, director of economic foresight and analysis at the Atlantic Council’s GeoEconomics Center, said the most telling indicators are the deficit and inflation. “They are on course to double the deficit they had in 2025 and that was already double what they had in 2024,” he said, pointing to depressed energy revenues despite higher fossil fuel prices in recent months.
In the first half of 2026, oil and gas revenues were 64% of their level in the same period two years ago. Sustained Ukrainian drone strikes have hit refineries, and tougher Western sanctions have begun to bite, including a lower European Union price cap on Russian oil and measures targeting enablers of Moscow’s shadow fleet.
Lichfield noted that inflation was brought down to roughly the central bank’s 4% target late last year, a considerable achievement given internal and external pressures, but he said that progress is unlikely to last. Earlier in the year, Russia’s largest retailer reported that citizens were increasingly switching to low-cost and private label food products, a sign of growing consumer strain.
Asked what levers the Kremlin could pull to ease the strain, Lichfield said Russian authorities might tax oil and gas companies more heavily than the current tax code suggests, attempt to borrow internationally, or tap the half of the central bank’s reserves that remain outside Western sanctions. Around $300 billion in reserves was frozen after the full-scale invasion began, and an estimated $300 billion is held either inside Russia or in jurisdictions not enforcing sanctions.
That money could technically be used to plug fiscal gaps, Lichfield said, though it might undermine confidence in the central bank’s commitment to fighting inflation. Even so, he said he does not expect Russia to end the war for economic reasons.
Elina Ribakova, a senior fellow at the Peterson Institute for International Economics, echoed that view, saying Russia is unlikely to change course while oil prices are relatively high. “It has to get much more dire,” she told CNBC in a phone interview. “If you tell me that we will have oil prices at $35 or $40 for the next year, then it might decide. But at the moment, especially given the war between Israel, the U.S. and Iran, it is unlikely.”
Ribakova said the conversation was different in January and February, when oil prices were much lower and the Russian government was already discussing revisions to its 2026 budget, a sign of serious fiscal trouble. She added that Putin has “staked so much” on the war “that he almost feels as like he has to keep on going.”
Neither Lichfield nor Ribakova expects economic pressure alone to force an end to the war, but both say the strain is mounting and becoming harder for the Kremlin to hide.
