In June 2025, Russian President Vladimir Putin stated at the St. Petersburg International Economic Forum that Western sanctions had not isolated Russia; instead, they had spurred economic cooperation with “reliable partners”. and the Russian economy was showing positive momentum. However, just two months later, the Russian government revised down its economic growth forecast, a shift that reveals the fragility of a wartime economy and the gap between Putin’s rhetoric and reality.

At the time, Putin emphasized that revenues from Russia’s non-oil and non-gas sectors were growing strongly, while unemployment and inflation were near historic lows. However, CPI data released in July showed that inflation in Russia remained at around 9%, far higher than the 2.9% figure cited by Putin, based on the official Russian narrative. Although subsequent official statistics indicated that annualized inflation had eased to about 6.6% by November 2025, it remained well above Putin’s claims, which reflects that there are persistent price pressures.

Meanwhile, overall economic growth in Russia has slowed sharply. The latest forecasts from the International Monetary Fund (IMF) and other institutions suggest that Russia’s real GDP growth in 2025 is likely to hover in a range of “around 0.6% and no higher than 1.5%,” far below earlier expectations and significantly weaker than the “positive growth momentum” previously implied by Putin. In fact, based on Russia’s most recent official data, together with Putin’s own public remarks during his year-end address, the nationwide GDP growth in 2025 is likely to be around 1%. In addition, some independent statistics show that Russia’s GDP grew by only about 1.1% year on year in the second quarter, a marked slowdown compared with the same period in 2024.

Moreover, according to the latest report by the German Institute for International and Security Affairs (SWP), Russia’s total military expenditure reached RUB 8.48 trillion (approximately USD 106 billion) in the first half of 2025, with non-public spending accounting for roughly half of the total. This sharp surge in the military budget has pushed defense spending to 40.5% of Russia’s overall budget, which is in fact a historic high. Compared with 2023, Russia’s military spending has increased by 31%, and compared with the first year of the war in 2022, it has risen by as much as threefold. In practical terms, this means that for every two rubles of tax revenue collected by the Russian government, roughly one ruble is being spent on the military and weapons procurement.

These military expenditures not only finance Russia’s war effort but have also distorted the broader macroeconomic structure. Under this heavy fiscal burden, an ever-larger share of government spending has been diverted toward defense and security. In 2025, military and security expenditures are expected to account for around 40% of national fiscal spending, equivalent to nearly 8% of GDP. These funds are used not only for procuring military equipment but also for paying tens of billions of dollars to Iran and North Korea in exchange for weapons and combat personnel. According to estimates by the Stockholm International Peace Research Institute (SIPRI), Russia’s planned military spending in 2025 amounts to approximately RUB 15.5 trillion rubles, or about 7.2% of GDP. Although this GDP share differs somewhat from figures cited by other sources, it nevertheless shows the overwhelming weight of military expenditure in the economy. Taken together, Russia’s war-related spending clearly occupies a critically important position in the country’s public finances.

However, in contrast to the rapid expansion of Russia’s wartime military spending, its economic growth has slowed markedly. At a cabinet meeting on August 27, 2025, Russian Finance Minister Anton Siluanov stated that the forecast for Russia’s GDP growth in 2025 had been revised down from the previously expected 2.5% to 1.5%. He attributed this slowdown to the dampening effect of high interest rates on credit demand among businesses and households. In an effort to curb inflation, the Russian central bank raised its key policy rate to 21% starting in October 2024. Although the rate was later reduced slightly, credit demand has remained weak, leaving private-sector economic activity subdued.

In the second quarter, Russia’s GDP growth rate declined sharply, and growth in July was only 0.4%, far below the pace recorded in the same period of 2024. The growth rates of industrial production and retail trade have also slowed significantly, reflecting the reality of a weak economy. Retail sales grew by only 2%, well below earlier expectations. In particular, food retail sales rose by 2.4%, indicating that food now accounts for a larger share of consumer spending. This is a clear indication that living standards for Russian households have deteriorated significantly. Corporate performance has also been disappointing. In the first half of 2025, profits of Russian companies fell by 8.4% year-on-year, with profits in the oil and gas sector plunging by 50.4%. Taken together, these figures suggest that Russia’s wartime economy has not only led to imbalances in fiscal spending but has also had a profound negative impact on domestic production and corporate operations.

A number of researchers, including Russian economists, have already warned that as military spending continues to rise, Russia’s economic structure is becoming increasingly distorted. Massive defense outlays are absorbing a large share of fiscal resources, leaving non-military sectors deprived of funding and leading to serious imbalances in resource allocation. Under a wartime economy, labor losses and supply-side compression are intensifying inflationary pressures, making it difficult to lower interest rates and thereby creating a vicious cycle.

The problem with this economic model is that while military spending may provide a short-term boost to certain areas of growth, its potential damage to the broader macroeconomy is long-lasting and profound. As the share of defense spending continues to rise, Russia’s overall productivity and competitiveness have been constrained. With large volumes of capital diverted into military projects, resources in other sectors cannot be used efficiently, leading to a steady decline in the production of civilian and consumer goods and a gradual loss of momentum in overall economic growth.

Some Russian economists have pointed out that as labor shortages and shortages of raw material supplies persist, inflation and high interest rates will continue to weigh on the economy. This, in turn, will lead to diminishing marginal returns in Russia’s economic performance. The contribution of military spending to growth will gradually decline and may even have a clearly negative impact on overall economic development.

Taken together, the findings of German think-tank research and statements by Russian officials suggest that structural problems and deep-seated challenges in Russia’s economic performance are gradually surfacing. The risk of further deterioration is a very real possibility, and a continued deepening of this trend could give rise to the following potential consequences.

First, when it comes to attitudes toward the Russia–Ukraine conflict, there will remain incentives pushing the United States and Europe toward greater alignment in their positions. For sure, the U.S. now has shown a stronger willingness than the European Union to promote a negotiated settlement. However, previous meetings between the U.S. and Russian presidents failed to produce particularly satisfactory results all the same. Moreover, during the latest round of talks in late December 2025, President Donald Trump made it clear that the issue of Ukrainian territory remained unresolved. At the same time, EU countries have maintained a relatively firm stance in supporting Ukraine. The increasingly evident and deepening economic difficulties facing Russia are likely to strengthen Ukraine’s resolve to resist and further solidify the EU’s commitment to supporting Kyiv. Together, these factors will exert pressure on the U.S. government, making it difficult for hardline elements in Washington’s policy toward Russia to fully dissipate.

Second, as Russia’s economic difficulties become more visible and deepen, there is a real possibility that economic nationalism in Russia will further intensify, potentially even taking on more extreme forms. This is bad news for Chinese companies operating in the Russian market. Earlier, following a surge in imports from China, the Russian government formally imposed an import ban on Chinese trucks. Although this move was widely seen as largely symbolic, given the Russian truck industry’s heavy reliance on Chinese components, it nonetheless set an important precedent. Based on historical patterns, economic nationalism tends to strengthen under conditions of economic stress. Hnence, pressure from Russian authorities on imports of Chinese goods, as well as policy demands pushing Chinese companies toward deeper localization, are likely to increase over time. Moreover, driven by a direct need to raise revenue, Chinese firms and Chinese personnel operating in Russia may face more frequent and onerous “extraction” demands, further eroding the business environment and making operating conditions increasingly challenging.

Third, the broader economic environment is a crucial foundation for corporate profitability. If Russia’s overall economic conditions continue to deteriorate, the purchasing power of the government, businesses, and households is likely to weaken significantly, increasing the uncertainty surrounding the profitability of Chinese companies’ operations in Russia.

Final analysis conclusion:

While Russia’s wartime economy has temporarily supported the development of certain sectors through increased military spending, the long-term structural imbalances create a vicious cycle, and economic decline is almost inevitable. Even if the Russia–Ukraine conflict were ultimately resolved peacefully through Trump’s mediation, the Russian economy could still face heightened recessionary pressures in the coming years. For Chinese companies with significant operations in Russia, it would be prudent to plan ahead and prepare for these potential challenges.

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Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.