3. Russia's Economy 2022-2026: A Fortress Under Siege

 

Russia's Economy 2022-2026: A Fortress Under Siege

Introduction

This is the third installment in my series analyzing Russia's economy, which traces developments back to 1998. The first post covered 1998-2008 - from absolute collapse to the oil boom. The second part (2009-2021) showed how the Kremlin turned that boom into an economic "fortress": low external debt, swollen reserves and total control over strategic sectors - all of it preparation for the sanctions to come. Now let us see whether the fortress withstood what it was built for.

In February 2022, after the full-scale invasion of Ukraine began, most Western economists agreed on one thing: Russia's economy was going to collapse.

In April, the International Monetary Fund (IMF) forecast an 8.5% fall in GDP for 2022. This was no ordinary recession - it was a figure that came close to a collapse. However, by October the forecast contraction had been cut to 3.4%. The final outcome surprised everyone even more: according to Rosstat, Russia's economy shrank by only 2.1% in 2022.

Why did the economists miss by such a wide margin (as they did in most cases)? Their models rested on the assumption that sanctions would work: Russia would lose access to Western markets entirely and would be unable to find new partners. The opposite happened: Russia redirected its trade flows and built an entire system for circumventing sanctions, which we will examine in detail in Part II. The miss was no accident. It was the result of the first serious test of the "fortress" whose construction we covered in the previous two posts.

Yet this post is also about what the survival cost Russia. The fortress held, but the war turned it from a protective reserve mechanism in peacetime into a military-mobilization machine that channels resources into the defense sector. 2023-2024 was the peak of that machine's growth: the growth was real and showed up in GDP as well, but it rested on military demand and crowded out the resources of civilian sectors. 2025-2026 showed that such growth cannot be sustained for long.

That is the central question of this post: has the "fortress" merely survived, or is it already "cracking" from within?

At the same time, we need to assess the short- and long-term effects of the sanctions. In the short term, the 2022 contraction was far smaller than expected, but GDP cannot capture the long-term structural damage - restricted access to technology, costlier capital and imports, declining product quality and frozen reserves. Uncovering these costs is the subject of the rest of this post.

 

Part I. 2022: The Test

The First Shock: The Ruble Crash and Capital Controls

On February 24, 2022, Russia invaded Ukraine. That same day the West imposed sanctions on Russia's central bank and largest commercial banks, and banned exports of high-tech goods. The ruble fell immediately: on the day of the invasion, February 24, a dollar cost 84 rubles; by March 7 it had climbed to 139 - the ruble had lost roughly 40% of its value. The Moscow Stock Exchange halted trading altogether for almost a month. Russia's central bank had only a few days to work out how to stop the panic before it turned into a meltdown of the entire banking system.

On February 28, Elvira Nabiullina raised the key rate (the interest rate at which the central bank lends to commercial banks, and which ultimately determines how expensive it is to borrow across the whole economy) in one stroke, from 9.5% to 20%. The high rate made ruble savings attractive and stopped the mass flight into foreign currency. This was not standard monetary policy - it was emergency surgery. At the same time, the 20% rate virtually froze the credit market: banks suspended new mortgage lending on February 28 itself, pending a review of terms.

The same day, the central bank took three more drastic steps:

1.     It required exporters to convert 80% of their foreign-currency earnings into rubles;

2.     It restricted non-residents from selling securities and taking capital out of the country;

3.     It temporarily eased requirements on so-called "open currency positions" for sanctioned banks (a rule that normally limits how much foreign currency a bank can hold relative to its own capital); with the exchange rate in chaos, the relaxation gave banks more room to maneuver in managing their currency exposure.

This was a complex system of capital controls that was put together in a matter of days, not months.

You Can't Plan for Everything

How was this possible? The answer is that they had worked out the scheme well before the war. In 2014, the sanctions imposed after the annexation of Crimea became a proving ground for preparing the central bank for further escalation. De-dollarization, the accumulation of gold reserves and distancing from the Western financial system - this was a decade of deliberate preparation for weathering sanctions. When the new shock hit, the bank's leadership coolly activated its pre-prepared workaround mechanisms.

Still, there was one variable the plan failed to account for: the Western freeze of $300-330 billion of reserves, which amounted to almost half of Russia's international reserves.

It was a blow the Kremlin did not see coming. Until then, freezes of central bank reserves had hit only relatively small countries already ostracized from the international financial system - Iran, Venezuela, North Korea. Russia, by contrast, was a G20 member deeply integrated into global markets. The practice established over decades assumed that a central bank's sovereign assets are untouchable, even during a political conflict. The Kremlin simply could not imagine that the West would break this precedent with the stroke of a pen.

As we noted in the previous post, in 2018, fearing US sanctions, the central bank sharply cut its dollar assets, including its share of US Treasury bonds, and redistributed its reserves into yuan, euros and yen. At the start of 2022, the central bank held more than $640 billion in reserves (the fourth-largest stockpile in the world). These reserves were spread across dozens of countries and institutions, which ultimately became their main weakness. The largest portion, $224 billion, turned out to be in Belgium, in the accounts of the clearing house Euroclear. Another $33 billion was in the UK, up to $30 billion in Japan, $23 billion in France, and the rest in Luxembourg, Switzerland and the US. All of it became inaccessible overnight.

Frozen $300 Billion, Almost Five Years Later This money remains frozen, not confiscated. Most of it, $224 billion, is held at the Belgian clearing house Euroclear. In December 2025, the European Union tried to channel these funds to Ukraine as a "reparations loan", without outright confiscating the assets. However, Belgium blocked the plan: its prime minister said the legal risks for Euroclear and for international law in general were too high (Russia's central bank has filed a lawsuit against Euroclear). In the end, EU leaders agreed on a €90 billion (~$106 billion) loan raised on the capital markets rather than from the frozen Russian assets. The money is earmarked to cover Ukraine's military and economic needs in 2026-2027. What does this mean for Russia? It means that its more than $300 billion in reserves has neither been returned nor definitively confiscated. Almost five years into the war, that situation is unchanged, and for the Kremlin it is a permanent reminder of how conditional its "sovereign" financial system is whenever Western infrastructure is involved.

 

Gold and the Yuan: Assets Safe from Sanctions

Unlike its European-held assets, gold and the yuan escaped the sanctions for different reasons. The central bank's gold reserve (2,298.5 tonnes of gold worth $127 billion, or 21.7% of reserves) was physically stored in Russia itself, where the West could not reach it. The yuan reserves were invested in Chinese government securities and held in Chinese banks. They survived not because of geography but because of Beijing's political choice - China simply did not join the Western sanctions.

Where did this gold come from? The central bank began accumulating gold back in the mid-2000s, and sharply accelerated the process after 2014 in response to the first sanctions imposed over the annexation of Crimea. For years it bought gold mined at Russian mines. Between 2014 and 2022 it nearly doubled its stockpile, to 2,280-2,300 tonnes. The gold is kept in Moscow and several regional vaults rather than in foreign safes, which became the main reason it remained untouchable.

It is important not to confuse two different gold stockpiles. The 2,280-tonne stockpile mentioned above is the central bank's core international reserve and remains almost intact to this day (although 2026 saw the first small decline - see the table at the end of the post). By contrast, the National Wealth Fund had a separate, much smaller, liquid gold-and-yuan "cushion" (554.9 tonnes as of November 2022), which the government spent actively and at an accelerating pace to cover budget deficits in 2023-2026. We will return to the story of this "gold fever" in Part III.

The Energy Market Window: Planned Gains or a Windfall?

In the war's first year, the energy market brought Russia an enormous windfall. The frenzy in Europe and fears of supply disruption sent oil and gas prices soaring: a barrel of Brent, which was around $78 at the start of 2022 and rose to $97 before the war, hit $128 in March 2022. The average for the year was $99.

A natural question arises: why didn't the West impose an embargo on Russian oil immediately, in February? The answer is simple: energy dependence. Before the war, about a third of the EU's oil imports came from Russia, and some member states (notably Hungary, Slovakia and the Czech Republic) were almost entirely dependent on the Druzhba pipeline. All 27 EU member states had to approve any decision unanimously, which took months. In the end, the embargo was agreed in June 2022: for crude oil transported by sea it took effect only on December 5, and for petroleum products on February 5, 2023. In other words, the full embargo came into force almost a year after the war began. That was enough time for Russia to find new buyers and set up circumvention mechanisms, which we will examine in detail in the next part.

Meanwhile, Europe sprang into action. In 2021, pipeline-delivered Russian gas accounted for about 40% of EU gas imports (about 27% of total consumption, including liquefied natural gas, LNG). After the war began, Europe moved on several fronts at once: it increased purchases of LNG from the US and Qatar, ran Norway's pipelines at full capacity, and cut consumption through energy efficiency and alternative sources. As a result, by 2025 the share of Russian gas in EU pipeline imports had fallen to 6% (about 12% of total imports including LNG), while Norway (30.9%) and the US (26.2%) took the leading positions. It was one of the fastest energy switchovers in modern history. In 2022-2023, however, energy prices also rose sharply for European consumers themselves.

As a result, despite lower sales volumes, thanks purely to high prices, Russia earned a record $383.7 billion from oil and gas exports in 2022. This is the highest figure in the post-Soviet period, a 27-year record, and 43% more than in 2021. Of this, roughly $169 billion (11.586 trillion rubles) went straight into the federal budget in taxes and duties. That revenue became the cushion that cushioned the first year's losses.

That is the anatomy of 2022: a system built in advance, plus a lucky break in the energy market. Together, these two factors explain why the economy shrank by only 2.1% instead of the forecast 8.5%.

Part II. 2022-2023: The Architecture of Circumvention

After weathering the first shock, Russia faced one practical task: how to sell its own products and how to buy the goods it needed once Western markets had suddenly closed. The solution turned out to be not import substitution but the redirection of trade flows.

The New Geography of Imports

According to Bruegel[1], after the sanctions were imposed, exports from Western countries (the EU, US and Japan) to Russia fell from $10.5 billion a month before February 2022 to $4.6 billion a month in 2023. Over exactly the same period, exports from alternative, mainly Global South countries (China, India, Turkey, Brazil) rose from $6.0 billion to $11.5 billion a month. In other words, the shortfall on one side was almost fully made up from the other.

A Three-Layer System: Oil's Back Roads

The shift in trade flows was no accident. Behind it stood a purpose-built system for circumventing sanctions, made up of three main layers.

Before we go through the three layers, it is worth explaining what the $60 "price cap" is, since it will come up repeatedly below. In December 2022, the G7, the EU and Australia introduced a rule: Western companies could transport, insure and finance Russian oil only if it was sold at $60 a barrel or less. The mechanism's effectiveness rests not on a direct blockade but on Western dominance of the maritime insurance market, where roughly 90% of the world's tanker insurance sits with Western (mainly British) companies. Breaking the $60 cap means losing access to that insurance.

The first layer: the "shadow fleet." In place of Western tanker companies emerged a fleet of vessels consisting mainly of old tankers that are uninsured or of murky ownership. Today this fleet numbers roughly a thousand vessels and carries 60 to 80 percent of Russian oil shipments. The way it gets around the cap is simple: these vessels do not depend on Western insurance or logistics services, so they have no need to honor the $60 cap.

It worked, but it cost Russia dearly. Russian oil (Urals) sold at a discount to the international benchmark (Brent), because the "sanctions risk" was priced into it on the global market. In 2022, that discount exceeded even $30 a barrel. Later, in 2023-2024, the circumvention schemes were refined, which narrowed the discount. In 2025, however, when the US imposed new sanctions on Rosneft and Lukoil, the discount widened again, to $20.

Here a pattern emerges that you will meet many more times throughout this post: sanctions can be circumvented, but it costs Russia dearly; the tighter the restrictions, the more expensive the workarounds become.

Parallel Imports: Smuggling Made Legal

The second layer: parallel imports. In March 2022, the Russian government legalized what used to be called smuggling: importing goods without the manufacturer's permission, via third countries. In the very first year, $20 billion worth of goods came in through this scheme, and over two years (2022-2023) the total reached $70 billion. Smartphones, car parts, electronics - everything that could no longer be bought directly - flowed into Russia through Turkey, Armenia, Kazakhstan, Kyrgyzstan, the United Arab Emirates and Georgia. Kyrgyzstan's case is especially striking: its exports to Russia grew roughly 8-fold (699%) between 2021 and 2023. Sanctioned dual-use goods (semiconductors, electronic components), which can also have military applications, were also supplied to Russia through Kyrgyz and Kazakh companies. Georgia's case is more interesting: its direct exports to Russia grew by only 5% in 2021-2022. On the contrary, by 2024 Russia's share of Georgia's total exports had even fallen from 14.4% to 10.4%. Yet over exactly the same period (2021-2024), Georgia's exports to Central Asia simply "exploded":

·     To Kazakhstan: from $96 million to $860 million (+795%, nearly 9-fold);

·     To Kyrgyzstan: from $31 million to $1.3 billion (+4,100%, roughly 42-fold).

This is a textbook case of smuggling: direct trade with Russia stays almost flat, while trade turnover with the intermediary countries leaps upward. A small share of these goods really does enter Kazakhstan and, especially, Kyrgyzstan and is then sent on to Russia; the bulk of them, as the car example below shows, never reach Central Asia at all and stay en route, on Russian territory. Either way, the final destination is Russia.

Georgia's Parallel: The Strange Route of Cars Since 2021, car re-exports from Georgia have jumped by 493% and hit a historic peak in 2025. During 2025, 111,600 vehicles left Georgia for re-export, with a total value of $2.8 billion. More than two thirds of these went to just two countries: Kyrgyzstan (~30-32%) and Kazakhstan (~33-35%). Another detail stands out: the average price of a single car has nearly tripled, rising from $7,600 (2021) to $24,000 (2025).

Officially, these cars are not going from Georgia to Russia but to Kyrgyzstan and Kazakhstan (which account for the bulk of Georgian car exports). Since there is no direct overland route to Central Asia, the cars mostly have to cross Russia. And the statistics raise doubts that many of them ever reach their destination. For example: According to Georgia's national statistics office, in the first 10 months of 2024 Georgia re-exported cars worth $964 million to Kyrgyzstan; Kyrgyz statistics, however, recorded only about $50 million in imports. The remaining $900 million or more simply "vanishes" along the way. This statistical discrepancy gives solid grounds to suspect that a significant share of the cars ends up on the Russian market.   Investigative journalism backs up this suspicion. Sky News filmed expensive cars (Porsche, Lamborghini, Mercedes, Range Rover) crossing straight into Russia at the Larsi checkpoint, even though their paperwork said Central Asia or the Emirates. In online videos, drivers openly admit that the final destination is a mere formality and that the cars stay in Russia.

The Yuan and New Payment Channels

The third layer: currency and payments. Instead of the dollar and the euro, the yuan became the main currency of Russia's foreign trade. Here, too, the ground had been prepared in advance: SPFS (Russia's alternative to SWIFT for bank messaging) and the Mir national card system, both discussed in the second post, were created after 2014 and were fully ready when 2022 arrived. From 2022 on, this system also spread quickly to partner countries, especially in Central Asia and Armenia. But SPFS only handled the exchange of messages; to actually move money, Russian banks needed the Chinese system, CIPS (Cross-Border Interbank Payment System), which Beijing created in 2015 for international settlements in yuan. By 2023, at least 23 Russian banks, sanctioned ones included, were connected to CIPS. The cooperation proved cautious and fragile: after the US threatened secondary sanctions in late 2023, several Chinese banks temporarily stopped accepting Russian payments altogether, while some banks stretched processing times to 2-3 weeks. And in March 2024, Chinese banks rejected roughly 80% of transactions (Kommersant/RBC). The same pattern emerges again: there is always a way around sanctions, but it is neither cheap nor fully reliable. This was not merely a technical switch - it was the start of a new economic dependence, to which we will return in Part III.

Part III. 2023-2026: The Road to a Dead End

2023-2024: Militarized Growth

In 2022 the "economic fortress" withstood the first blow. 2023-2024 seemed, at first glance, to paint an even more impressive picture: Russia's economy not only did not collapse but grew by an average of 4.2% a year - far faster than most European countries. But this growth was neither healthy nor organic, and it leaned heavily on military spending and arms production: according to the Bank of Finland (BOFIT), war-related industries accounted for roughly 40% of growth in the first half of 2023. Private consumption helped, too: by Bloomberg Economics' calculation, of the 3.6% growth in 2023 (Rosstat's preliminary estimate), household consumption contributed 2.9 percentage points, which the central bank attributed to record-low unemployment and rising wages.

This decomposition has one important limitation: military output is spread across several components (government consumption, inventories, investment), so the military sector's real contribution is not clearly visible from the spending side. The picture comes through much better from the production side: in 2024 manufacturing (which includes defense plants) grew by 8.6%, while without the military branches the industrial sector has been essentially stagnant since mid-2023 (Center for Macroeconomic Analysis and Short-Term Forecasting, CMACP, via Meduza). In 2025, too, growth was driven mainly by war-related branches (other transport equipment +32%, fabricated metal products +18%, computers and electronics +11.7%), while most civilian branches stood still.

 

All of these figures should be treated with caution: Rosstat's data have been revised more than once (for example, 2023 growth was corrected from 3.6% to 4.1%), and military output has no real market price.

By 2025-2026 it became clear what a heavy price the economy was paying for this boom built on military demand.

That is precisely the key question of this part: is growth built on war sustainable, or is the economy keeping itself afloat by burning through its reserves?

The National Wealth Fund: Is the Cushion Wearing Thin?

The answer lies in the dynamics of the reserves. We already mentioned the National Wealth Fund in Part I. Unlike the central bank's gigantic 2,280-ton reserve, this is a much smaller and more liquid "safety cushion." As of November 2022 the fund held 554.9 tons of gold - precisely the stock the Kremlin has been spending heavily since 2023.

The fund's liquid assets, which stood at $116.5 billion before the war, had shrunk to $46.7 billion by September 1, 2026 - a decline of almost 60%. This figure does not reflect spending alone, because gold and yuan prices, the ruble exchange rate and the revaluation of assets also affect it: as of September 1, 2026 the liquid assets stood at 4.0 trillion rubles, which corresponds to an exchange rate of roughly 86 rubles. So three things must be kept apart: the physical decline in assets, the change in market value, and the amount actually used to finance the budget. The physical decline comes mainly from gold (its tonnage does not depend on prices or exchange rates): of 554.9 tons, only 131.5 tons remained by September 1, 2026 (a 76.3% reduction). It did not happen all at once:

·      In 2023 196 tons were sold;

·      In 2024 another 171 tons were sold;

·      In 2025 the fund's gold fell by 27.5 tons: the fund sold about 100 tons, but 72.4 tons bought in June with additional budget oil and gas revenues were added;

·      In 2026 the process picked up speed again: in the first eight months the fund's gold already fell by 28.7 tons, of which 9.75 tons were sold in August to finance Rostec's aviation projects.

Two Details: The Rise in Gold Prices and the Central Bank's Reserve

Alongside the gold sales from the fund, two important details must be taken into account. First: gold is not just a resource to be sold; thanks to the price surge it is also a sharply appreciated asset. In October 2023 an ounce cost about $1,800; in 2025 the price rose from $2,600 to $4,400 (1.7-fold); at the start of 2026 the peak exceeded $5,600, and at the end of September it stood at about $4,158. So the gold sold from the fund covers the budget deficit today with far more rubles than it did in 2023, when the sales began. At the same time, according to the Ministry of Finance, the combined effect of exchange-rate differences and gold revaluation in January-June 2026 was almost zero (-27.4 billion rubles), while the amount transferred to the budget through the fund's currency and gold sales in January-March, summing the monthly data, was about 458.7 billion rubles. So the decline in the fund's value is not an accurate measure of the money actually spent on the budget.

The second detail is the central bank's gold reserve. In 2022-2025 the bank barely touched it: the stock rose from 2,299 tons to roughly 2,330 tons and stayed at that level. Thanks to the price surge, however, its value grew from $127 billion (February 2022) to $402.7 billion (February 1, 2026) and made up 48.3% of international reserves, the highest share since 1995. According to the central bank, between March 2022 and February 2026 the value of monetary gold rose by more than $261 billion. But in 2026 even this "untouchable" stock was tapped: from January 1 to September 1 the central bank's gold fell from about 2,326 to 2,271 tons. In the first half of the year alone, 43.5 tons were sold, which, according to analysts, is the largest six-month reduction in the past 25 years.

Gold Holdings 2022-2026: The National Wealth Fund and the Central Bank

Year-end	Fund's gold, tons	Change over the year, tons
2022	554.9	-
2023	359.0	-196
2024	187.7	-171
2025	160.2	-27.5*
2026 (September 1)	131.5	-28.7

* In 2025 the fund sold about 100 tons, but in June it received an addition of 72.4 tons bought with additional budget oil and gas revenues.

Date	Central bank's gold, tons	Value, $ bn	Share of reserves, %
February 2022	2,298.5	127	21.7
January 1, 2026	2,325.5	326.5	43.3
February 1, 2026	2,317	402.7	48.3
September 1, 2026	2,271	333.5	43.4

Source: Russian Ministry of Finance, Central Bank of Russia, Interfax, The Moscow Times, Kommersant, Kitco, Fortune. The conversion of the central bank's gold from millions of ounces to tons (1 million oz = 31.1 t) is the author's own calculation.

Unlimited Military Spending

It is ironic that Russia's "National Wealth Fund" is being drained mainly by war spending, which has nothing to do with the nation's wealth. The official 2025 defense budget was 13.5 trillion rubles (about $169 billion), but Defense Minister Andrei Belousov himself admitted that actual defense and security spending, all categories included, reached about 15.9 trillion rubles (roughly $199 billion), or 7.3% of GDP. For comparison: before the war, in 2021, official defense spending did not exceed 3 percent of GDP.

This trajectory worsens in 2026-2027. In assessing spending, two different indicators need to be distinguished. The first is the official budget line "National Defense": for 2026 it was 12.93 trillion rubles (about $140 billion at the budgeted rate of 92.2 rubles), while the draft 2027 budget provides for 17.1 trillion rubles, up to 7% of GDP (about $195.6 billion at the projected 2027 rate of 87.4 rubles). The second is an independent estimate of war spending that combines the open and classified lines of the federal budget. By Janis Kluge's (SWP, Berlin) calculation, in the first half of 2026 alone 10.7 trillion rubles (about $140 billion, at the actual average rate of ~76.5 rubles) was spent on such items from the federal budget alone (excluding regional and off-budget channels), which is 43.8% of federal budget expenditure. These two indicators are not directly comparable arithmetically, so 10.7 trillion cannot be set against the 12.93-trillion annual plan. If the first-half pace holds through the end of the year, such spending would reach roughly 20-21 trillion rubles a year, or about 9 percent of GDP (this is a simple extrapolation, not an official forecast). Unless the intensity of the war declines, actual spending will most likely again exceed the official plan substantially in 2027.

Roughly two-thirds of war spending is classified. According to available data, it goes mainly to two areas:

·      personnel pay (partly covered from regional budgets, the pension fund and the insurer SOGAZ);

·      munitions procurement, whose cost has risen significantly with the arrival of new, more expensive jet-powered drones (compared with the earlier Geran-2).

To fund the annual increases (by tens of percent) in contract-service bonuses, regions are turning more and more often to commercial bank loans - a trend directly tied to the strain in the banking sector.

 

A New Wave of Taxes

The government's choice is clear: it offsets ever-growing military spending by raising taxes. From 2025 the corporate profit tax rose from 20 to 25 percent (bringing the federal budget an additional 1.7-1.75 trillion rubles, about $21-22 billion), and from January 1, 2026 the standard VAT rate rose from 20 to 22 percent (the reduced 10-percent rate on socially important goods such as food, medicines, children's goods and books, and the zero rate on exports, remained unchanged). At the same time, the threshold for VAT exemption for businesses on the simplified regime was cut sharply: from 60 million rubles to 20 million (about $250,000), meaning that thousands of small businesses that were previously exempt from VAT will now pay it. A further reduction of the threshold was postponed to 2030. In addition, a new technology levy on laptops and smartphones (up to 5,000 rubles per unit) is planned from December 1.

The officials' imagination does not stop there: together with the 2027 budget, the Ministry of Finance presented an additional tax package from which it plans to raise about 1.1 trillion rubles (about $13-14 billion). The package includes raising the income tax on passive income (dividends, deposit interest, securities, property sales) on a progressive scale from 13-15 percent to 22 percent, 22-percent VAT on foreign online purchases and a 100-ruble customs fee on cheap parcels, a 15-percent tax on income from investment funds (PIFs), a 35-percent tax on dividends paid to foreign investors on "type C" accounts, a windfall profits tax on exporters of nonferrous metals, fertilizers and gold, and an increase in the vehicle recycling fee. The bills have not yet been published in full, so the parameters are preliminary. The logic, however, is a single one: the resources for the war must be found at the expense of ordinary consumption.

Caught in this double squeeze (on one side the growing military-budget burden, on the other the tax pressure shifted onto business and households), the momentum of economic growth finally runs out of steam.

Inflation and the Labor Shortage

Dealing with the problems created by war-oriented spending fell to monetary policy as well. The unprecedented rise in budget spending (mainly defense) overheated the economy and increased inflationary pressure: annual inflation was 7.4% in 2023, climbed to 9.5% in 2024, and exceeded 10% at the start of 2025.

To bring inflation down, the central bank raised its key rate to 21% in October 2024 and held it there until June 2025. Then came gradual cuts: to 18% in July 2025 and to 16% by the end of the year. In July 2026 the rate fell to 14%, but in September the central bank halted the cuts because core inflation was rising again. This was a very painful decision for ordinary businesses without state orders: the high rate slowed inflation, but at the same time made credit more expensive.

Meanwhile, with hundreds of thousands of people moving into military service and the defense industry, unemployment fell to 2.1-2.4 percent. This is a historic low, but a sign not of a healthy economy but of an acute labor shortage. The shortage of skilled workers is especially severe, and the flow of labor migrants from Central Asia cannot fill the gap. What is more, in 2023-2024 the ruble's depreciation and high inflation cut the hard-currency earnings of migrant workers and took away their incentive to come to Russia. It should be noted that Russians' real incomes did grow at the same time: in the first half of 2026 real disposable income rose by 1.5% and real wages by 6.5% (Rosstat), though the pace of growth is falling.

The Wave of Overdue Loans

Everything in an economy is connected, so the consequences of high rates and war-oriented spending inevitably show up in the banking sector as well. With rates this high, loans to companies without war orders (especially in mining and metallurgy, where prices and demand fell) have gradually turned into problem assets. By June 2026, banks' problem loans (including restructured and doubtful loans) had reached 13.4 trillion rubles (about $175 billion). Of this, the corporate sector accounts for 11.3 trillion (about $148 billion), or 11.7 percent of the corporate portfolio. Overdue corporate debt stood at 3.2 trillion rubles (about $42 billion) as of August 1, 2026.

As of the same date, the number of companies and sole proprietors with overdue loans reached 195,700, or 27.6 percent of corporate borrowers. For comparison: at the end of 2025 this share was 23.8 percent, and before the war, in February 2022, 13.1 percent (60,900 borrowers). In other words, the number of problem borrowers has tripled since the war began. Moscow Credit Bank (MKB), one of the largest private banks, disclosed that its loans overdue by 61-180 days grew 7.5-fold in January-September 2025 (to 632 billion rubles) and reached 26.8 percent of its portfolio.

The central bank does not yet acknowledge systemic risks, but the risks are plain: the part of problem loans covered neither by provisions nor by reliable collateral comes to 5.5 trillion rubles (about $72 billion). This is roughly 60 percent of the banks' capital buffer, that is, capital above the minimum requirement. There are growing signs of strain in the banking sector, but that does not yet amount to a systemic banking crisis: the buffer has not yet been exhausted.

The Ruble's Strength and Its Price

The average annual dollar rate strengthened from 92.8 rubles in 2024 to 80.1 rubles in 2025, and in May 2026 fell below 75 rubles on the exchange, while the budget assumed 92.2. The natural question is: what is propping up this rate? Officially - no agency. Since November 2014 the central bank has used a floating exchange rate and under normal conditions does not intervene directly in the currency market; it reserves intervention for threats to financial stability, as happened in 2022. In practice, however, the supply of currency to the market is regulated by the "budget rule."

The budget rule is a mechanism tied to a cutoff oil price (in 2026, $59 a barrel for Urals). When the oil price is above this level, the Ministry of Finance converts the additional revenue into foreign currency and gold. If it is below, the ministry sells gold and yuan from the National Wealth Fund to the central bank to cover the budget deficit and receives rubles in return. In turn, the central bank sells the same amount of foreign currency on the domestic market (this operation is called "mirroring"). As a result, the supply of currency to the market rises, which props up the ruble.

On top of this come the central bank's own currency sales, independent of the budget rule. Their volume averaged about $111 million a day (about 8.9 billion rubles) in 2025 and about $60 million (about 4.62 billion rubles) in the first half of 2026. From January 16 to February 5, 2026, the bank announced daily currency sales totaling 17.42 billion rubles (about $222 million): 12.8 billion rubles (about $162 million) corresponded to Ministry of Finance operations and 4.62 billion rubles (about $60 million) was the bank's own sale. According to calculations by NEST[2], based on central bank statistics, the bank's currency sales grew from a monthly average of $834 million in 2023 to $2.75 billion in 2025 and reached $3.6 billion in January-February 2026. By the same calculation, in 2025 the bank's currency sales equaled 34% of the foreign-currency earnings of Russia's 29 largest exporters (12% in 2024). In other words, the ruble's exchange rate is increasingly being held up by the bank itself.

The bank's currency sales are only one factor. The ruble is also propped up by the high key rate (which makes ruble deposits attractive and imports expensive), the decline in imports caused by sanctions and expensive credit, a large trade surplus and the drop in capital flight.

War financing also helps keep the ruble strong. According to Janis Kluge, an expert at the German research institute SWP (www.swp-berlin.org), the military industry mostly involves domestic production, wages and services, so it does not weaken the ruble. This does not mean that military production is independent of imports: a large share of critical components, such as drone electronics and machine tools, comes from China, and in Russia they are mostly just assembled.

In spring 2026 another circumstance helped strengthen the ruble: in March-April the Ministry of Finance suspended its budget-rule currency operations, removing a big buyer from the market. Operations resumed on May 8, but the daily volume turned out to be half what the market expected. Then the picture changed: at the end of September the central bank's official rate was already around 84-85 rubles, and from September 7 the Ministry of Finance cut its daily currency purchases from 6.5 billion rubles (about $77 million) to 2.5 billion rubles (about $30 million).

Why does Putin's Russia go to such lengths to keep the ruble stable? The psychological factor in holding the rate is at least as important as the economic one. In Russia a depreciation of the ruble, especially a sharp swing, is perceived by the public as a rapid deterioration of the economy (a legacy of 1998 and 2014), so the exchange rate is one of the most visible signals by which people gauge stability. In addition, depreciation feeds quickly into prices and further inflames already high inflation expectations. So the authorities and the central bank pay a significant price for exchange-rate stability: spending the fund's liquid gold (from 554.9 tons to 131.5 tons) and the bank's own currency reserves.

2026: The Budget Chasm and Surging Demand for Cash

The economy's problems have shown up in the budget as well: spending far exceeds the plan. In January-August 2026 the federal budget deficit reached 5.8 trillion rubles (about $76 billion), or 2.5 percent of GDP, whereas the Ministry of Finance had planned only 3.8 trillion rubles (about $50 billion, 1.6 percent of GDP) for the entire year. Over this period spending grew by 14.7 percent while revenue grew by only 9.2 percent. Moreover, revenue growth came entirely from higher taxes: revenue excluding the oil and gas sector rose by 18.1 percent, while oil and gas revenue fell by 16.7 percent. In July the ministry raised its federal deficit forecast to 5 trillion rubles (about $58 billion), while independent economists cite 6-7 trillion rubles (about $70-81 billion), almost 3 percent of GDP. By their calculations, by the end of 2026 the consolidated deficit (adding regional budgets and off-budget funds) will approach 9-10 trillion rubles (about $105-116 billion), or roughly 4.5-5 percent of GDP.

In response to these challenges the central bank froze its key rate at 14%, but it still cannot get inflation under control: in August the annual figure reached 6.3% (after 6.0% in July), the highest since November 2025. Ukrainian drone strikes on oil refineries also contributed in part (gasoline prices rose by 24.6%). Sergei Guriev, dean of the London Business School, explains the structural nature of this phenomenon clearly: when the state pays a soldier or the military-industrial complex a billion rubles (about $12 million), for the economy this is effectively the equivalent of printing money. This product never returns to civilian circulation - the tank burns on the battlefield. Despite tighter monetary policy, the structure of government spending itself creates permanent inflationary pressure.

Even more striking is the gap between official statistics and public perception: according to a September 2026 survey conducted by InFOM on commission from the central bank, the public puts inflation over the past 12 months at a median 15.1% and expects 14.2% over the next year, far above the official figure (6.3%). This gap itself carries serious risk: with inflation expectations this high, people try to spend their money quickly, which further feeds the inflationary spiral. Strain in the banking system has also become visible and, according to Guriev, this stems partly from the structure of the system itself: the defense sector receives advance payments from the budget at the start of the year and does not depend on interest rates, while business is forced to borrow from banks at a 14% key rate, which imposes an additional "tax" on it, and this is precisely what created the wave of overdue loans. The commercial banks' liquidity deficit (the shortage of settlement funds at the central bank) grew roughly fourfold in 2026: from 0.6 trillion rubles ($6.9 billion) to 2.6 trillion ($30 billion), though for now this remains within the central bank's own annual forecast (2.4-3.6 trillion rubles, about $28-42 billion). It should not be confused with the banks' total 6-trillion-ruble ($69 billion) debt to the central bank itself, which is an entirely different indicator.

At the same time, demand for cash is rising fast: from February to July 2026 about 2.5 trillion rubles (about $33 billion) left banks in cash, with a record 643 billion rubles ($8.4 billion) in July alone. Measured against the total volume of household funds (68.5 trillion rubles, about $815 billion, as of September 1), this is so far only 3-4 percent and cannot be called mass panic. Demand for cash may also be rising on inflation expectations and does not automatically mean a loss of confidence in banks. But the trend is noticeable: in July at least 152 of 301 banks recorded a decline in term deposits, and 37% of respondents consider cash the best form of savings, the highest figure since the autumn of 2022. Western media (Washington Post, Euronews, Fortune) call this process a "slow-motion bank run."

One more detail adds fuel to citizens' fears: in June 2026 billionaire Vadim Moshkovich had $7.6 billion in assets seized. This precedent concerns big business and is technically a very different legal mechanism from freezing deposits en masse, yet an ordinary depositor naturally asks: "How do I know this won't reach me?" Capital flight has also accelerated: in the second quarter of 2026 alone, more than $9.4 billion in capital left the country.

An Oil Price Rise That Will Not Save the Budget

The pressure on the budget and the banking sector would be eased first of all by selling oil at high prices. In 2026 such an opportunity did emerge. In March, the US-Israeli military operation against Iran brought the Strait of Hormuz, through which roughly 20% of global oil supply passes, to the brink of a blockade. The price of Urals crude, which had fallen to $56.6 in February, shot up to $112.3 by April, nearly doubling in two months. The 2026 Russian budget, meanwhile, assumed a cutoff oil price of $59. To ease the global shortage, in March 2026 Washington temporarily allowed the sale of part of the Russian oil cargoes already at sea (the OFAC license was extended several times and expired on June 17). On the face of it, all this should have brought the Kremlin additional, above-plan revenue.

But this window of opportunity closed quickly. By July prices were back at the $60 level, the global market adapted fast through alternative logistics routes and strategic stock management, and China cut its crude imports and even began releasing its own reserves. In August-September the geopolitical situation in the region flared up again (including because of damage to Saudi Arabia's main east-west pipeline, which threatened 4% of global supply), and the Brent price again topped $100, but this time along a sharply volatile and unstable trajectory.

The main problem is that, because of two mechanisms, even this price rise cannot effectively help the Russian budget. The first is the strong ruble: the 2026 budget counted the dollar at 92.2 rubles, while the actual average rate was 76.5. We discussed the causes of this strength above. Oil is sold in dollars while the budget spends rubles. The stronger the ruble, the fewer rubles the same dollar buys and the lower the budget revenue. The second is the so-called "fuel damper": a mechanism by which the budget itself compensates oil refiners so that they do not raise domestic fuel prices to international levels. The higher the global fuel price, the larger the damper payout - in September alone the budget paid oil companies 305.5 billion rubles (about $3.6 billion) in damper, the highest since April 2022. In the first eight months of 2026 the damper reached 1.204 trillion rubles (about $15 billion). In other words, money comes into the budget from oil with one hand and flows back to the oil companies with the other.

As a result, despite the sharp rise in international prices, in January-July 2026 Russia received a total of 4.6 trillion rubles ($55.2 billion) in oil and gas taxes - only 127.6 billion rubles ($1.5 billion) above plan. Compared with the same period last year, this revenue is 20% lower, and compared with the 2022 boom, 35% lower. Analysts estimate that, at best, 2026 oil and gas revenue will merely match the previous year. Oil and gas revenue depends on four factors: price, export volume, the tax regime and the ruble exchange rate, so a higher price does not by itself mean higher budget revenue.

All of this together explains why economic growth slowed so sharply. After 4.1-4.3 percent growth in 2023-2024, the central bank forecasts growth of only 0.5-1.5 percent for 2026, and the IMF names a similar range of 0.9-1.5 percent. The boom phase of the war economy is over. As some economists put it, this is a shift from the government-controlled slowdown of the economy ("managed cooling") to outright stagnation.

The chart clearly shows the negative trajectory of Russia's economic growth:

 

When the State Bank's Chief Economist Tells the Truth In May 2026, at the Nikitsky Club of the Moscow Exchange, Andrei Klepach, chief economist of Russia's state development bank, said publicly: "We cannot win the competition in this war of attrition." In his assessment, Russia's economy cannot grow by more than 2-2.5 percent a year, and in 2027 growth may not even exceed 1-1.5 percent. Real disposable income is growing by only 0.6 percent this year; grain profitability, by his own example, has fallen from about 40 percent on average to 4-5 percent; and investment in fixed capital will actually shrink by 2.5 percent in 2026. He stressed in particular that Russia is losing the technological and economic competition not only to China and the US but, to a degree, even to Ukraine - a country drained by war and in the grip of a severe demographic crisis. His sharpest warning went like this: "The economy will hold out, but we will run into a social crisis just when no one expects it." He also drew a parallel with the February Revolution of 1917 and the collapse of the Soviet Union. This episode sums up the main conclusion of this part: even the state's own economists can see that the fortress is "cracking" from within.

 

None of this means Russia's economy is on the brink of collapse today: the budget system still retains liquidity, and the national currency is relatively strong. But the Kremlin is buying this macroeconomic inertia at an enormous price. The liquid gold of the National Wealth Fund has fallen from 554.9 tons in 2022 to 131.5 tons, the budget deficit is growing, economic growth has nearly ground to a halt, and even high oil prices can no longer fill the holes in the budget. The pressure will turn into a systemic crisis only under certain conditions: if the oil price stays below the budget-rule cutoff (in 2026, $59 for Urals) for a long time, the fund's liquid assets will run out or the banks' capital buffer will shrink sharply. Until that happens, high interest rates, budget deficits and labor shortages can persist for a long time without an economic collapse - that is, in a regime of prolonged stagnation.

To the question of 2022 - would the fortress hold? - a new, more critical one is now added: how long can it hold out without eroding its own foundations? The answer depends largely on when and how the war ends and what shape Russia is in when it enters peacetime. The problems described in this post - slowing economic growth, high interest rates, rising taxes, budget deficits, falling oil and gas revenue and growing problem loans in the banking sector - will not disappear on their own when the war ends. They are joined by the demographic crisis and technological lag. We will discuss these topics in the next post of the series.

 

Macroeconomic Indicators, 2020-2026

Before moving on to the concluding post on Russia's economy, let us capture 2020-2026 in a single picture. The table shows the two prewar years and the period after, so that it is clear what has changed since February 24, 2022.

Indicator	2020	2021	2022	2023	2024	2025	2026
National accounts
Real GDP growth, annual, %	-3.0	+5.6	-2.1	+4.1	+4.3	+1.0	+1.0*
GDP at current prices, $ bn	1,488	1,829	2,296	2,035	2,186	2,665	1,333^
GDP per capita, approx. $	~10,200	~12,500	~15,800	~14,000	~15,100	~18,500	~18,600^
Current account balance, $ bn	35.4	125.0	237.7	49.4	62.5	43.1	34.1^
Prices and Monetary Policy
Inflation, year-end, %	4.9	8.4	11.9	7.4	9.5	5.6	6.3^
Key interest rate, year-end, %	4.25	8.5	7.5	16.0	21.0	16.0	14.0^
Exchange rate, RUB/$, annual average	72.3	73.7	69.9	85.5	92.8	80.1	84.3^
Labor Market
Unemployment rate, %	5.6	4.8	3.9	3.1	2.5	~2.2	~2.0-2.2*
Foreign Trade (Goods)
Exports, $ bn	337	494	592	425	434	419	219.5^
Imports, $ bn	243	301	277	303	302	303	146.1^
Trade balance, $ bn	+93	+193	+316	+122	+132	+117	+73.4^
Fiscal Sector
Federal budget balance, % of GDP	-3.8	+0.4	-2.1	-1.9	-1.7	-2.6	-2.5^
Consolidated budget balance, % of GDP	n/a	n/a	n/a	n/a	n/a	-3.9	~-4.5-5◇
Defense budget ("National Defense"), % of GDP	n/a	2.5	3.0	3.6	5.3	6.2†	n/a
Reserves and Funds
International reserves (central bank), $ bn	~596	~630	~582	~599	~609	754.9	769.0^
of which: frozen by the West, $ bn	-	-	~300-330◆	~300-330◆	~300-330◆	~300-330◆	~300-330◆
of which: central bank gold, tons	~2,295	~2,298	~2,299	~2,317	~2,330	2,325.5	2,282‡
National Wealth Fund (NWF), $ bn (liquid)	117.2	116.5§	~86‖	56.6	37.5	52.3¶	46.7^
of which: NWF gold, tons	-	-	554.9‖‖	359.0	187.7	160.2¶	131.5^
Demographics
Population, million	146.4	~146.2	145.6	145.4	144.8	144.0	143.4
Births, million	1.44	1.39	1.30	1.26	1.22	not published	not published
Deaths, million	2.10	2.44	1.89	1.76	n/a	not published	not published
Natural decrease, thousand	-689	-1,050	-590	-500	n/a	not published	not published

Source: Central Bank of Russia (CBR), Ministry of Finance, Rosstat, IMF, World Bank, The Moscow Times, TASS, Interfax, Trading Economics, OSW Centre for Eastern Studies, Free Russia Foundation - compiled by individual indicator. * 2026 - central bank/IMF forecast (GDP growth, inflation and unemployment only). ^ 2026 - actual data available so far (an incomplete year, not a forecast): GDP, foreign trade and current account - first half of 2026 (January-June); federal budget deficit - January-August 2026; international reserves and the liquid part and gold of the NWF - beginning of September 2026; key interest rate and exchange rate - as of September 11-15, 2026 (not an annual average or year-end figure, since the year has not yet ended); inflation - the actual August figure (not an annual forecast); GDP per capita for 2026 - an indicative annual estimate obtained by doubling the first-half figure. ◇ Author's estimate: derived from independent economists' annual forecast for the federal deficit (6-7 trillion rubles, ~3% of GDP) and from the 2025 ratio of the consolidated to the federal deficit (approx. 1.5x); no official full-year forecast has been published to date. † The official "National Defense" budget line - according to Defense Minister Andrei Belousov, total security-related spending reached 7.3% of GDP in 2025 (see Part III). ‡ The latest public central bank gold figure is as of July 2026 (the September figure has not yet been published). ◆ Central bank reserves frozen by the West (mainly the G7 and the EU) - see Part I. The amount is included in the "international reserves" total above, not added on top of it; it has remained practically unchanged since February 2022 (a large part of it, ≈€193-210 billion, is held at Belgium's Euroclear) and as of September 2026 it has neither been returned nor finally confiscated. § The NWF's liquid assets before the war, as of February 1, 2022. ‖ The interim, rounded estimate of the NWF's liquid part for 2022 (≈6 trillion rubles) rests on Finance Minister Anton Siluanov's statement of February 6, 2023, since the exact year-end figure was not published in this format. ‖‖ The NWF's gold peak (554.9 tons) was recorded in November 2022 - in February, before the war began, the fund held only 405.7 tons of gold; the increase is explained by the conversion from dollars and euros into yuan and gold in response to sanctions. ¶ January 1, 2026, i.e. the end of 2025. NWF gold was not published as a separate item with sufficient accuracy in 2020-2021, so it is not in the table. Birth and death data for 2025-2026 do not appear in the table because Russia's official statistics agency (Rosstat) stopped regularly publishing detailed demographic data in spring 2025 (according to The Moscow Times) - itself a significant fact, pointing to reduced transparency. Population figures are international estimates and may not match Rosstat's official numbers, which some independent demographers consider overstated.

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[1] Bruegel - a Brussels-based European economic think tank, a leading source on the analysis of Russian sanctions and the redirection of trade flows.

 

[2] NEST (New Eurasian Strategies Centre) - a think tank based in London and Washington that studies Russia's long-term development. It was founded by the Russian businessman and Putin-regime opponent Mikhail Khodorkovsky; its economics program is led by Sergei Aleksashenko, a former Russian deputy finance minister (1993-1995) and first deputy chair of the central bank (1995-1998).