Russia faces economic stagnation in 2026 amid war and western sanctions

With tightening Western sanctions and continued military spending pressures due to the ongoing war in Ukraine, Russia is likely to slip from a phase of “managed cooling” into full stagnation in 2026, with any significant recovery unlikely before 2027.

The previous economic boost from wartime military spending is fading, with costs expected to be passed on through higher taxes, while revenues decline due to lower oil prices and ongoing Western pressure on Russian energy exports.

War-Driven Economic Boom Fades

The year 2025 marked the end of Russia’s rapid wartime economic growth during 2023-2024. After two years of expansion exceeding 4%, GDP growth for 2025 is expected to slow to around 1% or lower, with similar challenges likely to persist in 2026.

The economy has largely exhausted the temporary factors that supported growth in 2023 and 2024. In 2023, rapid expansion reflected a recovery from the 2022 shock, when the economy had to quickly reorient toward wartime production.

In 2024, growth was further fueled by a sharp increase in government spending. Federal expenditures rose by roughly a quarter that year, from 32.35 trillion rubles ($404.4 billion) in 2023 to 40.2 trillion rubles ($502.5 billion), injecting demand into the economy.

These growth drivers were largely absent in 2025, and there is no obvious catalyst to revive growth in 2026.

Government spending is projected to reach 42.3 trillion rubles ($528.8 billion) in 2025 and 44.1 trillion rubles ($551.3 billion) in 2026, remaining mostly unchanged after inflation adjustments. Combined with interest rates around 16% aimed at curbing inflation, this points to an economy locked near stagnation, as Moscow policymakers attempt to balance growth with price stability.

As a result, many analysts now expect GDP growth to hover around 1% in both 2025 and 2026. Russia’s Academy of Sciences’ Institute for Economic Forecasting projects 0.7% growth in 2025 and 1.4% in 2026, accelerating to around 2% in 2027. The International Monetary Fund forecasts 0.6% growth in 2025 and 1.0% in 2026.

Falling revenues and rising tax burden

For the first time since the pandemic, Russia collected less budget revenue in 2025 than originally planned. When the 2025 budget was approved, revenues were set at 40.3 trillion rubles ($503.8 billion). Updated forecasts suggest actual revenues will approach 36.6 trillion rubles ($457.5 billion).

This represents a shift from the previous three years, including 2022, when revenues consistently exceeded initial projections.

The shortfall partly reflects weaker tax collection due to slower growth, as well as falling oil prices and Western sanctions that have widened the discount Russia must offer buyers for its crude oil.

Oil and gas revenues in 2025 are now expected at 8.7 trillion rubles ($108.8 billion), far below the initially planned 10.9 trillion rubles ($136.3 billion). With slower growth and oil prices under pressure, 2026 is likely to be another year of weak budget revenues.

The World Bank expects a global oil supply surplus to push Brent crude prices down from an average of $68 per barrel in 2025 to around $60 in 2026, the lowest in five years.

Authorities are now raising taxes to support the budget. VAT will increase from 20% to 22% from January 1, more businesses will be included in the VAT system, and the annual revenue threshold for mandatory payments is lowered from 60 million rubles ($750,000) to 10 million rubles ($125,000).

The government also plans to impose a tax on ready-to-use electronic goods, including laptops, smartphones, and lighting products.

Overall, these measures signal a post-spending period, with households and businesses facing higher taxes to fill the Kremlin’s war coffers, while the energy sector struggles under sanctions.

No relief from war pressures

Despite the economic slowdown, Russian authorities have little room to reduce military spending while the war in Ukraine continues.

President Vladimir Putin has shown no signs of retreat from his maximalist demands, repeatedly stating that Russia is prepared to fight until it secures control over the four Ukrainian regions it claims to have annexed.

Officially, national defense spending is set at 13.5 trillion rubles ($168.8 billion) in 2025 and 12.93 trillion rubles ($161.6 billion) in 2026. Actual spending, including classified expenditures, is likely higher.

Russia does not disclose full military spending in its federal budget, publishing only planned figures. Occasionally, officials provide partial data. In December, Defense Minister Andrei Belousov said defense spending reached 7.3% of GDP in 2025.

With GDP estimated at 217.3 trillion rubles ($2.72 trillion) in 2025, this implies total defense spending of around 15.86 trillion rubles ($198.3 billion), far above the budgeted figures.

As the war continues into 2026, military expenditures will remain a major constraint on the economy and its recovery prospects.

The increasing funds devoted to weapons production and war efforts do little to expand consumer goods supply, adding inflationary pressure.

The longer the war continues, the fewer resources will be available for civilian development, while taxes are likely to rise further to close the gap between spending and revenue.