Ever since the west launched its financial sanctions against Russia in July 2014, President Vladimir Putin has boasted that they have just made Russia stronger. Yet, contradicting himself, he has also called for an end to these sanctions, making clear that they bite. Since October 2024, senior Russian officials talk about “stagflation”—that is, high inflation and minimal economic growth.
The collective west introduced three kinds of economic sanctions after Russia launched its full-scale invasion in February 2022: financial sanctions, technology sanctions, and energy sanctions. They have all evolved over time. When the sanctions were first imposed, they caused an exchange crisis in 2014 and 2022, but the strong Russian Central Bank managed to overcome the fallout. In the longer term, however, the sanctions have starved Russia of international financing and top-tier technology.
The Russian authorities boast about two years of 4.1% GDP growth as their success, but Russia had a full decade of just about 1% a growth a year. The source of the alleged real growth in the last two years is entirely the military and related sectors. Arms are largely produced by state-owned enterprises and bought by the state. Their prices can easily be manipulated as was the case in Soviet times.
The economists Grigory Khanin and Vasily Selyunin revealed in 1987 that the USSR had exaggerated its real growth rate by 3-4%a year by calling some inflation economic growth. While we cannot prove it yet, it is likely to happen again. Moreover, a few years ago, the government relieved the Russian Statistical Agency of all independence, facilitating state manipulation of statistics. For 2025, the Central Bank predicts an economic growth of 1-2%, that is, near stagnation.
Officially, Russia’s consumer inflation is 12%, but Russia’s state-controlled inflation measure is not credible. An independent opinion poll company, ROMIR, has measured “the average cost of a Russian food basket, consisting of products from 35 everyday product groups.” Its latest monthly recording occurred in September 2024, when it reached the impermissible level of 22%, so further publication has apparently been prohibited. Since October 2024, the Central Bank has maintained an interest rate of 21%. In December, a substantial increase was expected because of the rising inflation. But Putin talked with Elvira Nabiullina, the chair of the Central Bank, presumably telling her not to hike, dissipating all illusions about the independence of the central bank.
Russia’s inflation is not caused by fiscal profligacy. On the contrary, Russia has long maintained budget surpluses, though it had a tiny budget deficit of 2% of GDP in 2022, 2023, and 2024.
For a normal country, a budget deficit of 2% of GDP would be of no concern, but the western financial sanctions since July 2014 have been quite effective, blocking Russia’s access to international financing. In 2013, Russia had a total private and public foreign debt of $729 bn, which plummeted to $290 bn by 2024. Although Russia has minimal debts, nobody, including Chinese state banks, dares to lend Russia money out of fear of western sanctions.
Recently, Russia has raised its taxes substantially. It has abandoned its flat income tax of 13%, introducing a progressive income tax, up to 22%. The corporate profit tax has been boosted from 20% to 25%. At most, this will give Russia 1.5% of GDP more in state revenues in 2025. Most of the deficit will have to be financed with the sales of domestic bonds, whose interest rates have skyrocketed, doubling the cost of the public debt in two years.
Russia remains completely dependent on one single source of financing: the National Wealth Fund. Before 2022, it contained $183 bn, but not all was liquid. At the end of 2024 it had only $38 bn of liquid assets. In the second half of 2025, Russia is facing a financial crunch. It has no sources left to finance its budget: either it cuts military expenditures of about 10% of GDP or slashes social expenditures even more.
The west sanctioned Russian energy in 2023. Moscow has stopped publishing most foreign trade statistics, but Bank of Finland Institute for Emerging Economics estimates that Russia’s total exports plummeted by 28% to $425 bn from 2022 to 2023 and recovered only to $434 bn in 2024, because the western energy sanctions had not been significantly tightened until the very end of 2024.
The western technology sanctions have had devastating effects on Russian manufacturing. A telling headline reads: “Russia has built only 7 out of 108 planned airliners since 2022.” In the civilian sector, the disaster is obvious, and it is presumably similar in the armaments sector, largely monopolised by Sergei Chemezov’s corrupt state company Rostec. Western technology sanctions are becoming ever more effective, but the multilateral western Coordinating Committee for Multilateral Export Controls (CoCom) of the Cold War should be re-established.
Apart from the financial squeeze, Russia’s greatest economic problem is labour shortage, reflected in a minimal official unemployment of 2.1%. In 2022, Russia was hit by two waves of emigration of young, well-educated men, following the full-scale invasion in February and mobilisation in September. The war itself has been very costly. Almost 200 000 Russian soldiers have been killed and probably 600 000 have been injured. The Soviet Union had massive problems with veterans after its unfortunate war in Afghanistan, and the situation will be far worse for Russia with the war in Ukraine. Putin is scared of renewing mobilisation. Instead, Russia offers high signing bonuses of new soldiers.
Russia is approaching crunch time in the autumn of 2025. Inflation stays high. People are angry over rising food prices. Major bankruptcies are auguring, while the Russian state cannot afford major bailouts. The business’s criticism of the Central Bank for high interest rates is fierce. The shortage of labour—and soldiers—is desperate. The critical shortage is budget financing, as Russia’s last liquid reserves are likely to run out in the autumn of 2025. Budget cuts will become necessary. The economy will become a greater constraint on Putin’s warfare. His only obvious salvation would be if Trump eases western sanctions on Russia’s finances. Unfortunately, this is a real possibility.
This article was written for the Lennart Meri Conference special issue of ICDS Diplomaatia magazine. Views expressed in ICDS publications are those of the author(s).
