As the Kremlin stalls on peace talks, Russia’s economy shows mounting strain
The wartime mobilization of Russia’s economy has drained its reserves, though the country has so far avoided slipping into a recession. Civilian industries are stagnating or already shrinking, while only the military sector continues to grow. The budget deficit — which swelled by 1.2 trillion rubles ($14.9 billion) in July alone — is now nearing five trillion ($62 billion). Economic problems are piling up, financial risks for ordinary Russians are mounting, but none of it has been enough to push the Kremlin to end the war in Ukraine. Meduza examines the main cracks in Russia’s economy and the dangers lurking behind them.
The economy is slowing
Russia’s economy is continuing to cool. GDP growth slipped to 1.1 percent in the second quarter of 2025, according to a preliminary estimate from Russia’s Federal State Statistics Service (Rosstat), down from 1.4 percent in the first quarter. For the first half of the year, the Economic Development Ministry calculated annual growth at 1.2 percent. The country has so far managed to avoid recession, and the gradual slowdown, in the view of Central Bank head Elvira Nabiullina, amounts to a “soft landing” after two years of wartime acceleration fueled by massive government spending. Analysts surveyed by the Central Bank in July expect1.4 percent growth for 2025, compared with 4.3 percent in 2024 and 4.1 percent in 2023.
Inflation, too, has finally begun to ease. In July, the annual rate slowed to 8.79 percent, down from 9.4 percent at the end of June and 10.34 percent at the end of March, Rosstat reported. That gave the cautious Central Bank room to trim interest rates from punishing highs, cutting its key rate from 20 to 18 percent. Officials have signaled that they may lower it further at upcoming meetings, though nothing is set in stone: the rate could stay at 18 percent or be reduced to as low as 14 percent by the end of the year. Much will depend on the ruble, with economists warning that a sharp weakening of the currency could send inflation climbing again.
Either way, rates will remain very high in 2025, continuing to dampen consumer demand and, in turn, slow the broader economy.
The labor market is overheating
Since the start of the full-scale war in 2022, Russia’s unemployment rate has kept setting new record lows. At an economic meeting before his visit to Alaska, President Vladimir Putin once again highlighted the striking figure of 2.2 percent registered unemployment Russia reached in May. But it’s hardly a milestone to boast about. The economy is suffering from the steady loss of men from the labor force and from military casualties.
The demands of the front, combined with the emigration of skilled professionals after the full-scale war began, have drained the labor market almost completely, creating a severe worker shortage and driving a race in nominal wages. Mortality figures became so alarming that the government ordered Rosstat to classify nearly all demographic statistics. The labor market remains overheated, and the wage race is undermining the Central Bank’s effort to bring inflation under lasting control. In May, average nominal wages grew by 14.5 percent year on year, Rosstat reported; adjusted for inflation, that meant 4.2 percent growth.
Despite the acute labor shortage, many companies — including the cement producer Cemros, the automakers Kamaz, GAZ, and LiAZ, the Chelyabinsk Electrometallurgical Plant, and Uralasbest — are shifting employees to shorter work weeks. The reason is falling demand as a result of a widening imbalance between the military and civilian sectors of the economy. Financial and labor resources are being funneled into the defense industry at the expense of civilian sectors, which are also feeling the pressure of the Central Bank’s punishingly high interest rate. Over six months, the share of companies planning layoffs rose from 6.9 percent in January to 11.5 percent in July, according to the Central Bank.
Non-military sectors are slumping
Since the start of 2025, civilian industries have begun to lag far behind sectors tied to the military-industrial complex, which has become the main driver of economic growth. Figures on overall industrial output are being entirely propped up by sectors where defense production dominates, according to the government-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF).
Industries without a defense component have been shrinking by an average of 0.3 percent each month compared to the one before. In June alone, output in civilian sectors dropped 0.9 percent year on year. Growth in these sectors has been absent since mid-2023, CMASF noted earlier this year. “With the exception of the military part of the economy, everything else is around zero or negative,” concurred Natalia Zubarevich, a professor at Moscow State University.
The decline is accelerating in the auto industry and in basic construction materials, particularly cement, CMASF reported. In the first quarter, output of construction materials fell an average of 1.2 percent each month; in the second quarter, the pace quickened to 1.9 percent (including a 2.1 percent drop in June). By July, activity in the sector had fallen back to nearly the levels of five years ago — during the 2020 COVID-19 pandemic.
Other consumer industries are also struggling. In the first half of 2025, Rosstat reported, production of televisions and washing machines fell by almost 30 percent, refrigerators by 12 percent, and footwear by 29 percent. At the same time, sectors linked to state defense orders are expanding: “specialized transport equipment” grew by 35 percent, and “fabricated metal products” by 14 percent.
How Russia is plugging its budget gap
Falling oil prices continue to erode Russia’s resource revenues. Over May, June, and July, shortfalls from baseline monthly oil and gas income added up to nearly 100 billion rubles ($1.2 billion). In August, the Finance Ministry expects that figure to grow by another 12.1 billion ($150.2 million).
To make up for the lost revenue, the ministry is dipping into the National Wealth Fund’s reserves. As of August 1, the fund’s liquid assets stood at the equivalent of 3.95 trillion rubles, or $48.3 billion. Since the start of the full-scale war, the Russian government has already spent roughly half the sovereign fund: on February 1, 2022, liquid assets totaled 8.78 trillion rubles, or $112.7 billion.
Even so, the Russian authorities have no plans to scale back the enormous military spending budgeted for 2025. Defense and national security are set to consume 40 percent of all federal spending — the highest share since the collapse of the Soviet Union.
As a result, the federal budget deficit reached 4.88 trillion rubles ($60.7 billion), or 2.2 percent of GDP, in the first seven months of the year. In July alone, the shortfall jumped by 1.2 trillion rubles ($14.9 billion). The Finance Ministry’s full-year deficit target had been 3.8 trillion rubles ($47.2 billion). Without spending cuts, the deficit could exceed three percent of GDP by the end of 2025.
For now, the Finance Ministry is relying on the same tool — the National Wealth Fund. Between July 7 and August 6, net sales of foreign currency from the fund’s reserves averaged 9.7 billion rubles ($120.4 million) per day. From August 7 to September 4, the ministry plans to sell 9.2 billion rubles ($114.2 million) daily. If that pace were to continue, the fund’s liquid reserves would be exhausted in less than two years.
And if — or when — the sovereign reserves run dry, the government may have little choice but to raise taxes on households and businesses again, while also increasing state borrowing.
We usually do the talking at fundraisers. This time, we’ll let our readers speak for us. “For years, Meduza’s been one of the only news outlets keeping me from going nuts. I’m still in Russia, still holding it together, but just barely. I know I’m not the only one. So, please show some love for Meduza and help keep us from going cuckoo!” — Lyu
Text by Yulia Starostina