Russia's wartime economy shows strain from military spending

Russia's economy is facing increasing difficulties driven by substantial military expenditures, which are expanding the budget deficit. Both consumers and businesses are reporting more pessimistic outlooks, and economic growth has decelerated. Despite these pressures, economists suggest that an immediate financial crisis or economic collapse is not imminent. Crucial oil export revenues are reportedly holding up, enabling the government to fund its ongoing military operations. Low unemployment and government support in less affluent regions are also contributing to public stability.

However, economists warn of long-term issues that could undermine the economy's foundations. Indicators of consumer sentiment have declined since a peak in 2024-25, a period when military spending had boosted growth and wages. More recently, consumers have contended with higher gasoline prices and shortages resulting from Ukrainian drone attacks on refineries. Many small businesses have also experienced losses due to strikes against online retailers. Economic growth has slowed from a peak of over 4% annual expansion in 2023-24, with the government forecasting 0.6% for 2026. The economy contracted in the first quarter before a partial rebound in the second.

Consumer sentiment decline

The consumer sentiment index compiled by the Levada Center fell to 94 over the summer, a decrease from 116 in the spring and summer of 2025. Readings below 100 signify that consumer sentiment is more negative than positive. Economists like Chris Weafer of Macro-Advisory Ltd. describe the economy as being in a state of "tolerable stability," with public mood characterized as "grumbling" rather than protesting, noting that disruptions to shopping habits are unlikely to alter public support for the Kremlin. President Vladimir Putin's approval rating has seen a recent decline but remains higher than pre-war levels.

Budget deficit and long-term concerns

A significant indicator of economic stress is Russia's budget deficit and the government's efforts to secure funding. The government has increased value-added tax, introduced other fees, and tightened taxation on small businesses, yet the deficit continues to grow. By the end of July, the budget deficit reached 2.8% of annual economic output, nearly double the initial target. Russia's reserve fund has diminished to 1.6% of GDP, necessitating domestic bank borrowing at high interest rates, with Russian bond yields reportedly reaching 17%. Experts like Janis Kluge of the German Institute for International and Security Affairs suggest that budget stress raises questions about the sustainability of the war effort. Russia's central bank has maintained high interest rates to combat inflation stemming from war spending, which disadvantages civilian companies compared to defense firms seeking credit. Some economists, such as Torbjörn Becker at the Stockholm School of Economics, warn that Western sanctions limit new investment, and the combination of high spending, low growth, and rising debt indicates a dangerous erosion of the economy's structural foundations, though the timing of any potential crisis remains uncertain.

What the coverage left out

None of the left-rated or centre-rated reports mention the specific figure of $1.2bn in relation to any aspect of Russia's economy or military spending.