As conditions at the front appear to be tilting nominally in Ukraine’s favor and Telegram accounts voice concern over Russian air defense shortages, officials are in trouble. Bumper revenues from rising oil prices provide a small margin of safety for the budget, yet the economy is going off the rails.
Officially, GDP declined 1.8% year-on-year in January and February. Setting aside questions about the figure’s reliability — it is likely fairly accurate but probably understates damage in the informal economy — the pullback is affecting both manufacturing and services. S&P Global’s PMIs show services contracting slightly for the first time in six months, while the decline in manufacturing accelerated in March compared to February.
Considering that Ukrainian strikes on export terminals, storage facilities, and refineries could slash production by up to 1 million barrels per day, and given that March oil and gas revenues were still down 43% year-on-year, talk of avoiding budget cuts does not reflect confidence in energy markets. Rather, it reflects panic that such cuts would transform a manageable recession into politically disastrous territory.
As hesitant as one may be to make sweeping claims about a system as large and complex as the Russian economy, it has not entered stagflation. It is much worse: the economy increasingly resembles a systemic balance-sheet recession, one that will likely be worsened by the side effects of the war with Iran.
Returning to Opora Rossii’s small business survey, 70% of respondents reported falling earnings in 2025. Though the sample is limited, the number of companies defaulting on obligations doubled in Q1. A 31% surge in new light automobile sales in March appeared positive but was mostly a low-base effect and a symptom of how the Russian economy has been deformed by the war. Consumers are funneling spending into goods in response to shifting bottlenecks, interest-rate decisions, and other distortions. Given that AvtoVAZ is about to halt production for 17 days, these sales figures are clearly not evidence of sectoral health.
Structurally, the household savings rate continues to rise and remains higher than in 2019. Whenever we see a surge in sales or purchases in one area of the economy, we must return to this figure. In theory, a meaningful decline in interest rates would unleash pent-up purchasing power and spark the kind of inflation seen in 2023−2024. But that is untenable. Imports must be restricted to preserve the trade surplus, which — despite the short-term energy price surge — will come under severe pressure later in the year if the Strait of Hormuz remains closed. An unfathomably massive energy and commodity shock would force governments worldwide to destroy demand on a scale that may never fully recover.
Russians’ rising savings therefore tell a different story: people cannot necessarily buy what they want and prefer to hold liquidity, often in cash rather than in banks.
Moscow’s financial sector is somewhat hostage to what the authorities will tolerate — a dynamic not entirely absent in U.S. financial markets these days — but the underlying framework is telling. When analysts say that «risks are strengthening» for the economy, that is about as close to an alarm bell as one can sound in the current political climate. The savings dynamic, combined with impending constraints on oil exports, is creating a situation in which household behavior increasingly resembles the forces that drove the Soviet economy to ruin.
If households cannot access the goods they want because interest rates are too high, can only afford so many domestic or international vacations, and their real wages are not rising relative to what they typically consume, the high savings rate becomes a drag on the economy. Without increased spending and reduced saving, businesses will invest less to meet demand. This leads to slower wage growth even as the labor market remains tight.
What we are witnessing looks like a growing wedge between the debt-financed military component of the economy — which is no longer driving higher consumption — and the retrenchment in civilian consumer spending and business investment.
Some savings are protected by high deposit rates that hedge against inflation. However, the erosion of political trust — driven by internet shutdowns and increasingly intrusive interventions into daily life — will push more people toward cash, which loses value unless spent quickly. The wider this wedge grows between the military and civilian economies, the more painful the eventual adjustment will be for the civilian sector. This will eventually cascade through business and household balance sheets, leaving everyone poorer, more miserable, and more stressed by a state that may ultimately have to mobilize those savings through coercion. The government’s repeated bans on gasoline exports may help preserve domestic supply as global refined product markets seize up, but they also underscore to the public that the situation is not truly under control.
We can no longer say the military economy is ticking along safely either. Ukraine’s newly developed ballistic missile and long-range drone capabilities are finally imposing material costs on Russia’s military-industrial base. Before the most recent strikes exposed gaps in air defense, electronics production, and ballistic/air defense missile manufacturing capacity, TsMAKP’s estimates already showed that industries not dominated by defense production were operating below levels seen in spring 2023. Any interruptions to military production lines may not register significantly in headline macroeconomic data, but they introduce new layers of risk. Assuming contracts have returned to normal terms, vendors are paying roughly half upfront with the balance on delivery. Every day, week, or month of delay or interruption heightens balance-sheet risks.
The depth of what lies ahead is debatable. However, the only realistic way to change the economy’s trajectory this year would be meaningful fiscal stimulus. Merely sustaining current spending levels falls far short. Not only must some degree of fiscal stimulus be applied (acknowledging inflationary constraints), but it must be directed in a fundamentally different way — toward capacities that support genuine long-term growth, such as major investments in roads, rail, telecoms, and public health. These would create pricing pressures but would at least lay groundwork for future development.
With each passing month, Russia’s leadership increasingly resembles passengers sitting in a railcar with the curtains drawn, pretending they are moving forward when in fact they are completely off the tracks.
