In the way the Russian state operates, incompetence and incapacity are often mistaken for malice. Yet the political system continues to rely on the image of power projected from the Kremlin—an image that permits the allocation of resources without meaningful consideration for the public good, precisely because power is assumed to justify its own choices.
Belarusian President Aleksandr Lukashenko’s admission that he had met with Ukrainian representatives following threats from Kyiv—and, according to Ukrainian President Volodymyr Zelenskyy, that Belarusian equipment used by Russian forces for targeting in Ukraine had been turned off—upended the usual narrative. These developments, and the political maneuvering around the Ankara NATO summit, reflect the wider consequences of Ukraine’s increasingly effective air campaign against targets inside Russia, including areas near Moscow.
The strike on Gazprom Neft’s Moscow Refinery, which supplies roughly 40% of Moscow’s gasoline and petroleum products, has reportedly rendered the facility inoperable for the rest of the year. Nationally, gasoline production has fallen 25%, with the disruptions compounded by Ukrainian strikes on regional oil and fuel storage sites. Deputy Prime Minister Aleksandr Novak has stated that fuel demand has risen 20−30% due to panic buying, prompting 20 regions to impose restrictions on sales to consumers.
Faced with these shortfalls, Russia will likely need to import fuel from India and other markets, sharply raising costs for wholesalers and retailers. Gasoline prices have already increased 10% this year, with the rate of increase accelerating sharply in June alongside renewed talk of a diesel export ban. The “damping” mechanism used to subsidize domestic fuel among Russian refiners does not apply to imported volumes. Because fuel demand is inelastic—people must get to work, obtain food, and the military requires supplies for the front—inflation is expected to rise in the coming weeks as higher prices spread through the economy.
Fuel shortages, together with reports of large-scale departures from Crimea, offer humiliating proof that the state lacks sufficient air defense capacity to protect vital assets. They also show that the regime’s earlier “soft touch” reliance on market mechanisms to conceal its appropriation of wealth and redirection of resources toward unproductive ends has ceased to function. Shortages now require non-market administrative intervention at a time when the multiplier effect of wartime spending is zero or negative. Disruptions in any key sector of the physical economy create outsized problems in Russia because of the country’s size and heavy dependence on logistics.
Accelerating inflation, according to Rosstat data, strengthens Central Bank Governor Elvira Nabiullina’s arguments for holding interest rates steady or even raising them—an ongoing and unresolved source of tension behind closed doors in Moscow and among major business interests.
Even before the fuel shortages emerged, industrial production contracted 0.8% in May from April, pulling year-to-date growth for January-May down to just 0.4%. Virtually all growth has come from the military sector, where defense enterprises routinely receive 30−50% of their state procurement payments in advance. High interest rates remain a burden for most firms but are far less problematic for military contractors’ working capital. Everyone else is struggling to varying degrees. Notably, businesses and households owed a record 3.92 trillion rubles to the tax service as of April, mostly in arrears, premiums, and late fees. It is difficult to see how this situation will improve after the developments of the past three weeks.
Of Russia’s 89 regions, 56 ran budget deficits in the first quarter, up from 45 in 2025. At current interest rates, most regions cannot borrow without direct financial support from Moscow.
Kremlin spokesman Dmitry Peskov has assured the press that “the stability of the Russian economy is ensured, macroeconomic stability is absolutely assured, and this leaves no one in doubt.” Such assurances are rarely reassuring. In this case, they highlight a trap the regime has created for itself in both communications and policy options. By publicly declaring stability, the Kremlin underscores its inability to fix the underlying problems and its lack of fresh ideas. The old tools no longer work, and the authorities cannot simply cut interest rates to boost consumption.
Sber forecasts that revisions to the family mortgage subsidy program could reduce demand by 7−20%, adding another material headwind at a time when housing purchases have long driven significant consumer spending. In the first quarter, investor applications to open franchise locations fell 40% year-on-year. Warehouse demand has dropped to its lowest level since COVID. Severstal expects steel demand to decline another 7−9% in the middle of a war while defense spending continues to rise. Oil prices have meanwhile returned to pre-war levels. Few people outside those most insulated from the war’s economic consequences can genuinely believe the situation is stable.
Faced with mounting evidence of the regime’s impotence at home and on the battlefield, the Kremlin cannot simply talk its way out of its predicament. The greater the dysfunction caused by Ukrainian strikes on the physical economy, the stronger the pressure to impose formal controls on economic activity to suppress inflation and allocate scarce inputs. Such controls have so far been politically unpalatable because of the inconvenience they create. Yet wartime cyclical and structural recessions differ fundamentally from the inflationary expansions of 2023−2024. Without mobilization later this year, the regime has no clear mechanism to address the mundane problems of daily life—the very issues it once promised to solve as long as the public stayed out of politics.
Mobilization would intensify the inflationary pressures already embedded in the labor market and inter-sectoral competition for resources, while further eroding the social compact the regime has maintained with the public. At the same time, it appears to be the only viable path toward creating a sustainable justification for the administrative interventions needed to manage chronic problems such as fuel shortages. Ukraine still faces serious difficulties on the battlefield, but its ability to strike deep into Russia will only improve with time. What once looked like confidence in the war effort increasingly resembles indecision—until something larger breaks.
