By Oliver Boyd-Barrett, Substack, 7/13/26
An Obsession
The state of Russia’s economy has become almost an obsession for direct participants in the propaganda war that in Western mainstream media suffuses reports and representations of NATO’s war on Russia over proxy Ukraine. Pro-Russian sources seem not to exercise anything like comparable interest in the state of Western economies or even, very much, of Ukraine’s
Competing Economies
This is a limitation, of course, as few Western economies can be said to be thrilling, many are stagnant, and some are in recession, and their economically inadvisable involvement in the Ukraine war is a good part of the reason for this state of affairs. Where economies look more exciting, as in the extremely different cases of Ireland and the US, a single sector (computing and AI) tend to account for a hefty percentage of gains, provided, of course, that one ignores environmental and other consequences unaccounted for.
The Much Exaggerated “Collapse”
Apart from consideration of what is happening to competing economies (and disregard for the cyclical nature of capitalism that thrusts all economies into periods of significant challenge from time to time), other common problems in the assessment of the Russian economy include clear editorial hostility to Russia that affects how data are interpreted, and high selectivity in the economic indices that are selected for discussion.
Economies rarely “collapse,” which is a favorite simile employed by each side when expressing its hope and expectations for the fate of their opponent.
Far more generally, economies pull through, adapt, develop, survive. Nuance rules.
A Dual or Multiple Reality: Explaining Resilience
Like many, Russia’s economy shows a dual if not multiple reality. Massive state spending after 2022 initially prevented collapse against the threat to the economy of the pulling out of Western enterprises and Western sanctions (which Trump is promising to further enhance at the urging, among others, of the late Lyndsy Graham), even though all that these seem to have achieved to date is rapid and effective product substitution and growth.
Other factors that staved off the worst of negative consequences were the forced domestic containment of Russian capital, the return of Russian capital invested overseas back to Russia, the acquisition of Western enterprises by local, and the fact that many Western enterprises remained in Russia despite pressure from their own governments but were required to reinvest local profits locally. Overall, initial Western sanctions and other hostile measures following the SMO of February 2022 proved to be a major boost for investment in the Russian economy.
Sources of Strain
Russia’s critics like to argue that the initial model of aggressive economic adaptation is transitioning into stagnation. They say that the economy is under severe strain from intense labor shortages (but which are often an indicator of a very active, though perhaps overheating, successful economy), heavy military spending (something that creates strong demand for industrial productive assets, a bonus for the economy), and strict monetary controls (which have had demonstrably favorable results in curbing inflation and interest rates), while simultaneously remaining resilient due to high employment and stronger trade ties with non-Western partners (hardly unimportant – see below).
The Military Factor
Critics are keen to convince themselves that the massive state-led stimulus for weapons factories has peaked, resulting in a “dual economy” of overheated military production and stagnant civilian growth. I would say that demand for weapons will continue to increase so long as the West, especially Europe, indulges in anti-Russian warmongering rhetoric – including bravura predictions of going to war against Russia by specific dates – and that while a militarily-skewed economy is not ideal, it does have positive consequences for the circulation of money in the economy and demand for civilian goods and services.
Conscription and war casualties have reduced the available workforce (although we should not overlook the fact that Russian compensation to bereaved families is relatively generous, and that Russia has shown that it can attract significant immigrant labor from North Korea and from China) creating severe labor shortages and a mild wage-price spiral.
Inflation and Interest Rates
Critics also argue that borrowing costs – with the Central Bank benchmark interest rate near a 20-year high of 21% – along with higher taxes and fears of nationalization, have led to a sharp drop in fixed capital investment. State finances face growing strains. Liquid assets in the National Wealth Fund have plummeted (down to 1.8% of GDP), while oil and gas revenues have experienced significant year-on-year drops, widening regional budget deficits. Consumers and entrepreneurs continue to save, but high inflation limits both purchasing power and business expansion.
Yet (!) Russia is investing 26% of its GDP, compared with investment of 15% of its GDP before the war, far higher than most anywhere in Europe. Consumers and entrepreneurs continue to save, even if relatively high inflation limits both purchasing power and business expansion.
Yet (!) the annual inflation rate in Russia is officially projected by the Bank of Russia to decline to a range of 4.5% to 5.5% by the end of 2026 (while the annual inflation rate in the USA is 4.2%, as of the latest May 2026 reading). This is a targeted cooldown from the 6.02% annual headline rate recorded a year earlier.
Borrowing costs remain high as the central bank balances economic cooling against rising inflation risks. Monetary policy easing has been complicated by expanding fiscal spending, wage growth, and energy infrastructure disruptions, causing annual inflation, as we have seen, to hover around 5%, above the central bank’s 4% target. As a result, analysts anticipate that the central bank’s rate-cutting cycle will slow or stall, meaning local mortgage and commercial loan rates will likely stay restrictive.
Banking System
Russia maintains an impressively low national debt, hovering around 17% of GDP.
The domestic banking system remains stable, and employment rates are very high, with wages creeping up to buffer households against rising prices. Continuous state interventions, including extensive social benefits, cash payments to soldiers, and high public spending, have propped up domestic demand and prevented a collapse in living standards for many. Latent vulnerabilities are growing due to a war-burdened economy, rising household insolvencies, and the compounding effects of international sanctions.
While the Bank of Russia maintains that the sector has adequate capital buffers to absorb losses, some independent and intelligence analysts warn of a looming systemic crisis. Signs of underlying strain include a rise in non-performing loans. The share of non-performing assets in the banking system has reportedly surpassed 10% (nonperforming loans make up about 1% of total loans held by US banks).
Debt
Corporate and household debt has risen. Over 500,000 Russians declared bankruptcy last year (but compared with the 574,000 bankruptcies declared in the US in 2025 – admittedly a country with twice the population – this is maybe not so bad) and an estimated 25% of the bond market is at risk of default as businesses struggle with refinancing. Deteriorating asset quality, critics say, is temporarily being masked by loan restructuring and strict financial controls.
New Trading Partners and Opportunities
In response to Western sanctions, Russia successfully redirected its trade and energy exports toward major markets in China and India, insulating itself from a major crisis in export revenue. This is a crushing response to those who argue that sanctions “isolated” Russia into a largely “closed” economy which is about as stupid as the Russophobic complaint that Russian “aggression” in Ukraine has isolated it in international relations (even though Russia is a major player within the BRICS and enjoys largely excellent relations with China and many countries of the global South).
The G7 price cap and European Union import embargoes continue to heavily restrict Russia’s oil and gas revenues – but only from Europe (!). Overall, Russian crude oil exports are close to their historical peak. Purchase by Europe of Russian LNG has risen 18% in the previous year and will likely increase further as gas reserves in Europe plunge in the lead up towards the next winter.
Sanctions and Drones
Extraterritorial U.S. sanctions targeting major firms like Rosneft and Lukoil have driven the Urals crude discount to Brent up significantly. Sanctions targeting Russia’s “shadow fleet” tankers (many of these now being hit by Ukrainian drones in the Azov Sea) have significantly squeezed logistics. Ships are forced to cover longer distances to reach buyers like China and India, artificially creating tanker shortages and depressing domestic crude production.
Drone strikes on oil refineries have severely crippled internal fuel output. Processing volumes fell by nearly one-third by mid-2026, forcing the Kremlin to implement fuel rationing across roughly half of Russia’s regions and boost imports from Belarus and India.
While sanctions compress Russia’s margins, international supply shocks – such as the recent conflict in Iran and subsequent volatility in the Strait of Hormuz – have kept global energy prices high. This allows Russia to stay afloat on higher nominal pricing despite steep buyer discounts.
Monetary Policy
Led by Elvira Nabiullina, the Russia Central Bank has been engaged in an aggressive monetary tightening cycle designed to keep the economy from completely overheating. This involves a gradual easing cycle. As we have seen, after raising the benchmark interest rate to a crushing historical high of 21% to control systemic panic, the Bank of Russia executed a sequence of cuts, ultimately lowering the key policy rate to 14.25%. The latest 25-basis-point cut was smaller than the 50 bps the market expected, revealing growing anxiety over pro-inflationary risks.
The central bank is explicitly battling the Kremlin’s fiscal policy. Government spending on the war has repeatedly run over budget, pushing the primary budget deficit well above targets. Because the Finance Ministry extended its target for balancing the budget all the way out to 2029, the central bank warned that it must keep interest rates highly restrictive. This tight monetary stance heavily frustrates domestic business owners who desperately need cheaper credit to resume civilian corporate investment.
Relations with China and India
Sanctions forced Russia to completely alter its trade map, transforming China into its primary supplier of manufactured goods and India into its most vital energy outlet, while greatly increasing Russian energy exports to both China and India. Bilateral trade between Moscow and Beijing jumped nearly 23% in the first five months of 2026 alone, hitting $109.5 billion. Russia holds a substantial trade surplus with China. Russia’s top exports are entirely resource-driven, led heavily by crude petroleum ($5.96 billion in May alone) and petroleum gas. China has successfully replaced Western tech and automotive suppliers. China exported $11 billion worth of goods to Russia in May 2026, primarily driven by massive car shipments ($1.33 billion), alongside telecommunications equipment.
Bilateral trade between Russia and India hit a historic record high of $68.69 billion for the recent fiscal year. The two nations are proactively tracking a roadmap to reach $100 billion by 2030. The dynamic is vastly lopsided. India imported over $67 billion from Russia, heavily tilted toward discounted crude oil and fertilizers. On the flip side, India’s exports to Russia are a mere fraction at roughly $4.88 billion (mostly pharmaceuticals and machinery). This has stranded billions in non-convertible Indian rupees in Russian bank accounts, creating an ongoing transaction bottleneck.
Gold Sales
Faced with a ballooning federal budget deficit driven by military expenditures, the Kremlin has drastically shifted its gold strategy from long-term accumulation to aggressive, short-term liquidation. Driven by a steep 38% drop in hydrocarbon taxes early in the year, Russia’s budget deficit rose to $78.4 billion in the first four months of 2026 alone. This greatly exceeded the $50.5 billion deficit the Kremlin had originally projected for the entire year. Between January and April 2026, the Bank of Russia shed 27.9 tons of gold to plug these widening fiscal holes.
This represents the single sharpest drop in sovereign bullion reserves in a quarter-century. Russia has converted this gold directly into physical cash by bypassing standard markets. Russia exported 25.3 tons of physical gold to China – valued at $3.29 billion – marking a massive ninefold increase over previous baselines. Prior to 2022, the National Wealth Fund strictly accumulated physical gold as an untouchable strategic cushion. Since then, more than half (232.6 tons) of the fund’s gold has been liquidated to cover state spending. Total remaining NWF liquid assets have plunged from 7.3% of GDP down to roughly 1.5% to 1.9%. While soaring global gold prices (surpassing $5,000 an ounce) temporarily artificially inflate the dollar-value of Russia’s remaining holdings, intelligence reports emphasize that using gold swap operations and emergency sell-offs indicates a severe, ongoing domestic liquidity deficit.
Russia’s state gold reserves fell below $300 billion at the end of last month amid a broader drop in the country’s total reserve assets, according to the latest data from the Central Bank of Russia (CBR). This marks the sixth consecutive month that Russia’s official gold reserves have dropped, and the decline has been dramatic. In April, the CBR revealed that Russia’s gold reserves recorded the sharpest drop in a quarter century.
The main purpose of gold sales is to cover the budget deficit, which reached 4.6 trillion rubles by the end of March, but may also be aimed at building up foreign currency reserves, especially yuan, and domestic demand for gold has risen as a hedge against a weakening ruble. Such sales of gold from reserves by the Central Bank of Russia is said by some expert observers to be consistent with what other central banks are doing, especially in developing countries. Note that because of rising prices in the value of gold, the actual current value of Russian gold reserves may be increasing even as stocks are falling.
Stock Market
There has also been the issue of a fall in the Russian stock market, that marks the longest unbroken slump since 1997. The Russian stock market plummeted in 2022 following the invasion of Ukraine and initial Western sanctions, triggering a market shutdown and massive sell-offs. By mid-2026, the market entered another protracted slump, hitting levels not seen since December 2022 due to fresh US sanctions on major energy firms and high interest rates. While the benchmark MOEX saw temporary, artificial “wartime peaks” driven by domestic retail investors – briefly hitting a high in May 2024 and seeing sporadic rallies in mid-2025 – these gains completely evaporated due to heavy economic headwinds. By late 2025, the market was plumbing deep lows, a trajectory that worsened dramatically into a 17-week consecutive collapse. This is said by Russia’s critics to present a serious loss of investor confidence reflecting stagnant peace talks, frequent infrastructure drone attacks, and the severe financial costs of the military-industrial complex. The Russian Central Bank is maintaining a tough stance on interest rates, signaling that high borrowing costs will persist longer than markets expected. Vital sectors – including oil and gas, mining, and major industrials – are struggling, with giants like Gazprom tumbling to decade lows.