Russia's Economy is Shrinking

Today, I noticed there were several new stories up about Russia's economy, all of them suggesting the news ranges from bad to dire. First up, is this story at Forbes which makes the case that Russia's economy seems to be shrinking.

While Russia’s economy is still enormous-- worth about $2.6 trillion--growth is slowing and its economy is shrinking each quarter. Growth rates are projected to be only 0.4% for 2026. This is even worse than 2025, when Russia grew by only 1%, and narrowly escaped a recession...

Defence officials reportedly told Russian President Vladmir Putin this year that they would need billions more to fund the conflict, as the war was running at least $28 billion over budget. It was also projected that Russia would overspend on the conflict by a further $54 billion in 2027 and 2028...

Russia is essentially burning through its GDP to seize a section of Ukraine that covers 10% of the size of Texas—or 268,597 square miles. This means that it is spending about $90 million per square mile acquired, and gaining territory very slowly.

Russia caught a break in the form of the Iran war which raised the price of its only export. However, that conflict probably won't last very long. Meanwhile, Russia is dealing with serious problems including inflation.

Another problem for the Russian economy is inflation—which just hit a five-month high at 6%, with services reaching an inflation rate of 10.6%. Key consumer goods such as the cost of all food prices has gone up. Just from 2024 to 2026, there was an 18% increase on grocery items.

Unfortunately for consumers, the Russian economy does not generate enough revenues to help defray these types of costs. All its scarce resources are allocated to military production...

Meanwhile Russia’s civilian sector is unravelling. Civilian companies are competing for labor at war-inflated wages, have had to borrow at rates near 20% and are selling to a market with low levels of consumer demand. Half of all civilian industrial sub-sectors are in decline. Outside of pharmaceutical and transport equipment, output is declining in 19 other civilian sectors. Thus, the Russians have a two-pronged problem: the military sector of the economy is overheated while the civilian sector is stagnating.

This is an analysis of Russia's economic conditions that relies on the official numbers and which does not take into account the recent bombing of Russian refineries and tankers which have created long gas lines throughout the country. In other words, Forbes is giving us what may be described as the best case scenario. 

Last week, Reuters presented a much more pessimistic view of what is happening in Russia. Based on a European intelligence report, this story predicts a banking crisis could be coming soon.

While Russia's banks have mostly weathered the sanctions imposed since Moscow's 2022 full-scale invasion of Ukraine, the June report says ‌deteriorating loans and growing household indebtedness create an "explosive" risk, just as the EU prepares a 21st package of sanctions it hopes to finalise in July, targeting banks and cryptocurrency networks...

The intelligence report, titled "Note on the probability of a banking crisis in Russia in 2026", said banks have been pushed to give subsidised loans to defence companies, homebuyers and others. It noted that state-backed credit programmes, loan restructurings and government support ‌masked the banks' vulnerability.

"The situation creates the illusion of a dynamic economy ⁠that, in reality, conceals an explosive situation which an economic shock, such as an ambitious package of sanctions against banks ... could trigger," said the report.

Fortune reports that Russia may be running out of cash and considering tapping into people's retirement money.

The government has been drawing down reserves in its sovereign wealth fund to close the gap, but that well is almost dry.

With few other sources to tap to pay for the Ukraine war, the Kremlin could set its sights on the general population’s nest eggs.

The finance ministry is preparing legislation that could let it gain access to $40 billion in pension savings held in privately managed funds.

With gasoline supplies down between 20% and 35% this summer and diesel prices also rising, it seems inevitable that inflation is going to rise substantially in the next few months. Businesses and trucks are paying those increased fuel prices and those will get passed along to everything people buy.

Finally, the really big problem is that Russia doesn't yet have an answer to the Ukrainian drone strikes. Foreign Policy says Russia's energy economy is at Ukraine's mercy.

Ukraine’s drone war against Russia isn’t new. Its offensive against Russian energy assets isn’t new. But the scale, range, intensity, and impact of what Ukraine has done in just the last few months most certainly are...

Omsk is a good example. That’s Russia’s largest oil refinery, and it is located in Siberia, more than 1,200 miles away from Ukraine. Its destruction last week was traumatic for locals and nearly as seismic inside the Kremlin.

But Ukraine’s offensive never lets up: In the past few months, it has hit oil refineries, oil depots, oil export ports, and fuel tanks. The carnage that Kyiv’s drone fleet has wreaked on the Russian Black Sea tanker fleet this month is without precedent.

“The picture has changed, and it changed this spring,” said Sergei Aleksashenko, a former deputy chairman of the Russian Central Bank who is now at the New Eurasian Strategies Centre. “This operation is a game-changer.”

Ukraine is reportedly able to manufacture 8 million drones a year now. Plus it has access to Starlink which Russia does not. This problem isn't going to get better on its own. It's easy to envision things getting worse for Russia as the drones improve in numbers and capabilities every month from now on. That means ongoing strikes on refineries and tankers and electrical substations. Crimea is already without gas and struggling to keep the lights on. What happens if that extends to other regions of Russia?

As always, the response from the propagandists on Russian TV is to escalate the fight. But if you watch this full clip from a recent episode it's pretty clear that no one is sure what that means. If you take nuclear threats off the table, which you really have to because that would bring a coordinated worldwide response that would end Putin, what else can you do? They better think fast because the Russian economy is ticking.

Editor's Note: Do you enjoy HotAir's conservative reporting that takes on the radical Left and woke media? Support our work so that we can continue to bring you the truth.

Join HotAir VIP and use promo code FIGHT to receive 60% off your membership.