Cooling off Once red hot, Russia’s war-driven economy is slowing down. What does that mean for consumers, the Kremlin, and Ukraine?

As the full-scale war in Ukraine rages on for its fourth year, and Moscow’s defense and security spending continues at levels not seen since the Soviet era, Russia's economy has started to cool from its peak of 4.5 percent GDP growth in late 2024. What's behind this sudden slowdown? And does it threaten the Kremlin's ability to keep its invasion going? Meduza answers these and other questions about the Russian economy's retreat.

After three years of war-driven frenzy and a surge to four percent growth in 2023–2024 — a pace Russia hadn’t seen in the previous decade except for during the lead-up to its full-scale invasion of Ukraine in 2021 — the Russian economy has begun gradually slowing down.

According to the Central Bank, the peak of the economy’s overheating came in the fourth quarter of 2024, when Russia's Federal Statistics Service (Rosstat) reported 4.5 percent year-on-year GDP growth. But by the first quarter of 2025, that pace had started to taper off. Both the Central Bank and the Economic Development Ministry estimate that GDP growth slowed to around two percent compared to the same period last year. Whether these forecasts prove accurate will become clear on May 16, when Rosstat publishes its preliminary economic update.

This slowdown was hardly unexpected. Sustaining rapid growth under sanctions and with a shrinking workforce inevitably takes a toll on the economy. But Russia’s economic officials had planned for both this and falling oil prices — and had warned President Vladimir Putin accordingly. Late last year, he downplayed the potential consequences, saying: “Strange as it may sound, given the current macroeconomic realities, we don’t really need growth like that right now.”

What exactly is causing the slowdown?

Two main factors stand out.

The first is the massive reallocation of resources toward the war effort (i.e. defense and security spending) at the expense of productive civilian sectors.

Excluding industries dominated by defense, it's fair to say that the rest of Russia’s industrial economy is effectively entering a recession, according to the government-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF). Civilian economic output shrank by 0.8 percent per month in the first quarter of 2025, including a 1.1 percent drop in March alone, bringing it to its lowest level since April 2023.

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Even sectors that had previously shown slow but steady growth are now contracting. CMASF estimates that average monthly output in these areas declined by 0.7 percent in the first quarter (with a 0.8 percent drop in March). A worse result — a 0.8 percent monthly decline over a full quarter — has only been recorded once in the past 12 years: during the shock-hit first quarter of 2022.

Production of construction materials had already been falling by 0.3 percent per month in the second half of 2024, but the pace of decline accelerated to 1.1 percent in early 2025. The civilian machine manufacturing sector is also deteriorating: electrical equipment output has now dropped for three consecutive months, averaging a 5.4 percent monthly decline (including 3.2 percent in March), while overall machinery and equipment output has fallen for four straight months (down 3.8 percent per month on average, including 2.7 percent in March).

Sustaining the war effort demands large-scale, ongoing investment in the defense industry, drawing financial and labor resources away from civilian sectors — already under strain from high interest rates. The Central Bank, aiming to contain inflation, kept its key rate at a record-high 21 percent for the fourth consecutive time in April.

Military spending isn’t the only inflationary force. The civilian economy is also struggling to meet rising domestic demand. The 2025 budget introduces both a higher tax burden — including a corporate profit tax raised to 25 percent and a progressive income tax on monthly earnings above 200,000 rubles (roughly $2,500) — and a real-term cut in social spending.

Another sign that the economy is cooling is that inflation has started to slow. Adjusted seasonally, it stood at 7.1 percent in March and averaged 8.3 percent over the first quarter — down from 12.9 percent in the fourth quarter of 2024. (Rosstat is also expected to publish final annual inflation figures through the end of April on May 16.)

So the war is the main factor slowing down the economy?

Well, that's not the full story — as we mentioned above, the slowdown has two main drivers. The second is a drop in oil and gas revenues.

The spike in energy prices back in 2022 brought Russia enormous windfall profits despite sanctions: revenues were 42 percent, or $175 billion, above the average annual income from energy exports over the previous 13 years.

But 2025 is a different story. Donald Trump’s tariff wars and the chaos he’s triggered in global trade, combined with OPEC+ shifting its pricing strategy (the cartel is now boosting production to lure buyers with cheaper oil), have driven prices down. The U.S. Department of Energy has already lowered its forecast for the spot price of Brent oil from $74.20 to $67.87 per barrel, while private banks are predicting it in the range of $55–65 per barrel. Meanwhile, Russian oil will almost certainly sell at an additional discount of $8–12 per barrel due to the Western embargo.

At the same time, Russia’s gas exports to Europe have dropped sharply — down from 46 billion euros in 2021 to just 16.6 billion euros in 2024, according to CREA. In January, Russia shut down the last remaining direct pipeline route to Europe, which ran through Ukraine. That alone will cost the country around $4.5 billion a year, according to Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center in Berlin.

As a result, oil is making up an ever-larger share of Russia’s hydrocarbon revenues. In 2022, oil (extraction, refining, and export) accounted for 66.5 percent of the country's oil and gas income. In 2023, it was 74.6 percent, and in the first nine months of 2024, it was 77.4 percent. Gas’s share, meanwhile, is falling: from 30.2 percent in 2022 to 20.2 percent in 2023, and just 16.3 percent in the same period in 2024.

“I said back in the fall, [when the 2025 budget was being approved], that the projected 69.70 per barrel for Urals was bold, even aggressive. A more conservative estimate would have been $10–15 lower,” Vakulenko told Meduza.

The Finance Ministry has since adjusted its expectations to better reflect reality, cutting its oil and gas revenue forecast for 2025 by 2.6 trillion rubles ($32.2 billion) and lowering the projected export price for Russian oil from $69.70 to $56 per barrel. As a result, the expected budget deficit has grown from 1.17 trillion rubles ($14.5 billion, or about 0.5 percent of GDP) to 3.8 trillion rubles ($47.1 billion, or about 1.7 percent of GDP). In the first quarter of 2025 alone, the budget ran a significant deficit: about 2.17 trillion rubles ($26.9 billion, or about 1 percent of GDP).

A forecast of $55–60 per barrel for Urals this year looks far more realistic, according to an oil and gas think tank analyst who spoke on condition of anonymity. And for the next few years, estimates in the $50–60 range appear more plausible than the previously expected $60–70 — though that higher range was widely accepted just a few months ago. The main reasons for the downward revision, he says, are the same: weakening global demand due to a potential economic slowdown, and the stance of OPEC+ leaders — especially Saudi Arabia — who now have less incentive to artificially cap production.

With Russian oil trading around $50 a barrel in April, according to Bloomberg, and growing concern about the future, some officials have revived the idea of lowering the oil price threshold in Russia’s fiscal rule (currently set at $60). But the Finance Ministry quickly shut that conversation down. “What surprised me wasn’t that they abandoned the idea,” said the think tank analyst. “What surprised me was that it came up at all before the war is over. Lowering the base price means you’d need to balance the budget by cutting spending — which is a dangerous idea, because it indirectly reveals your timeline for ending the war.”

The Finance Ministry’s refusal to cut the base oil price was expected. After all, nearly all oil and gas revenues are now used for current expenditures, making the fiscal rule more of a fiction than a functioning policy. “There’s no point in lowering the base oil price in the budget formula,” the economist said, “if they're not going to cut spending, including military spending.”

Will these economic risks force Russia to end the war?

The short answer is no.

According to the think tank analyst, Russia's 2025 budget is likely to fall short on oil and gas revenues. The exact size of the shortfall is still unclear, but it's highly likely that it will be manageable for the country's National Wealth Fund (NWF), the expert told Meduza. As of May 1, the fund's liquid assets stood at 3.296 trillion rubles (around $40.4 billion). That cushion should allow Russia to maintain its nominal spending levels in 2026 and continue financing the war with tolerable fiscal losses.

In other words, the government has a financial buffer worth several trillion rubles. Still, falling export revenues will weigh on the ruble, limit imports, dampen consumer activity, and worsen domestic debt problems. In early 2025, as RBC reported, Sberbank and VTB saw a sharp increase in retail loan defaults. In particular, the value of troubled housing loans on Sberbank's books rose by 90 percent in the first three months of the year, reaching 285 billion rubles ($3.5 billion).

Overall, the economic slowdown is gradual — not a crisis. The seasonally adjusted GDP contraction in the first quarter of 2025 compared to the fourth quarter of 2024 was "fairly modest" at –0.5 percentage points, especially considering that the first signs of labor market cooling appeared late last year, the economist told Meduza. He expects the Russian economy to show solid year-on-year growth in all three remaining quarters of 2025, with full-year GDP up 1.5 percent.

The Economic Development Ministry expects growth to slow to 2.5 percent in 2025 from 4.3 percent in 2024. The Central Bank is more cautious, forecasting growth of 1–2 percent. The Higher School of Economics's Development Center puts it at 1.5 percent, according to a February survey, while Finland's BOFIT (Bank of Finland Institute for Emerging Economies) project two percent.

In any case, the state of the Russian economy shows that Moscow's priorities remain focused not on social spending, but on military and political objectives — a fact that's clearly reflected in the structure of the federal budget. Growing imbalances aren't a concern for the Kremlin, so long as it has the resources to retain control and reserves to plug the gaps.