Russia's war-weary economy under pressure as inflation, oil slump, sanctions take toll

By Robert Stanley | 2025-05-06

Russia, whose three-year war effort against Ukraine has consumed massive economic and human resources, also faces mounting economic pressure from international sanctions that may ultimately determine the conflict's outcome.

The annual inflation rate in March stood at 10.3%, the fifth consecutive increase, while manufacturing -- apart from military equipment -- was at only 60% of capacity, according to financial website Trading Economics, which cited Russian government statistics.

Behind all this are sanctions imposed by the United States, the European Union and their allies that are hitting Russia where it hurts.

These sanctions are limiting imports of vitally needed materials that Russia cannot make at home, such as computer chips, and virtually halting its energy exports, which until the war generated the cash flow that propped up Russia's economy.

While sanctions take time to bite, Russia's economy is finally showing signs of the punitive measures' effect, according to Mark Temnycky, a nonresident fellow at the Atlantic Council's Eurasia Center.

"The Russian economy is now beginning to see the full effects of international sanctions," he wrote in January. "If these trends continue, then the full impact of these financial punishments, combined with strong Ukrainian resistance to Russian forces, could at last put enough pressure on the Kremlin to end its war."

Widening budget deficit

Urals oil, one of Russia's top exports, fell from $98 a barrel in April 2022, less than two months after Moscow launched its full-scale invasion of Ukraine, to well below $60 a barrel on a free-on-board basis as of April 24, according to Reuters.

It hit a historic high of $117.65 in February 2013, a year before Russia's annexation of Crimea.

Prices may drop even further. Russia's Economic Development Ministry on April 21 downgraded its 2025 forecast for the average price of Urals crude to $56 per barrel.

Russian Finance Minister Anton Siluanov is so worried about the widening budget deficit that he has called for increasing the amount of money from oil revenue that the Kremlin stashes in the National Wealth Fund, to at least keep up the appearance of restraining spending, Russian independent economic news outlet The Bell reported April 25.

Still, government spending has been the key growth driver since the invasion, when foreign companies, foreigners and much of Russia's middle class left the country, energy exports came to a virtual halt and the army mobilized hundreds of thousands of men, many against their will.

Ukraine's allies should exploit Russia's growing financial pressure and limited macroeconomic reserves to increase economic and strategic pressure, a study released at the end of last year by the Kyiv School of Economics said in a December study.

"This fall, the ruble's decline has accelerated, losing over 50% of its value against the US dollar and the euro," the authors wrote.

Shortage of manpower

Even as inflation gradually comes back under control, with seasonally adjusted numbers dropping to an annualized 7.1% in March -- down from 12.9% in the fourth quarter of 2024 -- the risk of recession is growing.

The economy is being squeezed by high interest rates, left at 21% on April 25 by the Bank of Russia, which said it expects them to stay there for the rest of the year.

"Current inflationary pressures, including underlying ones, continue to decline, although remaining high," the central bank said in an English-language April 25 note. Still, "domestic demand growth is still significantly outstripping the capabilities to expand the supply of goods and services," it added.

The Bank of Russia forecasts the economy to grow at only 1% to 2% this year, and 0.5% to 1.5% next year.

The war economy is behind most of the growth in manufacturing, but with hundreds of thousands of men drafted by the military, and 800,000 reported killed or wounded, Russia has a real shortage of skilled manpower to churn out the things it needs to grow, and even to keep its railroads running.

A shortage of manpower and parts stemming from the war and from international sanctions has hamstrung Russian railroads and freight trains are now traveling at their lowest speeds in 65 years, according to the rail news site Rail-Freight.

'A drop can easily become a dive'

All these pressures give Russia less and less space to maneuver.

Any further missteps could destabilize the cooling Russian economy, Alexander Kolyandr, a non-resident senior fellow at the Center for European Policy Analysis (CEPA) who specializes in Russian economy and politics, emphasized.

"A drop can easily become a dive," he wrote in April on CEPA's website. "Bad decisions by policymakers, a further dip in oil prices, or carelessness with inflation, and Russia could find itself in trouble."