Russia: An economy at the limit of implosion?

BarcelonaBombarded energy infrastructures. Hydrocarbon exports at discounted prices. Public finances stressed by the war effort. High inflation. This has been, for four and a half years, Russia's economic landscape, ever since President Vladimir Putin ordered a large-scale invasion of Ukraine that has turned into one of the longest conflicts in the history of a country that is no stranger to belligerence.

Over the last two years, Russian citizens have woken up to news of bombings somewhere in the country almost daily. These attacks, carried out with drones launched from Ukraine, have had as their almost sole target energy infrastructures throughout Russian territory, in some cases more than a thousand kilometers from the combat front. Given that the energy sector is the main pillar of the Russian economy – representing between a fifth and a quarter of economic activity, according to Rosstat, the Russian statistical agency –, the reduction in the capacity to transport oil and gas or to produce derivatives represents a problem for the country as a whole, but especially for the public sector, which depends, to a large extent, on hydrocarbon sales abroad.

In fact, the Kremlin's dependence on oil and gas is so great that it is often described by Western politicians and experts with the mocking phrase "Russia is not a country, it is a giant gas station with nuclear weapons". "Predictably, a higher oil price as a result of the war in the Persian Gulf will only have temporary fiscal effects, as Ukrainian drone sanctions have been effective in reducing export volumes", says a study by the Kiel Institute and the Stockholm Institute of Transition Economics, two think tanks European.

These attacks are in addition to the collapse of hydrocarbon and derivative exports experienced by Russia since the start of the full-scale war against Kyiv, especially towards the European Union, for decades its main client. In March 2022, just as the invasion of Ukraine began, the EU was buying more than 700 million euros worth of hydrocarbons and derivatives from Russia every two weeks. At the moment, the figure does not reach 40 million, which is mainly due to the fact that the EU still depends on natural gas imports, according to data from the Center for Research on Energy and Clean Air (CREA), an organization for the study of energy markets that produces an observatory of Russian hydrocarbon exports. Coal and oil are sanctioned by Brussels and other capitals and the shadow fleet – old oil tankers that Russia uses to transport oil to third countries – is being attacked by both Ukrainians and the navies of European countries.

Although Moscow advertised dependence on Russian energy as a sign of European weakness, the reality is that the EU economy has held up much better than the Russian one. The Kremlin often boasts about selling to China and India the oil that previously went to the EU, but the reality is that neither in volume has it been able to compensate for the loss of sales in Europe, nor is the price at which it sells oil and gas the same: Western sanctions allow Beijing and Delhi to pressure Moscow to obtain significant discounts, since they know that the Russian industry has no other outlet for its products.

The long-term effect of the sanctions

This Friday, Putin himself announced that for this 2026 he expects a growth of the Russian economy of 1%, a figure equal to that of 2025, but much lower than that of the years 2023 and 2024, when the Russian GDP grew above 4% in both years, after a 2022 in which the impact of the sanctions for the start of the war had left the rate in negative territory.

In 2013, most economic projections for the Russian economy forecast growth of around 4% per year for the following years. But in 2014, Putin decided to annex Crimea and attack—through militias armed by Moscow—the Ukrainian Donbas, which he only partially occupied.

Following those attacks, NATO countries introduced the first sanctions against the Kremlin, focused mainly on weaponry, but without going any further. In 2022, the Kremlin's hostility towards Ukraine reached its limit with the full-scale invasion of the entire country, which kicked off a war that today has already lasted longer than the Soviet Union's combat in the Second World War.

Since 2014, the effects of the sanctions and the war economy have been felt. From the 4% forecast before the conflict, the average GDP growth rate of Russia over the last twelve years has been 1.4% annually, approximately half of the world economy's average. "The accumulated shortfall in GDP growth since then is equivalent to two and a half years of growth" compared to its initial potential, explains an article published this week by the think tank New Eurasian Strategies Centre, based in London and Washington and specialized in the Russian economy.

High inflation

With the outbreak of the war four and a half years ago, the energy crisis that followed triggered an episode of very high inflation in Europe. Although Russian leaders mocked it, in recent years price growth in Russia has far exceeded the EU average. Putin boasted last Thursday that prices had grown by 6.2% annually (for comparison, in Catalonia it was 4%, the highest level since 2023), a figure that the Russian president said is "notably below where it was a year ago." "I will say once again that inflation was in double digits, at 10.3%, in the first quarter of 2025," Putin boasted.

This rise in inflation in recent years has to do both with sanctions and the exit of many Western multinationals from the Russian market, as well as with Ukrainian attacks, which have caused a shortage of gasoline and diesel that has sent costs soaring. In fact, between 2022 and 2025, gasoline prices rose between 6% and 11% each year in Russia, but so far in 2026, the rise is more than 16%. In large cities, it is common for one in ten gas stations to be unable to open every day, with peaks of shortages that cause long queues and closures of 60% of fuel retail outlets.

This inflation is also due to the low demand for the ruble, the national currency, in international markets because of the sanctions. This causes the currency to lose value and, consequently, all the imports that the country's companies make of foreign products –especially high value-added goods and services, such as consumer products, specialized machinery, or medicines– end up being more expensive.

The push of the war economy

The Russian economy beat expectations in the first two years of a war economy, when public spending on defense items represented a boost that was felt above all in the poorest regions of the country. "Many poorer regions have benefited from a much higher budget for military procurement and also from higher salaries paid to those who are willing to enlist in the army," explains the report by the Kiel Institute and the Stockholm Institute of Transition Economics.

The other side of the coin is that this boost has also had a limit for public finances, since the Russian state is in the red, an unusual fact before the war, when oil and gas sales to Europe balanced the Kremlin's public accounts. According to Putin, this year he expects a deficit of 2% of GDP, according to Reuters, at a time when Moscow is having trouble placing debt after defaulting on external debt in 2022 and interest rates at 14%.