Zelenskyy Calls Sanctions ‘Painful Blow’ For Putin, But Is Russia’s Economy Really Hurting?

Last Updated:October 25, 2025, 14:11 IST

Russia claims economic stability despite Western sanctions. But what do the numbers say? Here’s a deep dive into whether sanctions have truly bitten, or just bruised, the Kremlin

Russian President Vladimir Putin (AP Photo)

In his first direct move against Russia since retaking office in January, US President Donald Trump imposed sweeping sanctions on Rosneft and Lukoil this week, two giants that account for nearly half of all Russian oil exports. On Saturday, Ukrainian President Volodymyr Zelenskyy called them “one of the most painful blows for Putin." Yet Russia’s economic data paints a more complicated picture.

Russia’s war economy doesn’t appear to be collapsing. Growth remains positive, though it has slowed sharply in 2025 after two strong years. The ruble has steadied after earlier volatility, though analysts expect renewed weakness. And while Western markets are closed, energy exports to India, China, and other Asian buyers continue to bring in vital revenue.

So, is Vladimir Putin’s economy quietly crumbling, or has it adapted to survive?

Let’s unpack what’s really happening to the Russian economy in 2025.

Has Russia Managed To Survive Sanctions?

Western nations imposed some of the harshest sanctions in modern history on Russia after its full-scale invasion of Ukraine in February 2022, targeting banks, trade, and technology imports. Many early forecasts predicted an economic collapse similar to the post-Soviet crisis of the 1990s. That did not happen.

According to a report by Chatham House, Russia’s economy contracted by 1.4 per cent in 2022, but rebounded with growth of more than 4 per cent in both 2023 and 2024. The same report notes that by mid-2025, growth had slowed to about 1 per cent year-on-year, as inflation, higher interest rates, and borrowing costs began to weigh on output.

The reasons behind this unexpected resilience lie in structural changes that started years earlier. Since 2014, the Kremlin had reduced debt and built up foreign-exchange reserves exceeding $600 billion. These reserves, together with energy export earnings, provided enough fiscal space to absorb early shocks from sanctions.

However, the composition of growth has changed sharply. As per a Free Russia Foundation report, around one in four industrial workers is now employed in sectors linked to arms production. State contracts have kept factories in industrial centres such as Tula and Nizhny Novgorod operating at full capacity, boosting wages and employment in those regions.

While these areas have benefited from wartime demand, civilian industries and consumer markets have weakened due to import restrictions and tight monetary policy. As per the Chatham House report, much of the growth since 2023 has come from state-directed investment in defence and infrastructure, while private consumption and lending remain subdued.

In summary, Russia has managed to maintain growth and avoid a financial crisis, but that stability is heavily dependent on state spending and military production rather than broad-based recovery.

The Defence-Fuelled Boom: Real Growth Or Mirage?

What appears as stability in Russia’s economy today is, in reality, a wartime illusion. The draft federal budget for 2026–2028 makes clear that Moscow’s growth model is now built almost entirely around the war. Defence and internal security together account for close to 40 per cent of federal expenditure, nearly 8 per cent of GDP, a level unprecedented in modern Russian history.

At first glance, this spending has created the appearance of an economic revival. Industrial production remains strong, construction sites are active, and employment is near record lows. But the activity is narrowly concentrated in sectors serving the state: arms manufacturing, logistics, metals, and machinery.

Civilian industries, from automotive to consumer goods, continue to stagnate. The same state orders that keep military plants running have crowded out private enterprise and distorted investment flows.

Analysts describe this as a managed war economy, one that maintains output by replacing market demand with government spending. According to a report by The Carnegie Politika, even where nominal defence allocations seem to decline, they are offset by rising outlays on national security and law enforcement. Together, these categories remain at wartime highs, signalling that the Kremlin’s fiscal priorities have not shifted.

Behind this apparent stability lies a growing strain. Most of Russia’s sovereign wealth fund has been depleted, and the government is borrowing heavily from domestic banks to plug the deficit. Interest rates remain steep, credit to households and small firms has dried up, and real incomes outside defence hubs continue to slide. In essence, Russia’s economic engine is running on borrowed fuel.

This is why economists call the current expansion a “defence bubble", one that sustains output without creating lasting wealth. The state can continue to print orders and mobilise resources, but once that spending slows, much of the industrial momentum will vanish. The boom may be real, but it is built on foundations that cannot last beyond the war.

Budget Black Hole: Where’s The Money Coming From?

The financial engine keeping Russia’s war economy running has become increasingly complex and opaque. Officially, Moscow’s 2024 budget deficit stood at about 2.6 per cent of GDP, but that figure hides a much deeper shortfall once off-book military and emergency spending is included. A Free Russia Foundation report estimates the true deficit for 2025 at around nine trillion rubles, the highest in nearly two decades.

To bridge the gap, the Kremlin has relied on a combination of new taxes, domestic borrowing, and reallocation of classified reserves. The draft federal budget for 2026–2028 outlines a plan to raise the value-added tax from 20 to 22 per cent starting January 2026, while also cutting benefits for small and medium enterprises. These measures are projected to reduce the fiscal deficit to about 1.6 per cent of GDP, though they shift the burden onto households and private firms.

An assessment by Carnegie Politika describes this as a “tax-financed war economy," where every year since 2023, new levies have replaced stimulus spending. Instead of external debt, the government is borrowing internally: Russian banks are required to buy high-yield government bonds, while the Central Bank’s balance sheet continues to expand with state paper, a trend that could create future inflationary pressure.

Equally significant is the erosion of transparency. According to a report by the New Eurasian Strategies Centre, nearly one-third of all budget expenditure is now classified, and funds can be moved between ministries without parliamentary approval. The structure of this financing reveals how the costs of the war are being redistributed.

What began as state-funded mobilisation is now being underwritten by ordinary citizens, small businesses, and domestic lenders. Inflation, already hovering near double digits, reflects that transfer.

Has Oil Been Russia’s Lifeline?

Oil remains the single most important factor keeping Russia’s economy afloat. Despite unprecedented sanctions from the US, the European Union, and the G7, Moscow continues to export millions of barrels of crude every day.

After losing access to Western markets, Russia redirected its energy flows eastward. India and China have become the biggest buyers of Russian crude, often through middlemen or “shadow fleet" tankers operating beyond formal price-cap enforcement.

This arrangement has blunted the fiscal impact of sanctions but has also reduced Moscow’s long-term revenue base. Even with export volumes stable, profits have narrowed. The Free Russia Foundation’s analysis notes that energy sanctions have had a limited but persistent effect, less catastrophic than intended, yet steadily eroding the Kremlin’s fiscal flexibility.

Compounding the problem is stagnation in Russia’s gas and liquefied natural gas (LNG) sectors. Projects such as Arctic LNG-2 and Baltic LNG have faced repeated delays due to Western restrictions on liquefaction technology and shipbuilding inputs. As of late 2025, Europe’s pipeline gas imports from Russia are down by more than 80 per cent from pre-war levels. Though some output has been redirected to Asia, pipeline infrastructure constraints limit how far this can go.

To compensate, the Kremlin has leaned more heavily on crude exports and on the domestic tax structure that converts oil profits into budget revenue. Yet, because global oil prices have remained steady rather than surging, even the 10 per cent rouble depreciation projected in Russia’s own budget forecast barely lifts receipts. The New Eurasian Strategies Centre notes that in 2026, oil and gas will account for roughly 22 per cent of federal revenue, a level that signals neither collapse nor strength, but stagnation.

For now, oil has prevented the economy from unravelling.

Is Everyday Life In Russia Back To Normal?

For most Russians, the war economy has created a strange dual reality. In cities with defence factories, employment and wages remain high, and consumer sentiment briefly improved through 2024. But that stability masks growing pressure elsewhere.

Inflation has stayed stubborn, averaging between 8 and 9 per cent this year, and the cost of food and housing continues to rise faster than incomes. Consumer lending is stagnant, imports are scarce, and prices for everyday goods have climbed sharply as Western brands vanished and domestic substitutes fell short.

According to data cited in the Carnegie Politika report, more than 40 per cent of Russians now rely on state support or remittances. Real disposable incomes have fallen for the third straight year, even as official employment remains high. For many families, life feels both busy and brittle, sustained by state spending, yet hollowed out by inflation and shrinking opportunity.

Shadow Networks And Sanction Evasion: Has The West Lost Control?

Partly. Sanctions have damaged Russia’s access to technology and finance, but they haven’t sealed it off. Through parallel imports via Turkey, Kazakhstan, the UAE and Armenia, Moscow still buys much of what it needs. According to the Free Russia Foundation report, around 70 per cent of the foreign components in Russian missiles and drones in 2025 were Western-made, sourced through intermediaries and grey supply chains.

The payment system has also adapted: transactions increasingly use yuan and rupees, while MIR and UnionPay have replaced SWIFT in domestic circulation. This has weakened the bite of Western financial restrictions.

So, Is Russia’s Economy Really Suffering?

It depends on where you look. On the surface, the numbers show life: positive growth, low unemployment, and strong output. Underneath, the foundations are cracking. Productivity is falling, private investment is shrinking, and capital flight is quietly accelerating.

The Chatham House report notes that Russia’s real GDP is roughly 12 per cent lower than it would have been without the war, with cumulative losses of over $1.6 trillion and about $400 billion in frozen foreign assets. That is a massive hole for a country that could otherwise have kept modernising.

So while the lights are still on and wages are still paid, the quality of Russia’s economic health is deteriorating. Growth has become dependent on war, consumption is fuelled by state subsidies, and investment is falling. The sanctions may not have broken the Russian economy, but they have quietly rewritten it, from a market system into one designed to serve the battlefield.

The Bottom Line

History suggests economic punishment alone rarely stops authoritarian states. Iran, North Korea have all adapted to decades of restrictions. Russia is doing the same, with a larger resource base and a global network still willing to trade.

Sanctions have hurt. They’ve eroded Russia’s future capacity to grow, blocked key technologies, and strained its budget. But they have not stopped the war or broken the Kremlin’s control.

Karishma Jain

Karishma Jain, Chief Sub Editor at News18.com, writes and edits opinion pieces on a variety of subjects, including Indian politics and policy, culture and the arts, technology and social change. Follow her @kar...Read More

Karishma Jain, Chief Sub Editor at News18.com, writes and edits opinion pieces on a variety of subjects, including Indian politics and policy, culture and the arts, technology and social change. Follow her @kar...

Read More

News explainers Zelenskyy Calls Sanctions ‘Painful Blow’ For Putin, But Is Russia’s Economy Really Hurting?

Read More