# DECODING: Russia's war economy — exhausted but not yet broken, says Kiel Institute

> The report by the Kiel Institute for the World Economy published in June 2026 sums up the state of Russia's economy in a phrase worth examining: "structurally exhausted but not yet broken." This is neither the announcement of the imminent collapse that some had been hoping for since 2022, nor the confirmation of the economic robustness that Vladimir Putin likes to claim in his

- Author: Maxime Marquette
- Publisher: MadMax (https://mad-max.co)
- Section: Analysis
- Published: 2026-06-29
- Canonical URL: https://mad-max.co/en/article/decryptage-l-economie-de-guerre-russe-epuisee-mais-pas-encore-brisee-selon-le-ki

## Introduction: an economy still standing — but at what cost?

### The paradox of a besieged economy that holds

The report by the **Kiel Institute for the World Economy** published in **June 2026** sums up the state of Russia's economy in a phrase worth examining: "**structurally exhausted but not yet broken**." This is neither the announcement of the imminent collapse that some had been hoping for since **2022**, nor the confirmation of the economic robustness that **Vladimir Putin** likes to claim in his speeches. It is something more uncomfortable: an economy still standing, financing its war, but at the cost of the progressive destruction of its civilian fabric.

Data published in **June 2026** paint a contradictory picture. **Russian GDP contracted by 0.2% in the first quarter of 2026** according to official statistics — a minimal decline, almost within the statistical margin of error. Annual growth has fallen back to **0.8–1.3%** from over **3%** in **2023–2024**. The **federal budget deficit reached 3.8 trillion rubles**. Gasoline production has fallen **25% year-on-year**, a consequence of Ukrainian strikes on refineries. The **Russian Central Bank** was forced to cut its key rate to **14.25%** in June to support a slowing economy. And yet — this economy can, according to the **Kiel Institute**, sustain the war effort at least until **2027**.

*An economy "structurally exhausted but not yet broken" is an economy that can still kill. That is the most important diagnosis Western policymakers must internalize — and it invalidates both complacency and wishful thinking.*

## The slowdown figures: what the data actually say

### Official GDP, a partial instrument of truth

The **0.2% contraction in Russian GDP in Q1 2026** according to official data must be interpreted cautiously for two opposing reasons. On one hand, Russian statistics are notoriously opaque and potentially manipulated for political purposes — the reality could be more degraded than the official figures suggest. On the other, **GDP** is a macroeconomic measure that includes massive military spending — if the effect of war spending is removed, the contraction in Russia's civilian economy is probably far more severe than **0.2%**.

The **Kiel Institute** and other economic institutions tracking the Russian economy estimate that military spending's share of **Russian GDP** has reached **7 to 8%** in **2025–2026**, compared to roughly **3.7%** in **2021**. These expenditures are artificially propping up entire sectors — weapons production, military logistics, extractive industries operating under defense contracts — while leaving civilian sectors chronically underinvested. It is a classic war economy: solid on its headline numbers, but hollow in its substance.

### The budget deficit and its implications

A **federal budget deficit of 3.8 trillion rubles** for the first months of **2026** is significant — but not immediately catastrophic. **Russia** has the **National Wealth Fund (NWF)**, its sovereign wealth fund fed by oil revenues, to cover these deficits. This fund, which represented approximately **12% of GDP** before the invasion, has been substantially depleted since **2022** — but estimates of its current level vary, and Russian official data are unreliable on this specific point.

What is known with more certainty is that **Russia** is financing its war deficit through a combination of draws on the **NWF**, domestic borrowing at high interest rates, and **partial debt monetization** — a formula that creates inflationary pressure that the **Russian Central Bank** is trying to contain by maintaining a high key rate, now reduced to **14.25%** after being held at **16%** for several months.

*3.8 trillion rubles of deficit — that is abstract. What it concretely means is that Russia is spending on the war resources it no longer genuinely has the revenues to fund. It is drawing on its war savings. Those savings are not infinite.*

## Inflation and monetary policy: the Kremlin caught between two fires

### Persistent inflation despite high rates

**Russian inflation** is one of the most revealing indicators of real economic pressure. After reaching double-digit levels in **2022**, it was partially contained by the aggressive monetary policy of the **Russian Central Bank** — which had held its key rate at **16%** since late **2023** — but it remains persistently above official targets. Food products, consumer goods, and services have seen prices rise well above wages in non-military civilian sectors.

The cut in the key rate to **14.25% in June 2026** signals that the **Central Bank** has concluded that the economic slowdown represents a more immediate risk than inflation. This policy shift is telling: it indicates that Russia's civilian economy is slowing sufficiently for the central bank to prefer accepting more inflation in order to support growth. This is the sign of an economy under genuine pressure — not collapse, but increasingly difficult trade-offs.

### Military salaries as a major economic distortion

A structural factor contributing to Russian inflation is the level of **military wages**, which have been massively increased to attract volunteers and compensate for front-line losses. Russian soldiers engaged in Ukraine receive salaries that can reach several times the Russian median wage — a massive labor market distortion that pulls wages upward in other sectors, notably construction, logistics, and industry, creating inflationary pressures that are difficult to absorb.

This dynamic creates a paradox: the families of soldiers killed or wounded receive financial compensation that injects liquidity into regional economies outside the major metropolises — **Moscow** and **St. Petersburg** — creating local consumer demand that local supply chains cannot always meet. This is a well-documented perverse effect of war economies: military spending stimulates certain consumption indicators while deepening structural imbalances.

*Paying the families of the dead to mask inflation — that is the macroeconomic sleight of hand Putin has been performing for four years. It holds. For now. But no sleight of hand is eternal.*

## Energy under pressure: refineries, diesel, and the effect of Ukrainian strikes

### The 25% drop in gasoline production

The most striking data point in the **June 2026** economic analyses is the **25% drop in gasoline production in Russia** year-on-year. This dramatic decline is directly attributable to **Ukrainian strikes on Russian refineries**, which have methodically targeted refining installations since **2024**. Ukrainian long-range drones have struck refineries **1,000 to 1,500 kilometers** from the front line, demonstrating a capacity to hit Russia's economy at its strategic depth.

The consequences of this production drop are being felt across multiple sectors simultaneously. **Civilian consumption** is being rationed in some regions. **Pump prices** have risen despite government subsidies. And **military logistics** — which consumes immense quantities of fuel for armored vehicles, supply trucks, and aviation — must adapt to tighter supplies. The Russian government has been considering a **total ban on diesel exports** to protect domestic supplies.

### The potential diesel export ban

The option of a **total diesel export ban**, discussed within the Russian government according to sources available in **June 2026**, would constitute an economic survival response to the pressures caused by Ukrainian strikes. By keeping diesel within its borders, **Russia** could stabilize military and civilian supplies — at the cost of a significant loss in export revenues and additional strain on its trading partners that import its diesel, notably certain countries of **Central Asia** and **Southeast Asia**.

This decision illustrates the growing dilemma facing **Putin**: protecting the war economy requires increasingly distortive measures that impoverish the civilian economy and strain relations with trading partners. Every emergency measure creates side effects that demand further emergency measures. This is the classic mechanism of structural exhaustion — not a sudden collapse, but a progressive degradation that reduces the room for maneuver.

*When an economy begins to ban its own exports to survive, it is starting to eat its own tail. Russia is not quite there yet — but it is eyeing the tail with interest.*

## What the Kiel Institute means by "structural exhaustion"

### Civilian investment in free fall

The concept of "**structural exhaustion**" used by the **Kiel Institute** to describe the Russian economy refers to something deeper than deficits or inflation rates. It designates the progressive destruction of civilian productive capital: investments in civilian infrastructure, non-military research and development, education and health systems that are not linked to the war effort. These investments have been massively redirected toward military spending since **2022**.

The consequences of this trade-off are not immediately visible in standard macroeconomic indicators — they manifest over a five-to-ten-year horizon, in the form of infrastructure not being maintained, civilian technologies not being developed, young people emigrating or being sacrificed. **Russia** in **2030–2035** will be structurally weaker than it was in **2019**, whatever the outcome of the conflict in Ukraine. That is what the **Kiel Institute** calls "structurally exhausted."

### The hidden human cost

Structural exhaustion also has a demographic dimension that economic figures capture only imperfectly. **Russian human losses** — estimated at several hundred thousand killed and wounded since **2022** according to Western estimates, with a significant proportion of men of working and family-forming age — represent a loss of human capital without equivalent since the **Second World War**.

Added to this loss is the **emigration** of some of Russia's most qualified and mobile citizens — particularly following the mobilization of **September 2022**. Hundreds of thousands of people have left **Russia**, including a significant proportion of skilled workers in technology, science, and finance sectors. This brain drain aggravates structural exhaustion over the long term — but its effects will only be fully felt in the years following the end of the conflict.

*The men who died at the front will not come back to found businesses, pay taxes, raise children. The minds who left for Georgia or Serbia are not innovating for Russia. These losses do not appear in quarterly GDP. But they count.*

## Can it hold until 2027 — and beyond?

### The conditions for sustaining the war effort

The **Kiel Institute**'s estimate that Russia's economy can sustain the war effort until at least **2027** rests on several factors: **oil revenues** maintained at sufficient levels despite sanctions (thanks to the "**shadow fleet**" and sales to **India**, **China**, and **Gulf** countries), the **NWF reserves** still available, and the capacity of Russian companies to adapt to sanctions by substituting Western suppliers with Asian ones.

These resilience factors are real — but each has its limits. Oil revenues depend on the world oil price, over which **Russia** has only partial influence. **NWF** reserves are finite. And supplier substitutions often occur at higher costs and lower quality, particularly in the technological components of armaments. The **2027** horizon is therefore not a guarantee, but a cautious estimate under a scenario in which current conditions continue.

### What could accelerate the breakdown

Several factors could accelerate Russia's economic degradation beyond current forecasts: a significant drop in the **oil price** below **$60 per barrel** — the level below which the Russian budget enters critical deficit — ; an intensification and expansion of Ukrainian strikes on Russian energy infrastructure; the closing of new sanctions circumvention routes; or a resurgence of emigration among skilled workers.

Conversely, a major Russian territorial victory — or a ceasefire consolidating its gains — could reduce military expenditure and allow resources to be redirected toward the civilian economy. That is the bet **Putin** continues to make: hold long enough to obtain a crisis exit that allows him to present an acceptable economic record to his population. This bet is not won — but it is not yet lost.

*The question is not whether the Russian economy will collapse — it will, eventually, if the war lasts long enough. The question is whether it will collapse before Western political fatigue gives way. That is the race we are running.*

## Implications for Western strategy on Ukraine support

### Neither optimism nor catastrophism — strategic rigor

The **Kiel Institute**'s analysis has direct implications for Ukraine's supporters' strategy. It invalidates two symmetrical errors: the optimism of those who believe that economic sanctions alone will force **Russia** to the negotiating table in the short term, and the pessimism of those who conclude that Russia's economy is so robust that it would take decades to bring to its knees.

The reality is intermediate and dynamic: Russia's economy is under growing pressure, but can finance the war for several more years if no major shock occurs. The Western strategy must therefore be to **multiply sources of pressure simultaneously** — Ukrainian strikes on refineries, sanctions on oil revenues, diplomatic pressure on alternative suppliers, sustained and intensified military support for Ukraine — rather than counting on a single source of pressure to produce a rapid result.

### The message to Congress and European parliaments

For American or European parliamentarians debating the level of support for Ukraine, the **Kiel Institute** data send a clear message: withdrawing that support now would not produce an immediate collapse of Russia's economy that would force **Putin** to negotiate. **Russia** would hold for several more years. On the other hand, sustained and intensified support for Ukraine — multiplying economic, military, and diplomatic pressures — can significantly reduce the sustainability horizon of Russia's war economy.

That is the strongest strategic argument in favor of continuing Western support for Ukraine: not the hope of an immediate collapse, but the certainty that each additional year of war deepens Russia's structural exhaustion beyond the point of return. And eventually, the bill for "structurally exhausted" will come due — with interest.

*Those who want to cut aid to Ukraine hoping Russia will collapse on its own are making a naive wager. Those who maintain the pressure understand that structural exhaustion is a delayed victory. The only requirement is to hold.*

## Russia's economic resilience: myth or documented reality?

### What the data confirm, what they refute

Russia's economy has shown an adaptive capacity that many Western experts had not anticipated. Partial import substitution in certain sectors, the reorientation of energy exports toward **Asia**, and the maintenance of positive nominal growth in **2023** and **2024** have fed a resilience narrative that **Kremlin** propaganda exploits abundantly. The **Kiel Institute** data allow this narrative to be tested against the facts.

The reality is more nuanced: **Russia** does maintain certain macroeconomic indicators in an acceptable range — officially low unemployment, partially contained inflation, still-substantial foreign exchange reserves. But these figures mask deep distortions: a war economy draining resources from civilian sectors, real inflation well above official figures in consumer goods, and an unprecedented brain and capital drain since **2022**.

### The indicators that genuinely concern economists

The indicators that genuinely worry independent economists are those the **Kremlin** does not publish or publishes with delay: productivity in the non-military private sector, investment in civilian infrastructure, the demographics of the regions that have lost the most young men in the war. When this data filters through independent sources, it paints a portrait of an economy militarizing itself at the expense of its civilian future.

The **Central Bank of Russia** maintained interest rates above **16%** to contain persistent inflation. These high rates curb civilian private investment and create tensions in the real estate sector and in the financing of non-military businesses. This is the hidden cost of the war economy — not visible in the headlines, but felt in the daily economic reality of Russians.

*Russia's economy has not collapsed. True. But it has been transformed into a war economy — and war economies pay their price over time, not immediately. The USSR sustained its war economy for decades before the costs became unbearable. Putin's Russia is on a similar path, at a different speed.*

## Conclusion: exhausted but not broken — for how much longer?

### The verdict of economic analysis

The **Kiel Institute**'s diagnosis is unambiguous: Russia's economy is not on the verge of collapse, but it is in persistent structural degradation. **GDP** is contracting, the **deficit is widening**, **energy production is declining**, the **Central Bank** is cutting its rates to prop up a slowing economy. None of these indicators announces an immediate collapse — but together, they trace the trajectory of an economy consuming itself to finance a war.

The **2027** horizon as the sustainability limit is not a prophecy — it is a cautious estimate in a status quo scenario. If military, economic, and diplomatic pressures intensify, this horizon can move closer. If they ease, it can recede. What the **Kiel Institute** report says clearly is that the outcome depends as much on the choices of Ukraine's partners as on the resilience of Russia's economy. And that is good news — because democracies can choose.

### What "structurally exhausted" leaves behind

When this war ends — through negotiation, exhaustion, or victory — the **Russia** that emerges will be structurally different from the one that started it. Its public finances will be degraded, its human capital depleted, its civilian infrastructure underinvested. Rebuilding post-war **Russia** will be a generational challenge — and that reality will weigh on **Putin**'s own calculations, knowing that his successors will inherit this bill.

This is not a consolation for Ukrainians living under bombardment today. But it is an economic reality that illuminates the long-term balance of power — and that should inform the strategic patience of the democracies supporting Ukraine. Russia's structural exhaustion is not a metaphor. It is an ongoing dynamic. And it is working for Ukraine, if Ukraine receives what it needs to hold.

*Economic data on Russia is a battlefield in itself. The Kremlin publishes what suits it, conceals what embarrasses it, and bets on duration to exhaust its adversaries' will. Understanding Russia's war economy with precision — as the Kiel Institute does — is an analytical weapon the West must keep sharp.*

**By Maxime Marquette, columnist**

## Columnist's transparency note

### Editorial stance

I am not a journalist but a **columnist and analyst**. My expertise lies in observing and analysing the geopolitical, economic and strategic dynamics that shape our world. My work is to take political strategies apart, to understand global economic movements, to put the decisions of international actors in context and to offer analytical perspectives on the changes that are redefining our societies.

I do not claim the cold objectivity of traditional journalism, which stops at reporting facts. **I claim analytical clarity**, rigorous interpretation and a deep understanding of the complex issues that concern us all. My role is to give meaning to the facts, to place them in their historical and strategic context, and to offer a critical reading of events.

### Method and sources

This text keeps the basic distinction between **verified facts and interpretive analysis**. The rule never changes: a factual claim is published only when a verifiable source supports it, and the sources this article actually used are listed under **Sources**, never here.

**Primary source families** used by the publication, when the story has them: official statements from governments and international institutions, public statements by political leaders, reports from intergovernmental organisations, dispatches from recognised international news agencies.

**Secondary source families**: specialised publications, internationally recognised news media, analyses from established research institutions, reports from industry organisations.

When an article cites statistical, economic or geopolitical data, it comes from the institutions that produce it (intergovernmental organisations, central banks, national statistics offices), and the exact institution is named under **Sources**.

### Nature of the analysis

The analyses, interpretations and perspectives in the analytical sections of this article are a **critical, contextual synthesis** based on the information available, the trends observed and the expert comments cited in the sources consulted.

My role is to interpret these facts, to set them in the context of today's geopolitical and economic dynamics, and to give them a coherent meaning within the larger story of the changes shaping our time. These analyses reflect expertise built through continuous observation of international affairs and an understanding of the strategic mechanisms that drive global actors.

This article describes a documented state of affairs on its publication date, not a prediction: later developments may shift its outlook. No update is promised in advance; when an article is corrected or completed, the change is dated in the text.

## Sources

### Primary sources

- [FAF.ae — Russia's war economy has problems but is not about to crash — June 23, 2026](https://www.faf.ae/home/2026/6/23/russias-war-economy-has-problems-but-is-not-about-to-crash-vladimir-putin-is-still-able-to-fund-his-aggression)

- [The Moscow Times — Russian government weighs total ban on diesel exports — June 24, 2026](https://www.themoscowtimes.com/2026/06/24/russian-government-weighs-total-ban-on-diesel-exports-a93086)

### Secondary sources

- [The Moscow Times — Kremlin assures macroeconomic stability despite energy market volatility — June 23, 2026](https://www.themoscowtimes.com/2026/06/23/kremlin-assures-macroeconomic-stability-despite-volatility-in-energy-markets-a93076)

- [Euromaidan Press — Ukraine's economy records its steepest contraction since the renewed war — June 23, 2026](https://euromaidanpress.com/2026/06/23/ukraine-economy-contraction-june-2026/)

- [Kyiv Independent — Four years later, the reality checks on Ukraine's EU candidacy are piling up — June 23, 2026](https://kyivindependent.com/four-years-later-the-reality-checks-on-ukraines-eu-candidacy-are-pouring-in/)

- [Axios — Geopolitical and economic news — June 2026](https://www.axios.com/)

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Source: Maxime Marquette, MadMax. When citing, name the author and link https://mad-max.co/en/article/decryptage-l-economie-de-guerre-russe-epuisee-mais-pas-encore-brisee-selon-le-ki