Russia's war economy, a giant with feet of clay

Introduction: the portrait of a fading giant

Four years of war, a bill that keeps growing

Four years after the launch of the full-scale invasion of Ukraine, the Russian economy shows clear signs of structural exhaustion, according to a report published by the Kiel Institute for the World Economy and the Stockholm Institute of Transition Economics. The document, titled "Endgame: The State of the Russian Economy," paints the picture of a system running out of breath, where fiscal reserves are dwindling, growth is stagnating, and dependence on Beijing keeps growing.

This is not the portrait Vladimir Putin likes to present to his people. And that is precisely why I want to dwell on it: because behind the facade of martial power the Kremlin keeps projecting lies an economic reality far more fragile than the triumphalist speeches of state propaganda suggest.

Why this profile matters now

With Russia's summer offensive stalled on the front, this economic fragility takes on decisive strategic importance. If time no longer favors Moscow, then every additional month of war brings the regime closer to a breaking point it nevertheless refuses to admit publicly.

I say this with the conviction of a columnist who has followed this file from day one: this Kiel Institute report is not Western propaganda, it is a cold, numbers-driven, and unforgiving economic diagnosis of Putin's regime.

And I'll say it plainly again: when an independent economic institute, respected across Europe, chooses the word "endgame" to describe a regime's trajectory, that is never a rhetorical accident. It is a signal that must be taken seriously.

Fiscal reserves are melting before our eyes

From sovereign wealth fund to near emptiness

The most striking figure in the report concerns the liquid reserves of Russia's sovereign wealth fund, which fell from 6.5% of GDP at the start of the war to just 1.8% in April 2026. This vertiginous drop shows how heavily the Kremlin has drawn on its reserves to finance a war that, under Putin's original plans, was supposed to last a few weeks.

Russia's federal budget deficit also exceeded the government's annual target within the first three months of 2026 alone, a major warning sign for any economy, let alone a wartime economy under severe international sanctions.

Oil and gas revenues in freefall

Russian oil and gas revenues fell 45% year-on-year in the first quarter of 2026, according to the same report. This is a collapse that confirms, with hard numbers, the combined effectiveness of Western sanctions and Ukraine's strike campaign against Russian energy infrastructure.

Seeing these numbers in black and white gives me a satisfaction I don't need to hide: every percentage point of oil revenue lost by Moscow is one percentage point less to fund the missiles raining down on Ukrainian cities.

Corporate debt exploding quietly

Off-budget financing as a crutch

Facing these budgetary constraints, Russia increasingly depends on off-budget financing, rapid credit expansion, and indirect support through the banking system to sustain its military spending. Since the start of the war, Russian corporate debt has increased dramatically, a phenomenon largely obscured in the official statistics presented by Moscow.

This opaque financing strategy allows the regime to keep displaying seemingly stable growth figures, while masking an accumulation of systemic risks that could, over time, weaken the entire Russian banking system.

The real bottleneck: people and technology

According to economist Matthew C. Klein, co-author of the report, the main constraint now weighing on Russia's war economy is no longer access to money, but access to people, technology, and productive capacity. Labor shortages are hitting record levels, and any further increase in military spending risks producing inflation rather than a real increase in weapons production.

This is a chilling finding for Putin: you cannot print skilled soldiers or precision electronic components with mere rubles. The shortage of human skills may be the hardest Achilles' heel for the regime to fix.

The portrait of a growing dependence on China

Beijing, Moscow's indispensable supplier

China now accounts for roughly 35% of Russia's total foreign trade, according to an analysis by researcher Alicia García-Herrero, co-author of the report. Beijing supplies the vast majority of critical dual-use goods and military components entering Russia, and is reportedly responsible for about three-quarters of the increase in Russian imports of sanctioned military components since 2022.

This strategic shift is profoundly transforming the relationship between the two countries. What the Kremlin once presented as a "no-limits partnership" between equals increasingly resembles an asymmetric dependence, in which Beijing gains leverage over Russian trade, finance, and industrial supply chains.

A losing bargain for Moscow

According to García-Herrero, Russia has secured an economic lifeline from China, but it is Beijing that emerges as the true strategic winner, gaining growing influence over an increasingly weakened and dependent partner.

Here is a delicious irony Putin will have to swallow: the man who claimed to be restoring Russian imperial greatness is turning his country into a mere economic client of Beijing. China, meanwhile, advances its pawns without firing a single shot.

Inflation, the regime's silent enemy

A tax hike that betrays budgetary urgency

The Russian government raised its VAT from 20% to 22% at the start of the year, a rate now higher than those applied in the United States, the United Kingdom, France, or Germany, according to data reported by the Guardian. This tax increase, decided in the middle of a war, shows just how tight the Kremlin's budget has become.

Analyst Isaac Levi, cited by the Guardian, notes that revenue from Russian fossil fuel exports was 13% below pre-war levels in 2025, under the combined effect of tighter sanctions, Ukrainian drone strikes, and falling global oil prices.

A population absorbing the shock

Ultimately, it is ordinary Russian citizens who absorb the shock of this growing fiscal pressure, through persistent inflation and a progressive erosion of their purchasing power, while the regime continues to devote a disproportionate share of the national budget to the war effort.

I often think of these ordinary Russian citizens, not necessarily complicit with the regime, who pay every day for a war they did not choose. Their forced silence should never be mistaken for genuine consent.

Russian growth, a statistical mirage

An IMF figure that masks the real stagnation

The International Monetary Fund estimates that the Russian economy will grow by only 1.1% in 2026, a figure barely higher than the 1% recorded in 2025. These growth rates, presented by Kremlin propaganda as proof of resilience, actually mask a prolonged stagnation far from the ambitions announced at the start of the conflict.

Economist Moritz Schularick, the report's lead co-author, sums up the situation bluntly: fiscal reserves have been largely depleted, growth has stalled, and dependence on China is increasing. He adds that any rise in oil prices linked to other geopolitical crises will likely only provide Moscow with a temporary fiscal boost.

Russian regions, a laboratory of forced convergence

Another contribution to the report, authored by economist Iikka Korhonen, analyzes regional convergence within Russia during the war, revealing growing disparities between regions most mobilized by the military effort and those relatively spared, an imbalance that could fuel internal tensions over the medium term.

A country where some regions grow artificially rich from war while others grow poorer is not a country united behind its president: it is a social time bomb that Putin prefers to ignore publicly.

What the West must do with these vulnerabilities

Strengthening enforcement of existing sanctions

According to economist Torbjörn Becker, co-author of the report, enforcing the price cap on Russian oil must remain at the center of Western sanctions policy, with renewed efforts to curb the Russian shadow fleet that currently bypasses much of the international restrictions on oil exports.

The report also recommends stricter export controls, particularly targeting Chinese suppliers of military components, as well as new targeted measures to further reduce Russian export revenues that continue to fund the Kremlin's war effort.

A support tariff for Ukraine, a concrete proposal

Researchers at the Kiel Institute propose creating a "Ukraine Support Tariff," a tax on remaining trade with Russia, particularly liquefied natural gas, chemicals, and fertilizers that continue to reach European markets. This measure would reduce Russian export revenues while generating a dedicated funding source for Ukraine's defense and reconstruction.

This is exactly the kind of concrete proposal I would like to see adopted without delay by European capitals. It is no longer enough to morally denounce Putin's war: every Russian economic vulnerability must be turned into tangible leverage.

The ambiguous role of Ukrainian strikes in this equation

Military pressure amplifying the economic crisis

The repeated Ukrainian drone strikes on Russian refineries and energy infrastructure fit directly into this dynamic of economic exhaustion documented by the Kiel Institute. Every oil facility taken offline, even temporarily, worsens the drop in oil and gas revenues already recorded in the report.

This convergence between direct military pressure and structural economic sanctions creates a pincer effect on the Kremlin's budget, which must now cope with a simultaneous erosion of its productive capacity, financial reserves, and export revenues.

A vicious circle hard for Moscow to break

Vladimir Putin thus finds himself trapped in a vicious circle: the more he persists in the war, the more he wears down the economic foundations of his own regime, without achieving the quick military victory he initially hoped for on Ukrainian soil.

This may be Putin's greatest strategic mistake: underestimating how much a long war would wear down his economy faster than the resolve of the nation he thought he could subdue in a few weeks.

Trump, an unpredictable player in this economic equation

American pressure with variable geometry

The Trump administration continues to oscillate between occasional pressure on Moscow and a declared desire to quickly negotiate a way out of the war, an ambivalence that complicates the readability of the overall Western strategy in the face of the Russian economic fragility documented by researchers.

This unpredictability, while frustrating for Ukraine's European allies, has not prevented the maintenance of a Western sanctions framework robust enough to keep weighing on the Russian economy, as confirmed by the Kiel Institute's figures.

A necessary ally despite his zigzags

I continue to view Trump as a necessary evil for the West, capable of maintaining real pressure on strategic adversaries like Russia, Iran, or China, while generating diplomatic instability that legitimately worries Washington's European partners.

I stand by it: Trump remains an imperfect but indispensable ally in this economic arm-wrestling match against Moscow. His unpredictability can sometimes serve as extra leverage on the Kremlin, even if it worries me just as much as it reassures me.

What this means for the outcome of the conflict

Time no longer favors Putin

This economic profile confirms a strategic intuition widely shared among Western analysts: time no longer clearly favors Moscow. The longer the war drags on, the more the structural vulnerabilities identified by the Kiel Institute worsen, progressively narrowing the Kremlin's room to maneuver in pursuing its offensive.

This economic reality could, over time, force Putin to accept negotiation terms less favorable than those he initially hoped for, provided Ukraine and its Western allies maintain steady pressure without giving in to the temptation of a premature compromise.

The risk of a cornered, unpredictable regime

Caution is nonetheless warranted: an economically weakened regime is not necessarily a less dangerous one. History is full of examples of authoritarian powers becoming more unpredictable, even more aggressive, as their economic options narrowed.

This is the caution I try to maintain despite my optimism about the economic outcome of this conflict. A Putin cornered economically could be tempted toward desperate moves, and the West must prepare for that possibility without ever easing its resolve.

Lessons for Western unity

Transatlantic coherence as a condition for success

This Kiel Institute report is a reminder of a truth too often neglected: the effectiveness of Western sanctions depends directly on their coherent and coordinated application across the United States, the European Union, and their G7 allies. Any crack in this coalition offers the Kremlin an unexpected financial breath of air.

According to Moritz Schularick, "recent months have shown that sanctions enforcement matters" a great deal, and Europe's main challenge now is to turn Russia's growing economic vulnerabilities into lasting strategic leverage, rather than mere rhetorical moral satisfaction.

A responsibility that goes beyond the Ukrainian file alone

This dynamic extends far beyond the Russo-Ukrainian conflict alone: it sends a deterrent signal to the entire authoritarian axis formed by Russia, China, Iran, and North Korea, demonstrating that Western democracies retain, despite their internal divisions, the collective capacity to economically wear down a determined aggressor.

Here is the real stake of this economic file: proving, once and for all, that territorial aggression does not pay, even for a nuclear power like Russia. That message must echo all the way to Tehran and Pyongyang.

The Kremlin's oligarchs feel the wind turning

An increasingly nervous economic elite

Behind the cold statistics of the Kiel Institute lies a human reality: that of a Russian economic elite quietly beginning to worry about the trajectory of its own country. Several oligarchs close to the Kremlin reportedly expressed, in private, growing doubts about the long-term sustainability of this war economy, according to analyses picked up by several Western think tanks.

This nervousness among the elite has not yet translated into open dissent: the repressive system built by Vladimir Putin over two decades makes any public criticism extremely risky. But history teaches us that cracks within authoritarian regimes often begin with exactly this kind of worried murmuring in the corridors of power, long before they become visible to outside observers.

Capital already looking for the exit

Capital flow data, though imperfect due to the strict controls imposed by Moscow, suggest a continuing flight of private wealth toward jurisdictions perceived as safer, despite all the regime's efforts to lock down the national economy. This trend, documented since the start of the full-scale invasion in 2022, has never truly reversed.

This phenomenon illustrates a simple but often overlooked truth: even in a closed authoritarian regime, rational economic actors seek to protect themselves against structural uncertainty. And uncertainty, in Russia, has never been higher since the fall of the USSR.

I find it fascinating, and a little satisfying, to see that even the regime's beneficiaries are starting to doubt. Nothing undermines authoritarian power more surely than the quiet panic of those who have profited most from it.

What economic history teaches us about besieged regimes

Precedents that do not lie

Twentieth-century economic history is full of examples of regimes that artificially maintained a facade of power for years, even decades, before collapsing abruptly under the cumulative weight of their internal contradictions. The Soviet Union itself long seemed indestructible, until its economic foundations could no longer support the weight of its military machine.

Nothing guarantees that Vladimir Putin's Russia will follow exactly the same trajectory. But the structural parallels — excessive dependence on natural resource exports, disproportionate military spending, growing economic isolation — deserve to be taken seriously by anyone seriously analyzing the possible outcome of this conflict.

Strategic patience as a Western weapon

For Ukraine and its Western partners, this historical lesson should feed a strategy of determined patience rather than frustrated impatience. Every additional month of sustained sanctions, every additional strike against Russian oil infrastructure, every dollar of oil revenue lost by Moscow potentially brings the regime closer to the breaking point described by Kiel Institute economists.

This patience is not passivity: it demands, on the contrary, constant vigilance, firm enforcement of sanctions against evasion attempts, and continued military support to Kyiv so that economic pressure translates concretely onto the battlefield.

This is where I sometimes grow impatient: strategic patience is necessary, but it must never become an excuse to ease the effort. Every sign of Western fatigue gives fresh oxygen to a regime that deserves none.

The limits of our current knowledge

Unreliable official Russian data

Caution is warranted regarding the reliability of official economic statistics published by Moscow, which has a long tradition of manipulating numbers for internal and external propaganda purposes. The Kiel Institute report relies on independent methodologies, but some uncertainty inevitably remains about the exact scale of the crisis.

I do not claim that a Russian economic collapse is imminent or inevitable. Authoritarian regimes have often shown surprising resilience in the face of economic pressures that, on paper, seemed bound to trigger their rapid downfall.

A necessary methodological caution

This methodological caution, however, changes nothing about the underlying trend, confirmed by multiple converging indicators: depleted fiscal reserves, falling oil revenues, growing dependence on Beijing, persistent inflation. Taken together, these signals paint a coherent portrait of a war economy running out of breath.

I always prefer this careful rigor to premature triumphalism that could, tomorrow, backfire against my own credibility as a columnist. But caution never prevents clearly naming a trend as well documented as this one.

Conclusion: an unsparing portrait of a weakened regime

The balance sheet of a cracked economic empire

This portrait drawn by the Kiel Institute and the Stockholm Institute of Transition Economics confirms, with hard numbers, that Russia's war economy is approaching its structural limits. Depleted fiscal reserves, falling oil revenues, growing dependence on China, looming inflation: each of these elements forms a piece of the puzzle of a regime whose facade of power masks growing fragility.

For Ukraine and its Western allies, this diagnosis should serve as a strategic compass: maintain, or even intensify, economic and military pressure on Moscow, at a moment when every sign of Russian weakness documented by independent economists strengthens the legitimacy of a firm line rather than a hasty compromise.

A victory also being built on spreadsheets

Modern warfare is not won solely on the battlefield: it is also won in economic dashboards, independent institutional reports, and the collective determination of the West to never ease pressure on an aggressor who, by all now-documented evidence, is seriously running out of steam.

By Maxime Marquette, columnist

Columnist's transparency note

Who I am and my declared biases

I sign my texts under the name Maxime Marquette, columnist-analyst for mad-m.ca. I hold a declared pro-Western and pro-Ukrainian editorial line, critical of the authoritarian regimes of Russia, China, Iran, and North Korea. I consider Vladimir Putin the principal party responsible for this war of aggression and its disastrous economic consequences for his own people.

My method consists of systematically cross-checking multiple reputable journalistic and academic sources before stating a fact, and clearly separating my personal opinions, always marked in italics, from factual, sourced data drawn from verifiable reports.

What I don't know

I do not know with certainty at what precise pace the Russian economy will continue to deteriorate, nor whether Putin's regime will find unexpected new sources of funding. Nor do I know the exact impact a sustained rise in global oil prices might have on the Kremlin's finances. I do not invent any testimony, any anonymous source, any scene to which I did not have direct access through public, verifiable documents.

Sources

Primary sources

Endgame: Russia's war economy hits its limits — Kiel Institute, June 11, 2026

Russia's War Economy Hits Its Limits as Front Stalls — Étude, June 28, 2026

Secondary sources

The Russian economy is finally stagnating — The Guardian, February 6, 2026

After 20 rounds of sanctions, the EU sees cracks in Russia's economy — Euronews, May 8, 2026

Ukraine Targets Russian Refineries in Fresh Drone Strikes — Bloomberg, June 28, 2026

Ukraine hits two Russian oil refineries overnight — Reuters, June 28, 2026