# Russia's war economy, a giant starting to crack > Introduction: the endgame Moscow refuses to see - Author: Maxime Marquette - Publisher: MadMax (https://mad-max.co) - Section: Profile - Published: 2026-07-03 - Canonical URL: https://mad-max.co/en/article/portrait-leconomie-de-guerre-russe-un-colosse-qui-commence-a-craqueler ## Introduction: the endgame Moscow refuses to see ### A German institute sounds the alarm The **Kiel Institute**, one of **Germany's** most respected economic research centers, has published a report documenting signs of **structural exhaustion** in Russia's war **economy** after more than four years of conflict against **Ukraine**. The report's title, **"Endgame,"** leaves little room for ambiguity about the researchers' diagnosis. According to the **European Union's** top diplomat, **Kaja Kallas**, cumulative Western **sanctions** have already cost **Russia** between **1,000 and 1,300 billion euros**, a colossal economic bleed that illustrates the scale of the price paid by **Vladimir Putin's** regime to continue its invasion. ### A nuanced but relentless assessment The **Kiel Institute** does not claim that Russia's **economy** is on the verge of immediate collapse: the report instead describes a system **"structurally exhausted but not yet broken,"** a crucial distinction that explains why **Putin** can still fund his war effort despite increasingly worrying economic signals. This nuance echoes the analysis published by **The Economist**, which states that Russia's war **economy** **"has problems but is not about to crash,"** a fragile balance between apparent resilience and deep fragility that now characterizes the **Kremlin's** economic model. ## Military Keynesianism at its breaking point ### Artificial growth fed by cannons According to **Foreign Affairs Forum**, Russia's **economy** has been kept afloat in recent years through what several analysts call **"military Keynesianism pushed to the extreme"**: massive public spending on the defense industry that creates an illusion of growth while gradually depleting the country's financial **reserves** and civilian productive capacity. This strategy, which turns the civilian **economy** into a permanent war **economy**, is producing increasingly mixed results: some sectors directly tied to weapons production show sustained activity, while the ordinary civilian economy shows growing signs of structural slowdown. ### A GDP that betrays hidden weaknesses Russia's **GDP** contracted **0.2%** in the first quarter of **2026** compared with the previous year, according to figures cited by **Foreign Affairs Forum**, while the **International Monetary Fund (IMF)** revised its annual growth forecast down to just **0.8%** for the year as a whole. Russia's **Ministry of Economic Development**, for its part, projects growth of **1.3%**, a figure that, once adjusted for the country's runaway **inflation**, actually amounts to near-stagnation that should worry planners in the **Kremlin**. ## The explosive proposal for a Ukraine Support Tariff ### Hitting residual trade with Moscow The **Kiel Institute** proposes an unprecedented measure called the **"Ukraine Support Tariff,"** a customs duty that would specifically target the residual trade still active between **Russia** and certain European markets, notably in **liquefied natural gas (LNG)**, chemicals, and Russian fertilizers still imported by some **European Union** countries. This proposal stems from the observation that despite four years of **sanctions**, certain strategic trade flows persist between **Moscow** and **Europe**, giving the Russian regime foreign-currency revenue that directly funds its war effort against **Ukraine**. ### An instrument to close the last loopholes According to **Kiel** researchers, this targeted tariff would close some of the last significant loopholes in the Western **sanctions** regime, particularly in sectors where residual European dependence on Russian exports remains higher than most political observers publicly acknowledge. Implementing such a measure would, however, require a difficult political consensus within the **European Union**, as some member states remain more dependent than others on certain specific Russian imports, notably in the energy sector. ## The external lifelines keeping Moscow standing ### China, an indispensable technology supplier According to **Foreign Affairs Forum**, Russia's war **economy** remains heavily dependent on external lifelines, notably Chinese technology supplies that allow **Moscow** to partially circumvent Western **sanctions** targeting electronic components and dual-use technologies used in weapons production. This growing dependence on **Beijing** is gradually transforming the relationship between the two countries, with **China** gaining considerable economic and diplomatic leverage over a **Russia** increasingly isolated from the rest of the Western world since the start of the full-scale invasion of **Ukraine**. ### Gulf oil revenue as a top-up The **exceptional oil revenue** generated by tensions in the **Middle East**, particularly around the **Gulf**, has also provided **Moscow** with a welcome financial top-up, partially offsetting losses caused by the price cap on Russian **oil** imposed by Western countries for several years. This dependence on volatile external factors, whether Chinese goodwill or fluctuations in the global oil market, illustrates the underlying structural fragility of a Russian **economy** that no longer fully controls its own financial destiny. ## The oil cap and the twenty-first sanctions package ### Forty-four dollars, the limit still holding The **European Union** proposes maintaining the price cap on Russian **oil** at **$44 a barrel** until **January**, as part of its **twenty-first sanctions package** currently being prepared in **Brussels**, a measure that continues to deprive the **Kremlin** of a significant share of the oil revenue it could otherwise collect at world market prices. This new **sanctions** package also targets, for the first time, Russia's fishing sector, as well as banks and cryptocurrency firms used by certain Russian networks to circumvent Western financial restrictions in place since 2022. ### Mounting pressure that fails to bend Putin Despite the cumulative scale of these successive **sanctions**, **Vladimir Putin** has shown no sign of willingness to accept a genuine ceasefire, preferring to continue his military offensive despite the growing economic cost it imposes on his own country and civilian population. This **Kremlin** resistance to economic pressure raises legitimate questions about how effective **sanctions** really are as a sole lever of pressure, reinforcing the argument of those who advocate for even more massive Western military support to **Ukraine** alongside existing economic measures. ## Inflation, the invisible enemy of Russian daily life ### The cost of living explodes far from the front Beyond abstract macroeconomic statistics, runaway **inflation** directly hits the daily lives of ordinary Russian citizens, with significant price increases for basic food, housing, and everyday consumer goods, a reality Russian state propaganda finds increasingly hard to fully conceal. This persistent **inflation** is gradually eroding the purchasing power of Russian households, creating latent social tensions that **Putin's** regime tries to contain through strict information control and increased repression of any form of public dissent linked to economic hardship. ### Interest rates, a double-edged weapon Russia's **Central Bank** has had to keep interest rates extremely high to try to contain this **inflation**, a restrictive monetary policy that, while partially curbing price increases, also stifles private investment and civilian economic growth outside the military defense sector. This dilemma between fighting **inflation** and supporting growth perfectly illustrates the structural impasse now facing Russia's **economy**, trapped between monetary policy choices that are each more painful than the last for the civilian population. ## Labor, an increasingly scarce resource ### A worker shortage worsened by mobilization Ongoing military mobilization and the considerable human losses suffered by the Russian army since the invasion began have created a significant labor shortage in several civilian economic sectors, forcing some Russian companies to artificially raise wages to attract increasingly scarce workers. This structural shortage directly contributes to the wage **inflation** observed in certain sectors, creating a complex economic spiral in which the **war** simultaneously drains the human and financial resources needed for the normal functioning of Russia's civilian **economy**. ### The brain drain that keeps bleeding the country Since the full-scale invasion began in 2022, a significant number of skilled Russian professionals, particularly in the technology and financial sectors, have left the country to avoid mobilization or out of political disagreement with the **war** waged by **Vladimir Putin**, a brain drain that deprives Russia's **economy** of skills essential to its future modernization. This ongoing exodus, combined with the labor shortage caused by military mobilization, seriously jeopardizes the long-term growth prospects of Russia's **economy**, well beyond the duration of the current conflict with **Ukraine**. ## Russia's banking sector under mounting strain ### Bad loans piling up Several Western financial analysts observe a worrying accumulation of bad loans within the Russian banking system, a direct result of growing difficulties faced by civilian companies unable to repay their debts amid high interest rates and a broad economic slowdown. This weakening of the banking sector, though partially masked by Russian authorities eager to project an image of financial stability, could become one of the most significant breaking points if Western economic pressure continues to intensify in the months ahead. ### Sovereign reserves running thin Russia's **National Wellbeing Fund**, long presented as the **Kremlin's** financial safety cushion, has seen its liquid **reserves** decline significantly since the conflict began, reducing the fiscal room **Moscow** has to keep funding both its war effort and the social needs of its civilian population simultaneously. This gradual erosion of Russia's sovereign **reserves** is one of the most closely watched indicators used by Western analysts to assess **Putin's** regime's real capacity to sustain its war effort over the long term without triggering a major financial crisis. ## What Western experts predict for 2027 ### A capacity to hold out through 2027 and beyond According to **Foreign Affairs Forum**, Russia's war **economy** should be able to sustain the current military effort **"at least through 2027 and potentially beyond,"** a timeframe that tempers Western hopes of a rapid economic collapse that could force **Putin** to negotiate peace in the near future. This cautious projection is a reminder that economic **sanctions**, while effective at gradually weakening **Russia**, are not an instrument for rapidly resolving the conflict, reinforcing the case for sustained and predictable long-term Western military support to **Ukraine**. ### The delayed-breaking-point scenario Several Western economists believe the true breaking point for Russia's **economy** may come not suddenly and dramatically, but gradually, through an accumulation of converging structural weaknesses: persistent **inflation**, labor shortages, eroding sovereign **reserves**, and growing dependence on unreliable external partners like **China**. This scenario of gradual decline rather than sudden collapse demands strategic patience and consistency from the **West** in applying **sanctions**, two qualities Western democracies have sometimes lacked when facing fatigue among their own publics. ## Dissenting voices inside Russia itself ### Russian economists growing increasingly worried Despite widespread censorship and repression of any public criticism of **Kremlin** policy, some Russian economists, sometimes speaking in veiled terms in specialized publications, express growing concern about the long-term sustainability of the current economic model, implicitly acknowledging the same structural weaknesses documented by Western institutes. These dissenting voices, though marginalized and often forced into extreme rhetorical caution, reflect a growing awareness, even within Russia's economic establishment, that the current trajectory is not indefinitely sustainable without major structural reforms. ### The Kremlin's deafening silence Faced with these warning signs, the **Kremlin** continues to officially project an image of unshakable economic resilience, publicly refusing to acknowledge the scale of the structural challenges documented by institutions as respected as the **Kiel Institute** or the **International Monetary Fund**. This official denial, characteristic of authoritarian regimes confronted with uncomfortable economic realities, could ultimately worsen the crisis by delaying the necessary adjustments that the country's real economic situation increasingly urgently demands. ## The impact on Russian military capacity in the medium term ### The direct link between economy and war effort The gradual weakening of Russia's **economy** has direct repercussions on the country's ability to sustain its current military effort: weapons production, recruitment of new soldiers, and maintenance of existing equipment all ultimately depend on the country's overall financial health and its ability to mobilize resources over the long term. If the negative economic trends documented by the **Kiel Institute** are confirmed in the coming months, **Ukraine** and its Western allies could see Russia's capacity to sustain large-scale military operations across the entire current front gradually erode. ### A strategic window for Ukraine and its allies This gradual economic weakening of **Russia** could offer **Ukraine** and its Western partners a strategic window to simultaneously intensify military and diplomatic pressure, in the hope of convincing **Vladimir Putin** that continuing the **war** is becoming economically unsustainable even before it becomes militarily indefensible. Seizing this strategic window will, however, require flawless coordination between Western weapons deliveries and maintaining, or even strengthening, current economic **sanctions** against the **Kremlin** regime. ## The black market and sanctions-evasion networks ### A shadow fleet under growing scrutiny **Russia** continues to rely on a **shadow fleet** of oil tankers registered under flags of convenience to circumvent the Western price cap on **oil**, a practice increasingly monitored and sanctioned by European and American authorities since the start of the full-scale invasion of **Ukraine**. Every ship identified and sanctioned by the **European Union** progressively reduces the **Kremlin's** logistical room to export its **oil** at prices close to the world market, reinforcing the cumulative effectiveness of the price cap imposed by Western countries for several years. ### Cryptocurrencies, a new frontier for evasion Some Russian networks also use **cryptocurrencies** to circumvent Western banking restrictions, a practice that explains why the European Union's twenty-first **sanctions** package now explicitly targets cryptocurrency firms often used by these financial evasion networks. This ongoing race between Western regulators and Russian evasion networks shows just how much the effectiveness of **sanctions** depends on constant vigilance and rapid regulatory adaptation in the face of actors who keep finding new loopholes to exploit. ## The invisible social costs for the Russian population ### A youth deprived of an economic future Beyond macroeconomic statistics, Russian youth directly bear the consequences of this prolonged war **economy**: fewer job opportunities in civilian sectors, limited access to Western technology, and the constant prospect of military mobilization, all weighing heavily on the life choices of an entire generation of young Russians. This generation, sacrificed on the altar of **Vladimir Putin's** territorial ambitions, may bear the economic and social consequences of this **war** long after its eventual resolution, a negative legacy the Russian regime prefers not to discuss publicly. ### The human cost behind the economic figures The cold economic statistics documenting the exhaustion of Russia's war **economy** mask a much darker human reality: families grieving massive military losses, rural communities emptied of their mobilized working-age population, and a Russian social fabric deeply weakened by more than four years of uninterrupted conflict. This human cost, largely concealed by Russian state propaganda, is nonetheless one of the most tangible and lasting dimensions of the price paid by Russian society for the personal ambitions of one man at the top of the **Kremlin**. ## Putin's risky bet on time ### Betting on Western fatigue rather than military victory Several analysts believe **Vladimir Putin's** ultimate strategy no longer necessarily rests on a decisive military victory on the battlefield, but rather on a long-term bet that Western political will to keep financially and militarily supporting **Ukraine** indefinitely will eventually run out. This strategic calculation partly explains why the **Kremlin** seems willing to accept a growing economic cost for its own population, hoping that upcoming elections in several key Western countries produce governments less favorable to continued support for **Kyiv**. ### A bet the Kiel Institute judges increasingly costly The **Kiel Institute** report suggests, however, that this long-term bet is becoming more costly for **Russia** itself every month, with the documented structural economic exhaustion risking undermining Russian military capacity even before the Western fatigue **Putin** is counting on fully materializes politically. This race against time between Russian economic exhaustion and Western political perseverance will likely determine the ultimate outcome of this conflict, far beyond the mere balance of military forces observed daily along Ukraine's front lines. ## Conclusion: strategic patience as the only viable path ### A weakened giant still standing The **Kiel Institute** report confirms what many Western observers had suspected for months: Russia's war **economy** shows undeniable signs of structural exhaustion after more than four years of conflict, without collapsing spectacularly and immediately as some hoped at the start of the invasion. This nuanced reality demands a long-term strategy from the **West** combining sustained economic **sanctions**, constant military support to **Ukraine**, and enough strategic patience to let Russia's structural weaknesses fully produce their effects on **Vladimir Putin's** ability to continue his aggression. ### The price of Western impatience Any Western impatience, whether expressed through a premature loosening of **sanctions** or a reduction in military support to **Kyiv**, would risk giving **Moscow** the breathing room it needs to stabilize its war **economy** before the structural weaknesses documented by the **Kiel Institute** reach their full cumulative effect on Russian military capacity. **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 - [Kiel Institute — Endgame: Russia's war economy hits its limits](https://www.kielinstitut.de/publications/news/endgame-russias-war-economy-hits-its-limits/) - [Kiel Institute — Ukraine Support Tariff, full document](https://www.kielinstitut.de/fileadmin/Dateiverwaltung/IfW-Publications/fis-import/c35aae7f-c30b-4691-b71a-ce10df066171-KPB_212_EN.pdf) ### Secondary sources - [Foreign Affairs Forum — 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 Economist — Russia's war economy has problems but is not about to crash, June 22, 2026](https://www.economist.com/finance-and-economics/2026/06/22/russias-war-economy-has-problems-but-is-not-about-to-crash) - [The Guardian — EU G7 Ukraine live blog, quoting Kaja Kallas, June 15, 2026](https://www.theguardian.com/world/live/2026/jun/15/eu-g7-ukraine-kyiv-russia-war-iran-zelenskyy-macron-trump-europe-latest-news-updates) - [Kiel Institute — Sanctions and Russia's war economy, full report](https://www.kielinstitut.de/fileadmin/Dateiverwaltung/IfW-Publications/fis-import/eef51261-68bf-4883-b1e9-ed0fb74a92ed-Kiel_Report_no3.pdf) --- Source: Maxime Marquette, MadMax. When citing, name the author and link https://mad-max.co/en/article/portrait-leconomie-de-guerre-russe-un-colosse-qui-commence-a-craqueler