Executive Summary

As of August 2025, Russia’s economy is in an extremely fragile state as a result of disproportionate budget redistribution toward military spending and sanctions. The consequences of the war are already visible in record price increases for even the most essential food items, such as frozen fish (+31% year-on-year), butter (+25.5% year-on-year), or pasteurized milk and sour cream (+21% year-on-year). Inflation has triggered record-high levels of public anxiety on this issue, fueling unprecedented support among Russian citizens for ending the war in Ukraine. The current state of the economy and public discontent is not yet a critical factor forcing an immediate halt to military operations, but it is undeniably pushing the Kremlin to extract maximum gains from its criminal war as soon as possible, given the economic vulnerabilities. In this context, the weakening of European sanctions is becoming one of the key components of what Putin and the Kremlin define as a “victory over the West in Ukraine,” necessary for restoring critical segments of the economy and for rebuilding and strengthening the armed forces as part of Russia’s overall militarization campaign and potential future conflicts.

Formally, GDP growth remains at 1.1% in the second quarter of 2025, but this is well below the growth rates of 2023–2024, when the figure exceeded 4%. The main contribution now comes from military orders, while civilian industries continue to contract, as evidenced by declining production of household appliances, footwear, and cement. Meanwhile, the defense industry is showing double-digit growth rates, further entrenching the structural imbalance of the economy. The labor market remains paradoxical: official unemployment is at a historic low of 2.2%, but not because of increased employment — rather due to mobilization, emigration, and demographic losses. Many civilian-sector enterprises are moving to part-time employment and preparing for layoffs, signaling a deepening crisis in both labor supply and consumer demand. Inflation remains above 8%, easing only due to seasonal products such as vegetables, while everything else continues to rise in price. Even with the Central Bank lowering its key rate from 20% to 18% (somewhere between Venezuela and Angola — by comparison, the rate in Germany or the UK is 0.25%, while in Venezuela it is 57%), credit remains inaccessible, suppressing both consumption and investment. The federal budget is under mounting pressure: the deficit for January–July reached 4.88 trillion rubles ($60.8 billion), surpassing the annual plan, while the National Wealth Fund (NWF) has nearly halved since 2022 — from 8.8 trillion to 3.95 trillion rubles ($109.6 billion to $49.2 billion). At the current pace of withdrawals, reserves could be depleted in less than two years, forcing the Kremlin either to raise taxes or expand external debt. Economic tensions are exacerbated by internal elite disputes: the Central Bank and Finance Ministry insist on tight fiscal policy for stabilization, industrialists demand cheap credit, and Vladimir Putin takes a middle-ground stance, promoting the concept of “balanced growth.” The social sphere is reacting painfully. According to polls by state agencies FOM and VTsIOM, inflation expectations among the population have risen to 13.5%. Russians now say they need an income of 227,000 rubles ($2,827) to feel “happy” — twice as much as eight years ago, and nearly three times higher than current average wages (about 30% of employed citizens in Russia earn an average salary of around $1,000/monthly). At the same time, 22% of Russians report a worsening of their financial situation, while only 9% note improvements. Officially, 11.9 million people live below the poverty line, accounting for 8.1% of the population. This figure has been declining for the second year in a row, most likely because many of those signing military contracts come from impoverished regions and families. They initially receive signing bonuses, and later — their families receive payouts after the soldiers are killed at the front. Dissatisfaction with the economic situation is increasingly breaking into the public sphere, leaving the Kremlin fewer opportunities to suppress debate about the war’s economic consequences. In Novosibirsk, the Communist Party held a protest against rising prices; in Tomsk, a rally was held against housing and utility tariffs; and online, residents of Tyumen and Arkhangelsk regions gathered tens of thousands of signatures on petitions to freeze utility payments. The number of pressure points for the Kremlin is multiplying, now involving major sectors and state monopolies. On August 18, it was reported that in Kuzbass more than 500 miners quit due to wage arrears, halting work at several mines and open pits, costing the regional budget tens of billions. Discontent is also growing among Russian Railways employees — one of the country’s largest employers — which has been forced to implement selective layoffs and wage cuts, sparking negative publications from employees and frustration in work-related chats. Rising gasoline prices may further intensify economic problems. Since August 2, 2025, a new wave of drone attacks on Russian oil refineries has surpassed the effectiveness of previous ones, apparently aimed at halting production. Particularly dangerous for Russia are strikes against the chain of refineries from Ryazan to Volgograd: to the west and southwest of this arc, there are no major refineries supplying the domestic market, yet these regions are home to tens of millions of people, key agricultural areas, recreational zones, and critical transport routes. Against this backdrop, the Kremlin is eager to demonstrate “resilience” and control of the economy. Vladimir Putin and top officials are focused on “beautifying” reality and showcasing “achievements” — reduced inflation, a stable budget, Russia’s global economic position. The Kremlin seeks to negotiate from a “position of strength” and to project the ability to “continue the Special Military Operation as long as necessary.” Yet beneath this faсade lie accumulated vulnerabilities: reliance on military spending and the constant need to increase payouts to contract soldiers — which have risen by almost 2 million rubles over the past year, now reaching one-time bonuses of 3 million rubles ($38,400) per recruit; the decline of civilian production; and growing public discontent. Another major risk factor is sanctions pressure. Despite the regime’s key narrative that sanctions “only benefit” Russia, the country has reached a point of serious vulnerability: the economy increasingly depends on gray import schemes, a limited number of partners, and constant budget infusions. Each new round of sanctions targeting key sectors — from energy to finance — could sharply exacerbate the internal crisis. The system’s resilience increasingly resembles a fragile balance, where external pressure directly impacts social and political stability. This makes the immediate, step-by-step introduction of more effective sanctions one of the key levers of pressure on the Kremlin to achieve a just peace for Ukraine, end the criminal war, and ensure Europe’s long-term security.

Reality: Negative Dynamics

The Russian economy in 2025 is operating at its limits: growth rates are declining while reserves are being rapidly depleted. Formally, there is no recession — according to Rosstat, GDP grew by 1.1% in the second quarter after 1.4% in the first. However, growth is significantly weaker than in 2023–2024, when it exceeded 4%. The main driver of the economy remains military orders, while civilian industries continue to contract. According to the government-affiliated Center for Macroeconomic Analysis and Short-Term Forecasting, non-defense production is shrinking by 0.3% per month. Rosstat data show that in the first half of the year, the output of televisions and washing machines dropped by nearly 30%, footwear by 29%, and cement to 2020 levels. At the same time, defense-related sectors are expanding: “other transport equipment” — up 35%, “fabricated metal products” — up 14%. The labor market reflects this imbalance. According to Rosstat, official unemployment stands at 2.2% — the lowest in many years. But this is explained by a labor shortage caused by mobilization, battlefield losses, and emigration. Average nominal wages grew 14.5% compared to last year, but real growth adjusted for inflation was only 4.2%. Many civilian enterprises are shifting employees to part-time work — among them KamAZ, GAZ, and the Chelyabinsk Electrometallurgical Plant. The reasons are declining demand and the reallocation of resources toward the defense industry. According to the Central Bank, the share of companies planning layoffs rose from 6.9% in January to 11.5% in July. Inflation in July, according to Rosstat, reached 8.79% year-over-year, slightly lower than June’s 9.4%. The decline was mainly due to seasonal decreases in fruit and vegetable prices, while other goods and services continue to rise in cost. This allowed the Central Bank to cut the key rate from 20% to 18%. Even at this level, credits are too expensive, limiting access to this critical tool and suppressing consumer demand. A further reduction to 14% depends on the ruble’s exchange rate: currency depreciation could once again accelerate price growth. The main source of risk is the budget. According to the Finance Ministry, from January to July 2025, the deficit reached 4.88 trillion rubles ($60.8 billion), already exceeding the annual target. In July alone, it grew by 1.2 trillion rubles (≈ $14.95 billion). To cover the deficit, the government is tapping the National Wealth Fund. Since February 2022, its liquid assets have nearly halved — from 8.8 trillion rubles ($109.6 billion) to 3.95 trillion rubles ($49.2 billion) as of August 2025. At the current pace of foreign currency sales from the fund (9–10 billion rubles per day), reserves could be depleted in less than two years. In that case, the Kremlin may resort to raising taxes on citizens and businesses, as well as expanding external debt. Amid these economic challenges, internal disputes persist within the government. The Bank of Russia, led by Elvira Nabiullina, and the Finance Ministry, headed by Anton Siluanov, insist on keeping the key rate high to curb inflation. Industrial lobbies and their allies, including Herman Gref, Maxim Reshetnikov, and Alexander Novak, demand a rate cut to stimulate investment and growth. President Vladimir Putin has taken an intermediate stance, promoting “balanced growth.” Russia’s August fuel crisis has also worsened due to drone strikes that have damaged at least seven major refineries, knocking out about 10% of refining capacity: the Syzran, Novokuibyshev, Saratov, and Volgograd plants have been completely shut down, while the Ryazan refinery is operating at half capacity. Against this backdrop, exchange-traded prices are hitting new records a ton of 92-octane gasoline has reached 72,700 rubles, and 95-octane — 81,300 rubles, with prices up 40–50% since the start of the year. The government has imposed an export ban, hoping to return about 150,000 tons of gasoline to the domestic market, while the Federal Antimonopoly Service is proposing to raise mandatory exchange sales to 17%. But even these measures are not closing the gap: retail prices are rising by 15–25 kopecks per week, and gas station margins on 92 and 95-octane fuel have already turned negative. Overall gasoline production only slightly exceeds domestic demand, while spring reserves were at a minimum due to high borrowing costs. Authorities may partially ease the situation through reserves and imports from Belarus, but if drone attacks continue, fall maintenance at 9–10 refineries threatens even greater output cuts. In that case, millions of drivers will feel the shortage, even though the army and industry remain supplied with fuel.

Public Tension

According to the Central Bank, which conducted a survey through the state-run Public Opinion Foundation (FOM), from August 4 to 14, 2025, inflation expectations among the population rose again — reaching 13.5% annually, while official statistics reported inflation at 8.55% year-over-year by mid-August. Russians increasingly anticipate price spikes, particularly following the preferential increase of utility tariffs by 11.9% in July. The demand for higher wages and increased income needs is reflected in a state VCIOM survey from July 12: as of July 2025, Russians require an average monthly income of about 227,000 rubles ($2,827) to feel “happy” — twice as much as in 2017, roughly in line with inflation over that period. In reality, the average salary in Russia of around $1,000 is received by only about 31% of workers. According to FOM data for August 2025, 22% of respondents reported a deterioration in their material situation over the past 2–3 months, while only 9% reported an improvement.

Accumulating dissatisfaction with inflation and rising tariffs finds an outlet in coordinated protests. Here, leadership is traditionally assumed by the systemic opposition loyal to the Kremlin, which functions to dilute the protest agenda and reduce its intensity and focus. Protests against rising tariffs remain the main area of activity for pro-government “communists” — the CPRF. On August 6, a mass picket against “rising prices for essential foods and medicines” took place in Novosibirsk13, attended by several dozen residents. Participants complained about the “abnormal” rise in prices for potatoes, meat, milk, and gasoline (about $2.83 per gallon). On August 19, the CPRF held a rally in Tomsk against the “record increase in utility tariffs,” again with several dozen participants. The city administration refused to approve the event in the city center, forcing it to be relocated to the outskirts. Organizers stated that garbage collection fees had jumped 42% at once and “consume a large portion” of the modest pensions of residents. Protests also manifest online, particularly regarding utility tariffs. On Change.org, the petition “Residents of Tyumen Region Against the Increase in Housing and Utility Tariffs from July 1” gathered 4,827 signatures, while the petition “We Demand Regulation of Utility Prices (Tariffs)” from residents of Arkhangelsk Region gathered 10,333 signatures. Amid the crisis in the coal industry — caused by falling Russian coal prices, declining external demand, logistical bottlenecks, and high indebtedness — the first serious consequences have begun to appear. On August 18, it was reported that more than 500 miners at the Spiridonyevskaya mine in Kemerovo Region resigned due to months-long delays in wages, with total debt exceeding 193 million rubles ($2,406,000). Operations at six mines and nine open-pit coal sites in the region have been suspended, and since June 2025, the number of temporarily closed enterprises has increased by 50%. According to Governor Ilya Seredyuk, in 2024 the regional budget lost 58 billion rubles due to coal production problems, and by the end of 2025 this figure could increase by another 10 billion rubles ($124 million). Tension is likely to grow in other sectors where enterprises are forced to reduce production volumes, lay off workers, or place them on unpaid leave. Such processes are already being observed at Russian Railways (RZD) in specialized groups and chats, employees complain about low wages, harsh working conditions, and, since July, wage cuts and layoffs.

Kremlin Narratives

Economic problems, which the Kremlin had long tried to divert attention from through various campaigns, returned to the active political agenda after December 19, 2024, when Vladimir Putin opened a press conference by discussing the economy. This appeared as a direct response to growing public tension, primarily driven by rising prices. The president partially acknowledged the problem, calling inflation a “worrying signal,” but emphasized that “the situation in the economy is stable, and development is continuing despite everything.”20 During the first half of 2025, key state economic spokespeople — including Central Bank head Elvira Nabiullina and ministers Maxim Reshetnikov and Anton Siluanov — followed the framework set by the president: they partially acknowledged problems, downplayed their scale, and immediately shifted focus to the measures being taken. On August 12, ahead of his meeting with Donald Trump in Alaska, Vladimir Putin held an economic briefing at the Kremlin. In the public segment, he highlighted positive trends, praised officials for a “stable” federal budget, and called the reduction of inflation an “important achievement.” On August 15, Putin ordered a plan for structural economic changes to be approved by October 1. The Kremlin had already adopted a tactic of “beautifying” reality, as reflected in state media reports portraying Russia as “confidently maintaining its position as the world’s fourth-largest economy.” Notably, this tactic had intensified earlier: on July 16, a worker from the Magnitogorsk Metallurgical Plant was not allowed to ask Putin a question about lowering the key interest rate, being dismissed as “inconvenient.” The propaganda campaign primarily serves the Kremlin’s goal of negotiating an end to military actions on maximalist terms from a position of strength, demonstrating “state stability” and the ability to “continue the special military operation as long as necessary.” At the same time, any concessions prompted by accumulated negative effects from economic and other domestic difficulties are presented as “humanitarian considerations” to conceal actual vulnerabilities. The Kremlin follows a similar strategy regarding sanctions pressure: by emphasizing “resilience,” it effectively aims to negotiate partial relief during talks with the United States. “We have lived under a huge number of sanctions for quite a long time, and our economy is functioning. Of course, a certain immunity has already been developed in this regard,” Kremlin spokesperson Dmitry Peskov stated on July 30, masking the government’s real concern while awaiting potential new U.S. sanctions.

Useful Links

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