For three years, Russia’s Ministry of Economic Development has been the Kremlin’s in-house optimist, with growth forecasts that sounded more like lullabies than cold analysis.
That has now changed.
The ministry’s updated macroeconomic projection, published on May 12, is the first official document to concede that Russia faces at least two more years of stagnation — and that there is no rebound waiting on the other side.
The numbers tell the story:
For once, the ministry is more pessimistic than the Central Bank — a reversal of the long-standing division of labor in which the bank played the bad cop and the ministry the cheerleader.
The official rhetoric is being adjusted to match. Economy Minister Maxim Reshetnikov has taken to describing the slowdown as “the natural price of curbing inflation” and “a phase of fine-tuning.” Vladimir Putin, who in April complained publicly about weak growth, has been offered a soothing narrative in which Russia is merely cooling down after the overheating of 2023–2024, and will resume its march once inflation eases and rates fall.
But the new forecast quietly disagrees with the soothing narrative. A cyclical pause does not last two years, does not depress investment, and does not coincide with stubbornly elevated inflation. The ministry’s published numbers reveal something its officials cannot say out loud: that the constraints on the economy are structural, and that they follow directly from the war.
Military spending has risen from 3% of GDP in 2021 to 8% in 2025. The defense sector runs three shifts, hoovers workers out of civilian industries, and is paid in advance. This was financed first from the National Welfare Fund, then from tax hikes, then from expensive domestic borrowing. Each of these liquidity wells is now close to dry. High interest rates are not, as the Kremlin’s friendlier critics like to claim, a whim of Central Bank governor Elvira Nabiullina — they are the inevitable response to a fiscal stance that pours money into the war economy while sanctions block the imports and technology that would otherwise absorb it.
The strong ruble, often paraded as a sign of resilience, is the other side of the same coin: a collapse in imports caused by sanctions, weak demand, and capital controls. The expectation of oil price falls is based on the notion that global demand will soften, and acknowledges that Russian crude trades at a discount. Expensive credit reflects inflation that the budget itself generates. None of this is cyclical. All of it is what an economy looks like when it has been cut off from Western markets, capital, and technology, and forced to spend on tanks instead of productive output.
The war in Iran and the Trump administration’s recent decision to issue general licenses easing some secondary-sanctions pressure on Rosneft and Lukoil offer the Kremlin a partial reprieve. Unlike previous Middle Eastern flare-ups, this conflict shows every sign of dragging on, keeping a geopolitical premium under the oil price for months rather than weeks. The Rosneft and Lukoil carve-outs, narrow as they are, take some of the chill off buyers in India, Turkey, and China who had begun retreating after October’s Treasury designations.
Together, the two developments give Russia a modest fiscal cushion just as the budget needs it most. The trouble is that the cushion is fiscal, not structural. Higher revenues can soften this year’s deficit; they cannot rebuild the investment climate, unblock technology imports, or repair the labor market. The ministry’s own assumptions — a $50-a-barrel Urals from 2027 onwards — show that even officials inside the system do not expect the relief to last long enough to kick-start growth.
The arithmetic of next year’s budget is uncomfortable. Built on the old, sunnier forecast, it now looks short on revenues by 2–3 trillion rubles ($28bn-$42bn), potentially doubling the planned deficit. Part of that gap will be plugged by the National Welfare Fund through the budget rule — the mechanism that saves excess oil revenues when prices are high and tops up the budget when they are low. The rest will have to come from spending cuts, higher taxes, or more borrowing, all of which Russia has already leaned on heavily over the past two years.
The squeeze will also reach into the tax system itself. Russia’s mineral extraction tax — the main lever for capturing oil revenues — was hiked in 2024 to replace export tariffs, but at low oil prices it generates progressively less, because formula-based deductions, the damper subsidy, and reverse excise payments hand a growing share back to the companies. The same design that smoothed the windfall when prices were high amplifies the shortfall now. Finance Minister Anton Siluanov has hinted that the budget rule itself will be quietly rewritten — bureaucratic code for adjusting the parameters until the numbers add up. Defense and social spending are untouchable. Civilian investment, infrastructure, and Putin’s much-trumpeted “national projects” are not.
None of this is a collapse. Russia’s national debt is low at around 17% of GDP, the banking system is stable, employment rates are high, and wages are still creeping up. There will be no currency run, no debt crisis, no bread queues in 2027. The Kremlin will continue to fund its war in Ukraine. That, in a sense, is the point of the new forecast: it formalizes the trade-off Putin has chosen. Of the three things the government tries to do at once — finance the war, control inflation, and grow the economy — Russia can now manage only two. The third, growth, is being sacrificed.
The more important shift is conceptual. Until this spring, war and sanctions were officially treated as temporary shocks that would eventually pass. The new forecast moves them into the baseline.
This is the economy Russia now has: chronically slower than the global average, chronically short of cash for anything other than the army and the state, increasingly dependent on China, technologically lagging, and steadily losing the people most likely to do something about it.
It is not the picture of a country heading for the cliff. It is the picture of a country settling, with surprising equanimity, for a long, slow decline — and broadcasting to the world that while the state may endure, it will not prosper.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
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