Russia’s wartime economy strains as budget deficit reaches 2.8% of GDP

  • Russia’s government continues funding the Ukraine invasion despite mounting economic and fiscal strain.
  • The budget deficit reached 2.8% of annual economic output by the end of July.
  • Oil revenues, low unemployment and defense spending are supporting stability while longer-term risks worsen.

Russia’s wartime economy is showing increasing strain as military spending drives the budget deficit higher, growth slows and consumer sentiment deteriorates, but economists say there is no imminent financial crisis or economic collapse. Oil export earnings have recovered because of high prices linked to the Iran war, allowing the government to continue funding its 4 1/2-year-old invasion of Ukraine. Low unemployment, defense-industry expansion and government support in poorer regions are also limiting public discontent ahead of Russia’s stage-managed parliamentary election, which began Friday and concludes Sunday. The deficit reached 2.8% of annual economic output by the end of July, nearly twice the original annual target, while reserve resources fell to 1.6% of GDP. Domestic borrowing costs are high, with Russian bond interest rates reaching 17%. Longer-term risks include sanctions, weak investment, rising debt, high interest rates, labor shortages and slower productivity. Economists describe the current trajectory as unsustainable, although the timing of any crisis remains highly uncertain.

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