
Vladimir Putin is warned of a dual economic conflict with soaring military spending and falling oil revenues setting the stage for a potential stagflation crisis.
At a Glance
- A Russian economist warns of looming stagflation by year’s end if trends continue
- Military expenditures are crowding out social programs and civilian investment
- Plunging Urals oil prices threaten to double Russia’s budget deficit
- Sanctions have been cushioned by war economy pumps and fiscal reserves
- Further oil price drops could force Moscow into “guns versus butter” austerity
Strategic Pressures on the Kremlin
Russia’s economy is confronting two destabilizing forces: ballooning military spending and deteriorating oil revenues. In 2025, the Kremlin plans to allocate approximately $172 billion—about 7.7 percent of GDP—to defense, a staggering figure that underscores Moscow’s militarized priorities beyond the Ukraine conflict. This surge has supported industrial output and employment in key sectors, but it comes at the cost of shrinking civilian investment and social programs.
Compounding the pressure, global oil prices are undercutting Russia’s budget assumptions. The Urals blend, Moscow’s main export crude, is trading below $55 per barrel, far short of the $70 benchmark the Kremlin used to forecast revenues. This shortfall could double the budget deficit and trigger deep austerity.
Though Russia has survived prior oil crashes through fiscal reserves and domestic borrowing, its National Wealth Fund is now depleted, weakening its buffer against prolonged shocks.
Watch a report: How falling oil prices could alter Russia’s war strategy.
From Fiscal Engine to Fragile Front
Since 2022, Moscow has embraced a war economy strategy, pumping public money into military-linked industries. That transition yielded GDP growth of 3–4 percent in 2023 and lifted real wages by 8.7 percent last year.
Yet this model is nearing exhaustion. With the central bank’s interest rate now near 21 percent, inflationary pressures driven by wage hikes, supply shortages, and sustained war spending are mounting. The ruble’s instability and chronic labor gaps from mobilization have only tightened the vise.
Analysts warn that Russia may now be approaching classic stagflation: persistent inflation combined with stagnating growth and declining real incomes. Without new sources of revenue or relief from sanctions, the economic model risks collapsing under its own weight.
Tipping Toward Crisis
Russia’s economic trajectory will depend on three key factors:
- Military budget dominance – Defense spending continues to crowd out health, education, and infrastructure, fraying domestic stability
- Oil revenue collapse – Prolonged low prices could double Russia’s budget shortfall and sap public services
- Limits of sanctions resilience – As Western sanctions persist, Moscow’s isolation erodes investment and tech access, blunting long-term productivity
Without immediate correction, this dual threat could trigger an economic unraveling—where defense imperatives outpace fiscal capacity and economic stagnation meets public unrest. For Putin, the road ahead may offer no good choices.