How much is Putin spending on the war and how is the West increasing pressure on the Russian economy?
The Russian economy has been funding a full-scale war against Ukraine for three years. Military expenditures have triggered inflation, drained labor resources, and consumed a significant portion of the reserves that were built up during peaceful times. How the war undermines the economy of the aggressor nation, which problems can no longer be ignored, and whether Russia has any resilience left - is explored in this article by RBC-Ukraine journalist Dmitry Sidorov.
CONTENTS:
Stagflation Scenario
Three years of war means for Russia three years of living under harsh sanctions from the collective West. Despite Russia's efforts to circumvent the sanction pressure, it is becoming evident, and together with significant defense spending, it is gradually undermining the economy of the aggressor country.
According to the Russian Ministry of Finance, the total expenditures for the entire sector of state security and defense (the army, Ministry of Internal Affairs, special services, etc.) have increased almost three times from the pre-war 2021 to 2025 (inclusive) - from 5.9 to 16.9 trillion rubles. In 2025, this expenditure item is the largest in the federal budget structure - 41%, marking a record high since 1991. At the same time, the share of social expenditures was significantly reduced in the 2025 budget, which is a pillar of popular support for the Putin regime.
The rise in military expenditures is connected not only to the production of military equipment and weapons but also to high payments to the so-called "participants of the special military operation." Soldiers receive 400,000 rubles as a one-time payment for joining the army, in addition to a salary of no less than 195,000 rubles per month. Moreover, additional payments are provided by the regions of Russia. In the case of a minor injury, a military personnel can receive 100,000 rubles, for a medium injury - 1 million rubles, and for a severe one - 3 million rubles, with an additional 1 million rubles paid upon the establishment of a disability.
These payment amounts, multiplied by the official number of the army (2.4 million people, of which 1.5 million are actual servicemen), illustrate that maintaining the military contingent has become an expensive affair for the Russian budget. By increasing payments, the Russian authorities are trying to attract as many people as possible to the army. At the same time, they are injecting a cash flow into the population that significantly exceeds the amount of goods and services in the civilian sector, which inevitably leads to inflation. According to the Central Bank of Russia, the official inflation rate began to rise in April 2023, increasing from 2.3% to 8.9% by December 2024.
"The key challenge for them right now is inflation," said RBC-Ukraine Deputy Director for Securities Trading at investment company Dragon Capital, Sergey Fursa.
The non-military sector of the Russian economy cannot produce enough goods to satisfy demand and absorb the significant cash flow that is entering the economy. This is due to a shortage of labor resources, which have been conscripted for the war. Against the backdrop of mobilization, some people left the country as early as 2022. Sanctions are also taking their toll, as a significant number of Western companies have closed their offices and exited the Russian market.
A situation is developing where a large influx of money into the economy is driving inflation, while domestic production is declining. Economists refer to this scenario as stagflation, meaning a combination of stagnation (decline in production) and inflation. This term has already been cautiously mentioned in public speeches by the head of the Central Bank of Russia Elvira Nabiullina and the CEO of the state corporation "Rostec," which produces a wide range of military equipment, Sergey Chemezov.
In response to rising prices, the Central Bank of Russia has begun tightening monetary policy and raising the key interest rate. From July 2023 to January 2025, the rate increased from 7.5% to 21%. The increase in the rate was intended to curb price growth, but this has not happened.
"So far, their (actions of the Central Bank of Russia - ed.) are not yielding results. The problem is that they cannot achieve results because inflation is being driven not by a normal economy, but by a war economy, meaning the central bank does not influence military expenditures directly. When they 'tighten the screws,' it affects the normal economy, leading to less lending, which partly impacts inflation, but does not affect the entire economy, as the financing of war expenditures continues as before. The central bank's ability to influence inflationary processes and the money supply in the economy is limited," Fursa explained to RBC-Ukraine.
Alongside purely economic issues, political problems have also emerged. In December 2024, options for further increasing the key interest rate were considered, but the Bank of Russia's policy faced significant criticism from the industrial bloc - leaders of defense enterprises, metallurgy, and some Russian oligarchs. This is because raising the rate leads to increased borrowing costs, i.e., interest rates on loans that industry relies on. The Central Bank of Russia decided not to escalate tensions and maintained the key rate at 21% during the meeting at the end of December.
Resources for a War Economy
The Russian budget for 2025 is projected to have a deficit of 1.2 trillion rubles (revenues - 40.3 trillion rubles, expenditures - 41.5 trillion rubles). For Russia, this figure is not new, as the federal budget deficit exceeded 3 trillion rubles annually from 2022 to 2024. To meet expenditure needs and cover the budget deficit, the aggressor country relies on the National Wealth Fund, tax revenues, and money printing.
Since the onset of the full-scale war against Ukraine, Russia has spent a significant portion of the National Wealth Fund, which was accumulated from oil and gas revenues between 2010 and 2022. According to the Russian Ministry of Finance, the liquid part of this fund (which can be converted into real money) as of December 1, 2024, amounted to 53.8 billion dollars, whereas at the beginning of the war, it was around 150 billion dollars.
"This fund contains many assets that cannot be sold or converted into cash. In particular, the illiquid part includes the 'Yanukovych Eurobonds' (Eurobonds of the Ukrainian government purchased by Russia in 2013 - ed.). These three billion dollars that Ukraine supposedly owes are worthless papers, and there is much more like that. Therefore, attention is usually paid to the liquid part - gold and yuan. At the current rate of expenditure, it will last only until the end of 2025, or perhaps even sooner," Fursa commented.
In 2025, the Russian government significantly raised several taxes; for example, the corporate tax increased from 20% to 25%. Against the backdrop of rising key rates, deposit interest rates also increased, motivating the population to deposit trillions of rubles in banks. According to the Russian Deposit Insurance Agency, as of September 2024, the total volume of insured deposits of individuals and legal entities is 70 trillion rubles. Part of these funds is invested in loans, while some represent free liquidity in the banking system.
"This free liquidity can be directed towards the bonds of the Ministry of Finance of Russia. At the end of 2024, they already applied an emission mechanism: banks borrowed from the central bank, using those loans to purchase government securities, thereby financing the government," Fursa added.
In addition to purely internal resources, the Russian economy also unfortunately has significant external ones. This refers to the export of energy resources and the import of goods for weapon production, circumventing sanctions. A recent investigation by Reuters provided evidence of how Russian companies import chemicals for explosives production.
According to the analytical center at the Kyiv School of Economics, during 2022-2024, Russia managed to maintain oil and petroleum product exports at a relatively constant level - 4-5 and 2.5-3 million barrels per day of oil and petroleum products, respectively. The main buyers of Russian oil remain China, India, and Turkey, with supplies to these countries replacing lost export volumes to the EU, the USA, and the UK.
Despite relatively stable hydrocarbon export volumes, Russia's revenue from their sale on the global market has decreased since the onset of the war. According to the Kyiv School of Economics, in 2022, oil and petroleum products worth 218 billion dollars were exported from Russia, while in 2025, this figure is projected to drop by