Bad Economic Indicators

Russia’s bad decisions may be finally catching up with it.

In a recent article by The Bell, an independent Russian source for economic analysis, the authors summed it up neatly: “Russia is entering 2026 with an economy that looks externally stable but is internally exhausted.” While things look quiet on the surface “behind this façade lie financial, regional, and sectoral problems that can no longer be patched over with reserves or growth.”

The report highlighted 10 key pressure points on the Russian economy that are heading toward breaking point in 2026.

1. Debt Service Up. This year, interest payments on the national debt will rise to 8.8% of the federal budget, twice what it was before Russia’s War on Ukraine. And, given that sanctions close off foreign markets to borrowing, debt must be financed internally, which fuels inflation and a unsustainably high (16%) key Central Bank borrowing rate.
2. Inflation Up. Speaking of which, the economy’s inflation rate for 2025 came in at 5.6% (according to the obviously biased Rosstat). While the Kremlin forecast inflation to slow to 4-5% in 2026, already that is looking unrealistic. VAT and tariff increases and the tightly squeezed economy already have inflation for January 2026 at 1.26%. Further public sector fee increases this year will bring more pressure on prices, as will the expected decline in the federal borrowing rate.
3. Oil Prices Down. The cost of a barrel of oil fell below $40 in December, its lowest level in five years. Russia built its federal budget around projected world prices of $59 a barrel. This gap is expected to lead to a budget shortfall of over 3.5 trillion rubles ($45 billion), pushing the budget deficit well beyond the planned 1.6% of GDP (see “Debt Service Up” above).
4. Non-Petro Revenues Down. The budget predicted that 13.3% of GDP would come from non-petro sources. But the January 1, 2026, increase in VAT (a 10% bump from 20-22%) likely puts this projection in jeopardy.
5. Lending Down. Companies are not borrowing as much and definitely not to invest in economic growth. Corporate borrowing dropped from 17.9% to 9.4% over last year, and companies (those in the non-military sphere) are largely taking out loans to refinance existing debt, instead of to finance new activity.  
6. Civilian Spending Down. There are two Russian economies. As The Bell summarized, “the defense-industrial complex and its related sectors are showing double-digit growth, while the civilian sector is sliding into recession… Over the first eleven months of 2025, civilian manufacturing industries contracted by 4.9%. Tractor production collapsed by 61.6%, bulldozers by 53.7%, elevators by 37.2%, and cars by 34.1%. For the first time in 15 years, food production declined.” Overall, manufacturing is up 18% over the three years of the war, but that is entirely due to military related production.
7. China Trade Down. For the first time since the war started, Russia’s trade with China is down, falling by 7% last year (according to Chinese data). This is due to a number of factors: secondary sanctions; declining oil exports; China’s economic slowdown; and a Russian economy saturated with Chinese-made goods. None of these is expected to reverse course in the coming year.
8. Labor Tight. Russia’s unemployment level is way down, at just over 2%. While this is good news for workers, it is a tough nut for companies and the economy. Since demand for labor is high, the cost of labor has risen to 46% of GDP, its highest level since 2018. And this trend is only going to continue. Competition for openings is tightening while the population shrinks due to long-term demographics and short-sighted policies (the War on Ukraine is decimating the younger generation and political tensions have led to a reduction of foreign workers).
9. Regions Stressed. According to The Bell, “Nearly two-thirds of Russia’s regions – 55 out of 89 – ended the first nine months of 2025 in the red.” The shortfall is largely because most taxes are paid to the federal budget, while regions have to pay out many social services, e.g. benefits to war-scarred individuals and families. So, either the federal government must bail out regions, regions must cut social services, or regions must seek commercial loans, all of which contribute to inflation and a rising debt burden (again, see above).
10. Moral Hazard Up. When large companies upon which an economy depends (e.g. Russian defense industries) are too big to fail, they tend not to act responsibly, taking on more debt and taking risks that are more likely to lead to failure. Problem is, The Bell notes, in 2026, “the government has no reserves left to support the corporate sector, the economy is contracting, and external markets are closed.”

What does all of this add up to?

Economists have described the current US economy has “K-shaped” – those with wealth are doing fine and their fortunes are improving (the top part of the K), while the other 90% are doing worse, with rising prices and stagnant wages (the lower arm of the K). A similar bifurcation rules in the Russian economy, but the split is between the military and civilian sectors, and it is creating a situation where the economy is both overheated and cooling too fast.

As The Bell summarizes, companies in the military industrial sector get favorable treatment and access to resources. Everyone else faces dire circumstances and a difficult future. The market-driven part of the economy is being sacrificed to pay for the Kremlin’s bloody war. Regions face the difficult choice of whether to cut social spending or take on more debt. And households will face inflation and higher taxes and tariffs over the coming year (to say nothing of uncertain job prospects if they work in the civilian economy).

The report concludes with a dire prediction: “The lists of those rescued and those left without support will become the clearest indicator of the real priorities of economic policy. The key is not to watch declarations, but to see who is pulled out – and who is left to die.”