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It has become common to think that the Russian economy is facing a crisis of great magnitude that could unfold in the near future. However, it is essential to identify properly the main problems and the major risks likely to trigger it. Analysts generally point to colossal military spending amid a substantial budget deficit, a restrictive fiscal policy that pushes up borrowing costs without curbing inflation, the difficulties facing the oil industry and the decline in crude production, as well as Ukrainian strikes on infrastructure and the collapse of entire sectors, from e-commerce to agriculture.
All of these trends are real, but we must assess their scale with caution. This year, Russia will almost certainly devote more than 10% of its GDP to military purposes for the first time since the Soviet era, while the budget deficit for January‑June 2026 has doubled compared with the previous year. However, a closer look shows that a quarter of military spending consists of direct payments to the population (military salaries, enlistment bonuses, or allowances paid to the families of soldiers killed or missing in action), while the forecast deficit of 7 trillion rubles represents 2.8% of GDP, well below the 26.9% of GDP recorded by the United States in 1943, well before American troops landed in Normandy.
Sure, the cost of credit for Russian businesses now exceeds 20% per year, official inflation is 6%, and the inflation felt by the population is more than twice as high, yet the Russian economy has already survived rates reaching 150%. The official average inflation rate during Putin’s first two terms stood at 13.8%, which did not prevent the economy from growing on average by 7.4% per year during that period. Oil production is down, exports are down, and the refining sector is collapsing under Ukrainian drone strikes, but one should not forget that the physical volume of crude and refined oil exports fell by only 6% last year compared with 2021, after the European market—its main outlet for more than forty years—closed. The volume of online sales could drop by 10–12% this year. Yet it will still be higher than in 2024, and the decline in cereal exports should not make us forget that a quarter of a century ago Russia was a major net importer of all essential food products.
The Policy of Non-Development
It is not that one claims Putin now runs a prosperous and thriving country. Far from it: household incomes stagnate, the population declines by almost one million people per year, and technological dependence on the West has given way to a much greater dependence on China. Russia finds itself in a state of “non-development,” but neither sanctions nor Ukrainian attacks can deliver a fatal blow to its economy. However, by continually imagining new methods to pressure Moscow, Western policymakers overlook the most destructive force of all—the one the Russian economy is truly powerless against.
This force is the Russian leaders themselves, which is not surprising: after all, Soviet statesmen managed to destroy an economy and a country that were at the forefront of raw material production, steel, and electricity, that had built the world’s largest nuclear arsenal and that pioneered sending a man into space. The USSR collapsed because its economy did not harness private enterprise, did not stimulate wealth creation and investment, and ignored market signals, relying instead on strategies and objectives crafted by Gosplan.
Today’s Russia is different: although many key sectors, from oil extraction to the banking sector, are firmly controlled by the state, they operate within market rules. State banks, such as Sberbank or VTB, offer the same services, rates, and commissions as private Alfa-Bank. Mobile operators, both public and private, compete. Public airports and railways are used by private airlines and freight operators. Russia is a market economy and the pursuit of profit and the accumulation of wealth are goals that unite society—from the sole proprietor to the corrupt official.
As soon as Putin judged that the economic difficulties were over, he set about rebuilding the old Soviet-style economy once again.
Vladislav Inozemtsev
Twice during his long mandate, in the early 2000s and immediately after the start of the large-scale war in Ukraine, Putin, confronted with grave economic difficulties (the prospect of default on external debt in the first case, and Western sanctions in the second), chose a profound liberalisation of the economy.
In the 2000s, taxes were cut, regulation was harmonised, and foreign trade legislation was simplified. In 2022, “parallel imports” were allowed, enabling Russia to bypass a host of restrictions. Intellectual property rights and patents belonging to Western companies were annulled, reporting obligations for financial institutions were simplified, and tax exemptions as well as a moratorium on bankruptcies were put in place.
In both instances, the private sector responded to government measures by increasing investments and intensifying activity. In less than three months in 2022, new supply chains were established, allowing Russia to abandon cooperation with thousands of European firms. The settlement system with Asian countries was completely redesigned to bypass Western banking networks. Revenue from hotels and restaurants in provincial cities began to grow by many tens of percent per year, drawing Russian tourists away from foreign destinations. Card payment terminals even appeared in kiosks in the most remote villages. But as soon as Putin deemed the problems solved, he once again set about rebuilding the old Soviet-style economy.
The Return of the Soviet Economy
Today, this poses a greater danger to Russia than the war in Ukraine and Western sanctions combined.
The Kremlin now demands unconditional loyalty from entrepreneurs. It raises taxes (VAT and personal income tax have each been raised twice since 2019, rising from 18% to 22% and from 13% to 22%, respectively); it imposes restrictions on foreign firms (and even joint ventures); and it nationalises the assets of those it deems disloyal. Since 2024, more than 6 trillion rubles of assets (75 billion euros, or 3.2% of Russian GDP) have been seized, including airports (such as Domodedovo), food groups (such as Rusagro), and gold firms (such as Yuzhuralzoloto), which are now in state hands. Faced with nationalisation, even loyal companies understand that any asset could be worth nothing in the future.
Consequently, attempts by the state to sell confiscated companies to new owners succeed only when the price is halved—if not further—from the market price on the eve of nationalisation. Naturally, investments are down (-14.3% in Q1 2026) and the Moscow Stock Exchange index has recorded this year a 19-week stretch of declines.
The Kremlin believes it is procuring resources for war, but in reality the economy loses far more value than the budget collects: what seemed highly valuable yesterday is worth nothing in a country where property rights are not protected against state claims. The latest measure in this direction is Decree No. 604: the Kremlin bluntly states that companies whose owners fail to protect their facilities from Ukrainian missile and drone attacks can be nationalised. Signed just two weeks ago, leaks have already suggested that the list of such companies includes 167 cases, meaning that these nearly 200 recently profitable firms will soon be nationalised and likely driven into bankruptcy by bureaucrats and security officials.
What seemed very valuable yesterday is worth nothing in a country where property rights are not protected against state claims.
Vladislav Inozemtsev
But that is only the beginning. While in the 2000s—something Putin should remember—the tax take rose from 18% to 32% per year, even though tax rates were cut, today the opposite is happening. In Russia, the so-called “environmental tax” tied to the future disposal of a new passenger car often exceeds its wholesale price, and the recent near-doubling of this tax has reduced total revenues simply because it cooled demand. Last year the Kremlin pushed to introduce a “tourist tax” on hotels and other accommodations, but this year a State Duma commission was forced to admit that it raised less money than was needed to fund the growing staff of the tax authorities responsible for collecting it. The latest development is an increase in taxation on small businesses.
Indeed, a “simplified tax regime” was introduced in Russia at the end of the 2010s: small businesses and individual entrepreneurs could join it, and the only tax payable then was 6% of their total turnover. It was possible to avoid VAT, but only if turnover did not exceed 60 million roubles (about 620,000 euros at current exchange rates) per year. Since this year, the threshold has been lowered to 20 million roubles, and beyond that VAT must be paid, which means that the tax burden is at least tripled (note that this threshold of 20 million roubles is calculated based on 2025 turnover and thus applies retroactively).
Consequently, a substantial portion of the economy began tipping into the “shadow” economy: since February 2026, the Bank of Russia has noted a rise in demand for cash of more than 600 billion rubles per month. The same pattern is seen among those who registered in recent years as self-employed. This mode of activity was introduced in 2018 and led to substantial simplification and reduction of social contributions. The new regime proved so advantageous that the number of self-employed rose from 800,000 in 2019 to 16.5 million by the end of 2025. A change in their status, which could occur next year, would deal another blow to the private sector (small businesses and sole proprietors account for only 20% of budget revenues, but about 42% of employment; if they go bankrupt or cease activity, the state will face a sharp rise in unemployment and its own social obligations).
A substantial portion of the economy began tipping into the “shadow” economy.
Vladislav Inozemtsev
The madness of Putin does not stop at purely financial reforms: his mindset demands a level of state and bureaucratic control over the economy and all its actors that is as total as possible.
There is no “official quality control” in France or in any other European country as extensive as in Russia. Every carton of milk, every bottle of mineral water, and every other product must carry a special label under the Chestny Znak (“Mark of Honesty”) program, which allows tracking the entire journey of a product from the factory to the shelf, while increasing its price by 10 to 35%. The revenues from this labeling go to a company owned by Rostec, the leading Russian arms manufacturer. But that is hardly the most surprising element. Each year brings its quota of new restrictions. To support Russian automakers (which, in reality, merely assemble vehicle kits imported from China), restrictions have been imposed on which brands can be used as taxis: taxi drivers in Russia can no longer drive a Mercedes or a Renault.
Even in the Soviet Union, collective farmers were allowed to keep a cow or poultry in their yard, but since September 1, any rural household with more than ten chickens or ducks must install on its coop a QR code plate issued by local veterinary services, a sign that, added to the inspector’s visit, costs as much as five to six poultry (in three years, this plate will have to be installed even if one only has one rooster or one goose).
In the end, in a country as centralized as Russia, top-down initiatives are replicated at regional and municipal levels. In Saint Petersburg, for example, authorities decided to ban legally residing migrant workers from working as delivery personnel or as cooks in street food stands. Consequently, the prices of these services rose and unemployment increased. In Rybinsk, the mayor decided the city would look more pleasant if commercial signs were designed in a uniform style, using the old Russian orthography prior to the 1918 reform. Naturally, the cost of designing and manufacturing these signs falls on shop, café, and restaurant owners. In Novosibirsk, the Siberian industrial hub from the Stalin era, which had struck me as a young student with its brutal, monotonous concrete architecture forty years ago, the city council demanded that all street kiosks be rebuilt according to a standard model and repainted a uniform gray color. It threatened to demolish kiosks or terminate their public-right-of-way leases if they refused. We note that renovations and repainting typically cost two months’ profits for a retail business. One could multiply such examples indefinitely.
When the Kremlin Targets Businesses
In recent years, budget revenues from oil and gas on the federal level have continually fallen. While the federal budget collected 11,600 billion rubles (160 billion euros at the 2022 average exchange rate) from this sector in 2022, it took in only 8,500 billion rubles (about 90 billion euros at the 2025 average rate) last year. At the same time, revenues from taxes on domestic corporations and self-employed individuals rose, from 16.2 trillion to 28.8 trillion rubles (roughly 223.4 to 305.7 billion euros at the respective exchange rates). The situation worsened this year: compared with the first half of 2025, oil and gas revenues fell by 22.7%, while all other revenues continued their anemic growth. It seems the Kremlin is doing everything it can to squeeze as much money as possible from private companies.
Paradoxically, the greatest threat to the Russian economy does not come from Western sanctions or Ukrainian strikes on infrastructure, but from the actions of the country’s top leaders. Putin and his inner circle, aged 70 to 75, grew up in the Soviet Union. They view its collapse not only as “the greatest geopolitical catastrophe of the 20th century,” but also as an unfortunate incident caused by Western intrigues and Mikhail Gorbachev’s betrayal. They are incapable of recognizing the legitimacy of private enterprises. Any money not under their control is, to them, just like it was for Soviet communists, money stolen from the “State.” They do not understand that citizens drive progress, make more investments, and pay more taxes—taxes that could then fund a war against a neighboring country. This glaring anachronism at the Kremlin becomes the main reason for Russia’s imminent defeat in its aggressive venture: doing business in the country becomes counterproductive, and the authorities know only how to collect taxes and impose more restrictions, not how to grow the economy.
The greatest threat to the Russian economy does not come from Western sanctions or Ukrainian strikes on infrastructure, but from the actions of the country’s highest leaders.
Vladislav Inozemtsev
Public ownership, as the French example shows, is not synonymous with inefficiency: France’s SNCF trains run almost on time (TGVs at 85%, TER and Intercités at 89%, Transilien/RER at 91%, compared with a 58% average for Deutsche Bahn). Yet the constant churn of rules, the heavy tax burden, contempt for property rights, and the perception of businesses not as partners but as vassals lead nowhere good. Since 2022, the Kremlin has not merely tightened the screws on entrepreneurs; it now openly contends, as Putin’s advisers—young people who grew up in the post-Soviet era—have suggested, that the Soviet planned system failed only because the computational power of the time was insufficient to properly allocate the proportions of the national economy, and that the moment has come to reintroduce it on a new technological basis.
A war economy does not always follow the same model. In the United States, during World War II, it rested on private-sector initiative and the capacity of private enterprise, as well as a colossal amount of funds raised through higher public debt. This led to the emergence of the United States as the world’s leading economic power. In the Soviet Union, it was built on the impoverishment of the population and a rigid planning system, which eventually caused the collapse of communism and the disintegration of the political project.
Putin is steering Russia along this second path, and there is no reason to block him. Ukraine and the West must, first and foremost, make the Kremlin aware of the threats it faces. Making him believe that he is threatened will destroy the Russian economy more effectively than any external force could ever accomplish.