Three and a half years into Russia’s full-scale invasion of Ukraine, the economic landscape for both nations—and indeed, much of the world—looks vastly different from what many predicted back in February 2022. The fighting has ground on with no end in sight, and while the frontlines remain largely static, the economic battle is intensifying. The costs are mounting, not just in destroyed infrastructure and lost lives, but in the slow strangulation of Russia’s economy and the growing resolve among Kyiv’s allies to turn up the heat with tougher, smarter sanctions.
Last Monday, on October 6, 2025, Ukraine launched one of its largest drone offensives yet, striking 14 regions across Russia, Crimea, and the Black Sea area. According to BBC reporting, the targets weren’t random: a major ammunition plant, a key oil terminal, and a crucial weapons depot were all hit. Among the most significant was the Sverdlov ammunition plant in the Nizhny Novgorod region, a facility that supplies Russian forces with everything from aviation bombs to anti-tank weapons. These strikes are just the latest in a long campaign—over the past year, Ukrainian drones and missiles have damaged 21 out of Russia’s 38 large oil refineries, causing up to $10 billion in economic losses, factoring in downtime, repairs, and lost revenue.
The consequences have been swift. Russia’s refinery production has dropped by roughly 10 percent compared to earlier this year, leading to shortages at the pump and sharp increases in fuel prices. The Russian government, clearly rattled, has responded by restricting or banning exports to conserve domestic supply. But the damage doesn’t stop there: as the war drags on, Russia’s overall economic outlook is becoming increasingly bleak.
The World Bank recently revised its forecasts for Russia downward. GDP growth for 2025 has been slashed from 1.4 percent to just 0.9 percent, and projections for 2026 and 2027 have also been cut. Before the invasion, Russia routinely posted growth rates above 4 percent—a stark contrast to today’s stagnation. Western sanctions have played a major role, as CNN and BBC both report, with Russia’s largest banks cut off from the SWIFT payment system and some $300 billion in foreign reserves frozen. The European Union and G7 have imposed price caps and embargoes on Russian oil and gas, forcing Moscow to redirect exports to Asia at steep discounts and with huge logistical headaches.
In a bid to skirt sanctions, Russia has cobbled together a shadow fleet of about 1,430 aging oil tankers, most of which are uninsured and operate with dubious paperwork. These ships—often owned by shell companies—transfer oil at sea to obscure its origin, making enforcement a nightmare. Environmental risks are high, with oil spills becoming more frequent, and the Kremlin’s revenues from oil and gas have dropped by around 30 percent compared to what they might have been without the war. In the first seven months of 2025 alone, oil and gas revenues fell 19 percent year-on-year, prompting Moscow to revise its full-year revenue estimates down by about a quarter.
It’s not just lost sales that sting. Sanctions have also blocked the sale of advanced semiconductors, machinery, and dual-use goods to Russia. This has left the country’s arms industry and civilian sectors—from aviation to electronics—scrambling for parts, often resorting to smuggling through third countries like Turkey, Kazakhstan, and the UAE. Enforcement is patchy, but Western governments are ramping up efforts with so-called secondary sanctions targeting companies and nations that help Russia dodge restrictions.
Despite these economic blows, the Kremlin has shown little sign of backing down militarily. In fact, Russia’s economy has shifted decisively onto a war footing. Military spending hit nearly 7 percent of GDP in 2024—the highest since Soviet times—and factories in previously depressed regions are running around the clock to supply the armed forces. Wages in these areas have tripled compared to peacetime, creating a short-term boom that’s masking deeper structural problems. As John Dobson, a former British diplomat and fellow at the University of Plymouth, observed in BBC reporting, “any war-driven economy propped up by military spending is not productive investment and isn’t sustainable. Once the war ends there’s a serious risk of collapse in the sector and mass unemployment.”
Meanwhile, the Kremlin is preparing for the long haul. The latest three-year budget plan, submitted to parliament in late September, locks in military spending at about four times pre-war levels. To foot the bill, Russian taxpayers are being squeezed: starting January 1, 2026, the value-added tax (VAT) will rise from 20 percent to 22 percent, with the extra money “primarily directed” toward defense and security, as reported by CNN. President Vladimir Putin has admitted the economic pain this will cause, but he insists it’s necessary for the country’s security.
Inflation is running hot—currently at 8 percent, with forecasts of 6-7 percent by year’s end. Interest rates remain at a punishing 17 percent, making it harder for businesses and consumers to borrow. The budget deficit is widening, and with global oil prices hovering around $65 per barrel (the Kremlin optimistically predicts $70 for 2026, but US forecasts suggest closer to $51), Russia may be forced to weaken the rouble to keep revenues up—a move that would further stoke inflation.
Amid all this, Kyiv’s allies are debating how to make sanctions bite even harder. Eighteen rounds of EU sanctions and dozens more from the US, UK, and others have weakened Russia’s economy, but not its will to fight. Some in Washington have floated the idea of a 500 percent tariff on Russian energy exports, though experts and even Putin himself dismiss this as “impossible to imagine” due to the likely spike in global prices. A more realistic option, according to Chatham House’s Timothy Ash, would be a 20-30 percent secondary tariff, with the proceeds used to fund Ukraine’s defense.
Europe is also considering using €140 billion ($162 billion) of Russia’s frozen assets as the basis for a loan to Ukraine, repayable only if Moscow pays reparations. German Chancellor Friedrich Merz, writing in the Financial Times, argued that “Moscow will only come to the table to discuss a ceasefire when it realizes Ukraine has greater staying power.”
Experts also suggest exploiting Russia’s worsening labor shortages. With so many working-age men mobilized or having fled abroad, encouraging a “brain drain” by easing immigration rules for Russians could further strain the Kremlin’s ability to manage the economy and keep inflation in check.
But perhaps the most effective economic weapon is in Ukraine’s own hands. Kyiv’s long-range drone strikes have reportedly knocked out as much as 38 percent of Russia’s oil refining capacity, according to estimates cited by CNN. While some analysts caution that these figures may overstate the lasting damage, the strikes have undeniably led to gasoline shortages and forced Russia to export more crude oil, which is less profitable than refined products. As Ash put it, “You’re not only causing domestic disruption to the economy through a shortage of fuel at the pumps, but you’re actually capping their export receipts as well.”
All the while, Russia faces a grim demographic outlook, with mass emigration, declining birth rates, and mounting war casualties. The country’s reliance on military spending is crowding out private investment, especially in high-tech and export-oriented sectors, and its isolation from global innovation threatens to choke long-term growth.
For now, the Kremlin’s economic resilience owes much to the steady hand of central bank chief Elvira Nabiullina, who has kept the system from collapse. But the pressure is mounting. As the war enters its fourth year, the question remains: how much more economic pain can Russia endure before the cost becomes too great to bear?