Russia’s economy is showing significant strain as its protracted conflict enters 2025, with new data revealing troubling consumer trends amid escalating military expenditure. What began as economic resilience has transformed into a complex web of fiscal challenges that are increasingly difficult for ordinary Russians to navigate.
The Russian government continues to project strength, but beneath this carefully cultivated image lies a domestic economy under mounting pressure. According to the latest figures from Moscow’s National Research University Higher School of Economics, retail spending declined by 3.8% in the first quarter of 2025 compared to the same period last year, marking the steepest drop since the initial Western sanctions were imposed.
“What we’re witnessing is the delayed impact of prioritizing military spending over consumer welfare,” explains Elena Ryabinina, senior economist at the Peterson Institute for International Economics. “The Russian government has effectively maintained a wartime economy for nearly three years, and the sustainability of this approach is now seriously in question.”
The Kremlin’s federal budget data reveals military expenditures have surged to approximately 7.1% of GDP, more than triple pre-war levels. This massive reallocation of resources has created what economists term a “crowding out” effect, where government military spending restricts private sector investment and consumption.
Behind these statistics are everyday Russians facing increasingly difficult choices. In Moscow’s suburban Yasenevo district, Nikolai Petrov, a 54-year-old electrician, expressed growing frustration. “Prices keep climbing while my salary stays frozen. The government says we’re winning, but my family feels like we’re losing.” His sentiment reflects a broader trend – the disconnect between official economic narratives and lived experiences.
Recent consumer confidence surveys conducted by Russia’s state statistics service Rosstat show declining optimism, with the consumer confidence index falling to 68.3 points in March 2025, down from 83.7 a year earlier. This drop coincides with inflation reaching 9.3% in April, significantly exceeding the Central Bank of Russia’s 4% target despite aggressive interest rate hikes.
Central Bank Governor Elvira Nabiullina has maintained a hawkish stance, raising the key rate to 18% in March in an effort to combat inflation. “We face extraordinary circumstances requiring extraordinary measures,” she stated during the last policy meeting. The bank’s balancing act grows increasingly precarious as it attempts to control inflation without stifling an already struggling economy.
Labor shortages have emerged as another significant challenge. The Russian labor market, which initially appeared resilient, now shows signs of severe strain. With approximately 830,000 workers either enlisted or having fled the country, key industries face critical workforce deficits. The construction sector reports 27% fewer qualified workers compared to pre-war levels, while IT companies struggle with a 35% reduction in specialized talent.
“Russia is experiencing a dangerous brain drain that will have long-term implications for economic innovation and growth,” notes Sergei Guriev, professor of economics at Sciences Po Paris and former chief economist at the European Bank for Reconstruction and Development. “Even if the conflict ended tomorrow, rebuilding this human capital would take a generation.”
The energy sector, traditionally Russia’s economic backbone, continues to adapt to Western sanctions and price caps. While Russia has redirected much of its oil exports to Asian markets, primarily China and India, the discounts required to secure these sales have significantly impacted revenue. The Russian finance ministry reported oil and gas revenues 23% below projections for the first quarter of 2025.
Financial markets reflect these underlying stresses. The Moscow Exchange (MOEX) index has declined 17% since January, with particularly sharp drops among consumer goods and non-military industrial companies. Meanwhile, defense contractors like United Aircraft Corporation and Almaz-Antey have seen their valuations soar, creating what analysts describe as a “dual economy” – military prosperity alongside civilian economic decline.
International economists monitoring Russia’s fiscal situation note the precariousness of its position. “Russia’s fiscal buffers are eroding more rapidly than anticipated,” explains Catherine Yudina of Oxford Economics. “The National Wealth Fund has declined by nearly 40% in real terms since 2022, limiting the government’s ability to maintain both wartime spending and social stability.”
For ordinary Russians, the economic pressure manifests in changing consumption patterns. Discount retailers report surging customer numbers, while premium segments experience declining sales. A recent survey by Russian market research firm Romir found that 67% of respondents have switched to lower-cost alternatives for everyday products, up from 41% a year earlier.
Despite these challenges, Russia’s economy has proven surprisingly adaptable. Import substitution initiatives have gained traction in some sectors, particularly agriculture and basic manufacturing. However, more complex industries continue to struggle with component shortages and technological limitations imposed by sanctions.
As 2025 progresses, economic forecasters remain divided on Russia’s trajectory. The International Monetary Fund projects minimal growth of 0.8% for the year, while more pessimistic assessments from independent Russian economists suggest the possibility of contraction if military expenditures continue at current levels.
What remains clear is that Russia’s wartime economy has entered a new, more challenging phase. The initial resilience has given way to systemic strains that threaten both economic stability and social cohesion. For a leadership that has staked its legitimacy on delivering prosperity alongside security, these economic headwinds present a dilemma with no easy solutions.
