Russia’s Economy Reaches a Critical Stage, New Report Finds

Russia’s economy is entering a more fragile phase despite avoiding collapse since its full-scale invasion of Ukraine, according to a new report by the Kiel Institute for the World Economy and the Stockholm Institute of Transition Economics. The report argues that slowing growth, shrinking fiscal reserves, rising financial risks, and increasing dependence on China are reshaping Russia’s long-term economic outlook.

Russia’s Economy Faces Growing Structural Pressures

Four years after the full-scale invasion of Ukraine, the report titled “Endgame: The State of the Russian Economy” concludes that Russia’s economy has become increasingly vulnerable, even though it has avoided the dramatic collapse predicted early in the conflict.

The authors argue that headline economic indicators mask deeper structural weaknesses. Economic growth has slowed sharply, while the economy has become increasingly dependent on defense-related production. At the same time, civilian investment has stagnated, labor shortages have intensified, and trade volumes have fallen to their lowest level in more than a decade.

According to the report, Russia’s official 2026 growth forecast has been reduced to just 0.4%, with the economy contracting by 0.3% during the first quarter of 2026 despite a substantial increase in government spending. The authors also question whether official inflation and growth statistics fully reflect current economic conditions.

Russia’s Fiscal Buffers Continue to Shrink

One of the report’s central findings is the rapid depletion of Russia’s financial reserves. Before the war, Russia relied heavily on its National Wealth Fund to cushion economic shocks. However, liquid assets in the fund have fallen from 6.5% of GDP before the invasion to just 1.8% by April 2026, leaving far less fiscal flexibility. Meanwhile, Russia’s fiscal position has deteriorated rapidly.

The report notes that the first-quarter 2026 budget deficit exceeded the government’s full-year target, while oil and gas revenues declined sharply because of sanctions, lower export volumes, and damage to energy infrastructure. Although higher global oil prices have provided temporary relief, the authors argue that these gains are unlikely to offset deeper structural challenges.

In addition, the report highlights rising corporate debt, increasing pressure on banks, and continued reliance on high interest rates to contain inflation, creating significant macroeconomic tensions.

China’s Role In Russia’s Economy Continues To Expand

The report identifies China as Russia’s most important economic partner since Western sanctions were imposed. China now accounts for approximately 35% of Russia’s total foreign trade, compared with a much smaller share before the invasion. At the same time, Chinese suppliers have become increasingly important for machinery, electronics, industrial equipment, and dual-use technologies that support Russia’s manufacturing and defense sectors.

Researchers argue that this relationship is becoming increasingly asymmetric. Russia has become more dependent on China for trade, finance, and technology, while China has gained stronger bargaining power by purchasing Russian commodities at discounted prices and expanding its influence over strategic supply chains.

The report also notes that China supplies more than 60% of the critical military-related components reaching Russia, either directly or through intermediary trade networks.

Authors Call For Stronger Sanctions Enforcement

Rather than arguing that existing sanctions have failed, the report suggests that enforcement remains uneven. The authors contend that Russia’s ability to finance its war increasingly depends on export earnings from hydrocarbons. Consequently, they recommend tighter monitoring of sanctions, stronger action against the so-called shadow tanker fleet, expanded export controls, and broader use of secondary sanctions targeting companies that facilitate sanctions evasion.

The report also proposes that Europe consider introducing a Ukraine Support Tariff on remaining imports from Russia. According to the authors, such a measure could simultaneously reduce Russian export revenues while generating additional resources for Ukraine’s reconstruction.

Why It Matters

The report argues that Russia’s economy is entering a more constrained phase rather than facing an immediate collapse. Although military spending has supported economic activity, the authors contend that shrinking fiscal reserves, mounting financial pressures, labor shortages, and growing dependence on China could weaken Russia’s long-term economic resilience. They conclude that future developments will depend largely on export revenues, sanctions enforcement, and broader geopolitical dynamics.

According to the authors, Russia’s mounting economic weaknesses also create an opportunity for Western governments to strengthen the effectiveness of existing policy measures. The report identifies oil and gas export revenues as the main source of financing for Russia’s war effort and calls for stricter implementation and enforcement of current sanctions.

“Price cap enforcement must take center stage in sanctions policy. This includes renewed efforts to limit Russia‘s shadow fleet,” argues Torbjörn Becker, Director of the Stockholm Institute of Transition Economics and co-author of the report.

For European policymakers, the findings reinforce the importance of sustained sanctions enforcement, coordinated export controls, and continued monitoring of Russia’s evolving economic position.

About the Report

The Kiel Report, “Endgame: The State of the Russian Economy,” brings together leading international experts on the Russian economy. The report includes the following contributions:

• Russia’s economic endgame, Torbjörn Becker and Moritz Schularick
• Why economists get the Russian economy “wrong” and how we can think about sanctions, Torbjörn Becker
• The limits on Russia’s war financing and the energy windfall, Matthew C. Klein
• The China-Russia asymmetric partnership: Implications for Europe, Alicia García-Herrero, Elina Ribakova, and Lucas Risinger
• China’s role in supplying Russia with sanctioned products, Konstantin Egorov
• Regional convergence in Russian regions during the war, Iikka Korhonen

Further Reading

• FREE Network Policy Briefs on Russia
• Economic Sanctions Research
• Ukraine Economy and Reconstruction