Mounting defence expenditure is widening Russia’s budget deficit and increasing strain across its wartime economy, as business and consumer sentiment weakens and economic growth slows.

Economists note, however, that these difficulties do not point to an immediate financial meltdown or economic collapse. High global oil prices linked to the Iran war continue to shore up essential export revenues, allowing the state to fund its four-and-a-half-year-old invasion of Ukraine – for now.

In addition, low unemployment rates and generous government spending in poorer regions are helping to suppress domestic discontent.

This economic baseline fits the Kremlin’s narrative of stability during Russia’s stage-managed parliamentary election, which began on Friday and runs until Sunday.

Yet experts caution that underlying long-term challenges are steadily weakening the economy, creating risks that could eventually precipitate a crisis.

Consumers are more pessimistic

Indicators of consumer sentiment have drifted down since a peak in 2024-25, when increased military spending was pumping up growth and wages. More recently, consumers have coped with higher fuel prices and shortages due to Ukrainian drone attacks that knocked out refineries.

Many small businesses have lost inventory and customers due to strikes against online retailers Wildberries and Ozon.

At the same time, growth has slowed from a peak of over 4 per cent annual expansion in 2023-24. The government foresees 0.6 per cent this year, and the economy shrank in the first quarter before rebounding somewhat in the second.

The consumer sentiment index compiled by the Levada Centre, an independent Russian pollster, fell to 94 over the summer, down from 116 in spring and summer of 2025. Readings under 100 indicate that consumer sentiment is more negative than positive.

People asked about the election in Moscow responded with mostly basic concerns about pensions and prices.

Alexander Vertukhin, a 72-year-old retired military prosecutor, said the government should be focusing on “a decent standard of living for pensioners”.

As for his own situation, “I’m doing fine, both financially and in every other respect”, he said.

“Overall I’d like housing to become more affordable, I’d like pensioners to be able to live decently instead of merely surviving,” said Dmitry Kirillin, 26.

“I’d also like travel in our country to be more affordable. Those are the main things that first come to mind, if I gave it more thought I could probably name more.”

He added, “I’d like prices to rise more slowly, if that’s possible in the current situation.”

The fuel situation and Wildberries strikes have made the war more visible to people but do not constitute a crisis, said Chris Weafer, CEO of the Macro-Advisory Ltd. consultancy active across the former Soviet Union. He described the economy as in a state of “tolerable stability” and the public mood as “grumbling” but not protesting.

“The economy is under strain – it’s stagnant to the effect that it’s stable but not growing,” Mr Weafer said.

“But it’s not facing recession either.”

Most people “are not that affected” by the Ukrainian strikes, he said. “Just because your shopping habits are disrupted, that’s not going to change the public support for the Kremlin.”

President Vladimir Putin’s approval rating has declined in recent months but remains higher than it was before the war started in 2022.

Russia’s budget deficit is climbing

One key sign of stress is Russia’s budget deficit and the government’s efforts to find new sources of money. Putin has resorted to increasing value-added tax paid by consumers at the cash register, raising a raft of other fees and tightening taxation of small businesses. But the deficit has continued to climb.

By the end of July, budget data showed a deficit of 2.8 per cent of annual economic output – almost twice the original annual budget target. Available resources in Russia’s reserve fund have dwindled to 1.6 per cent of GDP, meaning the Kremlin needs to borrow from domestic banks.

That, however, means paying high borrowing costs, with interest rates on Russian bonds as high as 17 per cent, according to Janis Kluge, an expert on Russia’s finances at the German Institute for International and Security Affairs.

Budget stress is “adding to doubts about how long Russia can sustain the war”, he wrote in a recent report. Russia’s central bank has kept rates high to contain the inflation caused by war spending. That stresses civilian companies who don’t get the privileged access to credit afforded defence firms.

Another source of war funding has been increased private lending by Russia’s compliant banks to defence-related companies, meaning those debts are not showing up in the deficit figures.

Western sanctions hit hard

Over the long term, Western sanctions deprive Russia of new investment that would make the economy more productive.

And the risk factors – high spending, low growth, rising debt and elevated borrowing costs – lead some economists to warn that while Russia’s economy has not collapsed, its structural foundations are eroding dangerously.

The current trajectory is “unsustainable”, according to Torbjörn Becker at the Stockholm School of Economics. Still, “the timing of a crisis remains highly uncertain”.

Higher oil prices help Russia

Oil export earnings, which had fallen below US$10 billion per month ahead of the Iran war, rebounded to $15.8 billion by June and $13.8 billion in July.

Russia’s budget constraints “may effectively disappear for as long as elevated energy prices persist,” Mr Becker wrote.

To change that, tougher measures against Russia’s sanctions-evading oil tanker fleet must be a priority, he argued.

Poor regions benefit from war spending

Money for defence factories and enlistment bonuses has been a boon to Russia’s provinces, which are poorer than Moscow and St. Petersburg. With factories often running full blast, unemployment is just 2.2 per cent nationwide.

The Uralvagonzavod tank factory in Nizhny Tagil in the Urals region increased its workforce from about 20,000 to more than 38,000 since the invasion of Ukraine as it launched 24-hour production, according to a recent report from the Centre for Strategic & International Studies on Russia’s defence industries.

Kupol, which makes drones and surface-to-air missiles, is the largest industrial enterprise in the Udmurtia region on the Volga River and more than doubled its output in 2025.

Shortages of skilled labor are restraining production in defence firms and across the economy, compounded by the emigration of several hundred thousand mostly younger people due to fears of conscription and political repression.

Kremlin says stability is ‘ensured’

Kremlin spokesperson Dmitry Peskov said month-to-month deficit figures were volatile and that “this is not a figure that should be cause for concern. Macroeconomic stability is absolutely ensured.”

But the chief economist of Russia’s state-owned VEB.RF state development bank, Andrei Klepach, warned in a speech that due to sanctions and economic isolation, “we’re falling behind in the technological and economic competition in the world”, and that “we can’t win the competition in this war of attrition”.

He was fired.