Stagnation Ahead: Russias Economic Forecast for 2026 Amid Ongoing Conflict and Rising Taxes

With Western sanctions becoming stricter and the military budget strain from the ongoing conflict in Ukraine showing little sign of relief, Russia is expected to transition from a period of «managed cooling» to outright stagnation by 2026, with any substantial recovery not anticipated before 2027.

The initial boost from wartime military expenditure is waning, and the associated costs are expected to be shifted onto the public via increased taxes, as revenue declines in the face of falling oil prices and sustained Western pressure on Russia’s energy sector.

The year 2025 will signify the conclusion of Russia’s wartime economic expansion experienced in 2023-2024. After two years of growth exceeding 4%, GDP growth for 2025 is projected to decelerate to approximately 1% or even lower, with the same economic challenges likely continuing into 2026.

The economy has largely depleted the temporary factors that spurred growth during the previous two years. The rapid growth in 2023 was primarily a recovery from the 2022 economic shock, which forced a swift adjustment towards wartime production.

In 2024, the growth was supported by a significant surge in government spending. Federal outlays increased by about 25%, rising to 40.2 trillion rubles ($502.5 billion) from 32.35 trillion rubles ($404.4 billion) the previous year, stimulating economic demand.

However, these drivers were mostly absent in 2025, and there’s no clear trigger on the horizon to revive growth in 2026.

Government expenditure is forecasted to reach 42.3 trillion rubles ($528.8 billion) in 2025 and 44.1 trillion rubles ($551.3 billion) in 2026, remaining relatively flat after accounting for inflation.

Alongside interest rates hovering around 16% aimed at curbing inflation, this indicates an economy on the brink of stagnation while Moscow’s policymakers strive to reconcile growth with price stability.

As a result, many analysts anticipate GDP growth will remain around 1% in both 2025 and 2026. The Economic Forecasting Institute of the Russian Academy of Sciences predicts growth of 0.7% in 2025 and 1.4% in 2026, with an acceleration to about 2% in 2027. Meanwhile, the International Monetary Fund forecasts growth of 0.6% in 2025 and 1.0% in 2026.

For the first time since the pandemic, Russia’s budget revenues are expected to fall short of initial projections in 2025. When the budget was finalized, revenues were estimated at 40.3 trillion rubles ($503.8 billion), but revised forecasts indicate actual receipts may approach only 36.6 trillion rubles ($457.5 billion).

This marks a departure from the previous three years, including 2022, when revenues consistently surpassed estimates.

This revenue shortfall is partly due to diminished tax intake amid decelerating growth, alongside decreasing oil prices and Western sanctions that have compelled Russia to offer greater discounts on its crude to buyers.

Oil and gas revenues for 2025 are now anticipated to be around 8.7 trillion rubles ($108.8 billion), significantly below the initial expectation of 10.9 trillion rubles ($136.3 billion). With growth slowing and oil values under pressure, 2026 is likely to result in another year of weak budget revenues.

The World Bank forecasts a global oil supply surplus that will drive Brent crude prices down from an average of $68 per barrel in 2025 to approximately $60 in 2026, marking a five-year low.

In response, the authorities are increasing taxes to bolster the budget. The value-added tax (VAT) will rise from 20% to 22% starting January 1, and more enterprises will be incorporated into the VAT system as the threshold for mandatory payments is lowered from 60 million rubles ($750,000) to 10 million rubles ($125,000).

Additionally, the government plans to impose a tax on finished electronic goods, such as laptops, smartphones, and lighting products.

These initiatives reflect a post-spending adjustment period, where households and businesses will bear higher taxes to replenish the Kremlin’s war funds as the energy sector grapples with sanctions.

Despite the economic downturn, Russian authorities have limited ability to reduce military expenditure as the conflict in Ukraine persists.

President Vladimir Putin has shown no inclination to ease his demands, repeatedly asserting that Russia is prepared to continue the battle until it secures control over the four Ukrainian regions it claims to have annexed.

Officially, national defense spending is set at 13.5 trillion rubles ($168.8 billion) for 2025 and 12.93 trillion rubles ($161.6 billion) for 2026. However, actual expenditures, including classified spending, are expected to be higher.

Russia does not release complete military spending figures in its federal budget, providing only planned amounts. Officials occasionally share partial data, with Defense Minister Andrei Belousov stating in December that defense expenditures reached 7.3% of GDP in 2025.

With GDP estimated at 217.3 trillion rubles ($2.72 trillion) in 2025, this suggests total defense spending of approximately 15.86 trillion rubles ($198.3 billion), which exceeds the amounts indicated in the budget.

As the conflict continues into 2026, military spending will remain a substantial burden on the economy and its recovery prospects.

As more resources are allocated to armaments and the war effort, this spending contributes little to the availability of consumer goods, thereby exacerbating inflationary pressures.

The longer the conflict persists, the less funding will be devoted to civilian development, with taxes likely continuing to increase to bridge the gap between expenditure and revenue.