Western leaders were bullish when they imposed sanctions on Russia after the invasion of Ukraine in 2022.

“The Russian economy is on track to be cut in half,” said the then US president, Joe Biden, in March, a month into the war.

“It was ranked the 11th biggest economy in the world before this invasion – and soon it will not even rank among the top 20.”

His prediction was off the mark. After the immediate shock of sanctions in 2022, Russia’s military spending surged and the economy boomed.

Rather than falling out of the top 20, Russia was the world’s ninth biggest economy as of 2025, overtaking Canada and Brazil to rank just behind Italy, France and the UK.

But further climbs now seem unlikely. In 2026, there are clear signs that the Russian economy is finally running aground.

While the dramatic collapse envisaged by the west may be off the cards, the Kremlin faces its most precarious economic position since its tanks first rolled into Ukraine.

Growth has slowed to a crawl amid falling oil prices – a key source of government revenue – and long-term demographic pressures that high defence spending previously masked.

To bridge the fiscal gap, ordinary Russians face tax hikes and a state that has been rewired for war, with funding for welfare, education and healthcare crowded out.

Meanwhile, trade with key allies has become more muted, corporate bankruptcies are rising and labour shortages are severe.

How the malaise will affect the conflict in Ukraine is, experts say, dependent on Russia’s recent macroeconomic manoeuvres – and whether global events continue to drive down oil prices.

Growth downgrade as oil revenues dry up

The current outlook is unfavourable. In January the International Monetary Fund (IMF) downgraded its growth forecasts for Russia to an estimate of just 0.6% in 2025 and 0.8% in 2026.

Outside the pandemic years of 2020-22, these are the lowest annual growth rates for Russia since a recession caused by sanctions over the 2014 annexation of Crimea.

They are also lower than the IMF’s forecasts for economies in the west.

This loss in economic momentum comes at the same time as falling oil and gas revenues – a key underpinning of Russia’s war machine.

In 2022 the tax take from fossil fuels made up about 40% of funding in the Russian federal budget, more than enough to pay for the war.

But preliminary estimates for the first three-quarters of 2025 show this share has dropped to 25%.

Falling prices are partly behind this – the price of Ural oil has dropped from about $90 (£66) a barrel in early 2022 to $50 a barrel by the end of 2025 – amid a global glut of oil supply.

But the west’s sanctions are playing a role too, despite Russia’s efforts to find new buyers.

China, India and to a lesser extent Turkey all increased their purchases in the wake of the invasion, as exports to Europe fell off sharply.

But as of 2026, their combined business pales in comparison with how much the countries that imposed sanctions were buying on the eve of war.

India in particular has wound down purchases in recent months, amid threats of trade tariffs from the US president, Donald Trump.

Isaac Levi, a policy analyst at the Centre for Research on Energy and Clean Air, said: “Russia’s fossil fuel export earnings in 2025 were 13% below prewar levels, squeezed by tougher sanctions, Ukraine’s drone strikes on energy infrastructure, the struggle to find new markets for its gas exports, and lower global oil prices.

“These pressures are steadily draining the revenues Moscow relies on to bankroll its war – but Ukraine’s allies must go further to fully constrain the Kremlin’s war chest.

“Targeting Russia’s shadow fleet, including detaining flagless vessels, would sharply constrain its oil export volumes as well as its earnings.”

Long-term pressures still not solved

Vladimir Putin’s problems with oil may be just a temporary setback, particularly if oil prices begin to recover in 2026.

But there are also long-term demographic pressures that are now biting the Russian economy hard.

The Russian population has fallen consistently since 2019, from 145.5 million to 143.5 million in 2024.

A combination of falling fertility rates, casualties of the war and emigration are to blame.

Although western countries have seen similar falls in their fertility rates, they have not been as large, and immigration has helped keep populations rising.

“Russia doesn’t have the potential for rapid growth,” said Dr Marek Dabrowski, a fellow at the Brussels-based thinktank Bruegel.

“The war-related business climate is, of course, part of the story, but the major story here is the long-term demographics. It hasn’t changed.”

This means labour shortages are now commonplace in Russia – a fact that experts say can be seen in its unusually low unemployment rate of just 2%.

The Kremlin has sought to shore up its fiscal position with several hefty tax rises.

In 2025 it increased corporation tax from 20% to 25%, and introduced higher income tax bands.

In addition, a rise in VAT came into force at the beginning of 2026 – from 20% to 22%, which is higher than in the US, the UK, France or Germany.

Though the Russian government has exempted some essential goods, the VAT hike comes on top of persistent inflation in Russia that has driven up the price of basics.

While much has been made of the impact of the war on inflation in the west, Russia has experienced far higher inflation for longer.

Efforts to combat this inflation have only added to the slowdown.

Dr Vladislav Inozemtsev, an economist and co-founder of the Centre for Analysis and Strategies in Europe thinktank, said: “There is an irresponsible policy conducted by the central bank and the finance ministry that started to ‘cool the economy off’ in 2023 for fighting inflation.

“For this, the central bank has raised its key rate up to 21%, the government abandoned its subsidised mortgage programme, and the banks started to cut loans and increase rates, most of which were not fixed but floating.

“Why the Kremlin was supportive of such a policy is kind of a riddle for me.”

Optimism softening as military spending slows

There are signs this economic hardship is taking a toll on the morale of ordinary Russians.

According to polling conducted in Russia by Gallup, the invasion of Ukraine initially increased optimism about the economy in Russia, amid the wartime boom.

In July 2021, most Russians believed the economy was getting worse, but in November 2022 this situation had reversed, with most believing conditions were getting better.

Yet as of August 2025, this optimism has softened, with 39% of Russians saying economic conditions are getting worse, up from 29% in 2022.

The key question for Ukraine is whether Russia will be able to maintain its surge in military expenditure.

Over the course of the war, Russian military expenditure as a share of GDP has doubled to more than 7%.

That is twice as high as the US’s spending of 3.4% of its GDP, and higher than any individual member of Nato.

But the rise in spending in the first few years of war has now slowed, with only a 0.1 percentage point increase between 2024 and 2025.

However, Russia is in a unique position when it comes to options for maintaining its war chest.

Borrowing is possible because Russia has a relatively low stock of debt – though access to international markets has been cut since the invasion and subsequent sanctions – and taxes could be raised again.

And much is dependent on what happens to oil. Further falls in prices may mean increased precariousness, but equally, rises might mean stabilisation.

Experts therefore conclude that Russia should be able to keep paying for the war, at least in the short term.

“Putin will encourage the central bank to print money; he will continue to raise taxes, sell state property and nationalise business corporations,” said Inozemtsev.

“This will allow him to get enough money to wage the war for 2026, and, most probably, for 2027.”

There is also the question of whether growing economic discontent in Russia will translate into growing political discontent.

But in the last few weeks, there is evidence the Kremlin’s thinking has changed.

Russia has agreed to peace talks with Ukraine for the first time in months, with meetings led by the US taking place in Abu Dhabi this week.

For Ukraine’s negotiators, a key factor is now in play: Russia’s war economy is showing signs of weakness, and cannot last for ever.