Russia is expected to retain the capacity to finance its war effort for at least the next two years by redirecting budget spending and relying on energy export revenues, despite rising inflation and growing labour shortages. The European Union continues to maintain economic pressure, planning additional sanctions packages and extending sectoral restrictions.
In 2025, Moscow is allocating as much as 40% of the federal budget to military and security purposes, equivalent to 7.2% of GDP. Defence Minister Andrei Belousov revealed that 80% of the defence budget — more than 11 trillion roubles — is being channelled directly into financing the war in Ukraine.
Oil and gas revenues, which are crucial for the budget, fell by 49% year on year in December, while military spending reached a record USD 149 billion in the first three quarters of 2025.
Analysts at the Center for Strategic and International Studies (CSIS) note that, thanks to careful fiscal management, Russia may be able to sustain its war effort for another two to three years. However, mounting strains are already visible: inflation is exceeding official figures, and food prices are rising faster than government data suggests.
Central bank governor Elvira Nabiullina has been fighting inflation by raising interest rates in an effort to curb price pressures driven by soaring war spending and a credit boom. Rates currently stand at 16%, which has partially slowed inflation but at the same time burdened businesses and dampened investment.
“Massive investment in the military sector inevitably comes at the expense of other areas — from civilian infrastructure and education to healthcare, social programmes, and technological development in non-military sectors. The state budget is a system of interconnected vessels: when money is suddenly redirected to the military, it has to be missing somewhere else,” stresses Adam Świerkowski, editor at Defence24.
EU’s 19th Sanctions Package
In October 2025, the European Union adopted its 19th sanctions package against Russia, targeting 557 vessels belonging to the so-called shadow fleet and banning exports worth €155 million, including metals, chemicals, and rubber.
EU High Representative for Foreign Affairs Kaja Kallas announced the extension of sectoral sanctions until 31 January 2026.
“The latest package strikes where it hurts most — through LNG bans and financial and crypto-related restrictions,” representatives of the European Commission stressed.
Previous sanctions packages froze €210 billion in assets belonging to Russia’s central bank and introduced trade bans worth €140 billion annually. The ban on LNG imports is set to fully enter into force by January 2027, earlier than originally planned.
Ukrainian President Volodymyr Zelenskyy has emphasised the need to maintain and intensify pressure on the Moscow regime.
“We are working with European institutions on the details of the EU’s 20th sanctions package, whose main goal is to increase pressure on Putin’s energy assets and the oligarchs linked to him,” the Ukrainian leader said.
He added that other countries, including Canada, are also preparing new sanctions packages aimed at increasing pressure on Russia.
Dependence on Asian Partners
Sanctions imposed by the U.S. Department of the Treasury in October on Russia’s largest oil companies — Rosneft and Lukoil — have significantly increased pressure on the state budget and the energy sector. The price of Urals crude fell to $35 per barrel, while the 2025 budget had assumed $69.
The blockades are forcing Moscow to pivot toward Asia, limiting imports of dual-use technologies and Western investments. New supply routes strengthen logistics chains but increase Russia’s dependence on Asian partners.
State energy giants like Gazprom and Rosneft now rely heavily on oil sales to China and India, with energy sector revenues accounting for 30% of the federal budget. However, attacks on refineries and the LNG import ban through 2026 are deepening budget deficits.
Among the entities affected by the new restrictions are five banks, shadow fleet operators, and companies from China, the UAE, and India supplying dual-use goods. The 19th EU sanctions package added 69 new entries to the restriction lists.
Economic problems are beginning to affect ordinary consumers more widely. According to a Sberbank report, December spending fell by 8.7% on clothing, 8.8% on household goods, and 5.9% on health and beauty. Companies are forced to cut jobs or suspend wages.
“Russia’s policy will create greater wealth disparities within society — either citizens will have employment tied to the military-industrial complex, or they will have to emigrate. This societal polarization will generate dangerous dynamics and social unrest,” assesses Adam Świerkowski, editor at Defence24.
Controversies and Internal Divisions in the EU
Last week, the European Union decided to add 41 more vessels of the Russian shadow fleet to its sanctions list. In total, the EU has now imposed restrictions on 597 units, including intermediary entities from third countries such as China, Iran, and North Korea, as well as suppliers of dual-use goods.
“By targeting the shadow fleet, the EU effectively raises costs for Russia, disrupts its maritime operations, and halts cooperation with EU operators,” the Commission stated.
The latest extensions also renewed sectoral sanctions until 31 July 2026, covering €210 billion in frozen Russian assets and €140 billion in trade bans from previous packages.
However, the process of adopting sanction packages has revealed widening divisions within the EU. Threats of vetoes from Slovakia, the Czech Republic, and Hungary could effectively block the adoption of further sanctions.
Meanwhile, the Kremlin continues to push a narrative claiming the sanctions are ineffective and that they strengthen Russia’s self-sufficiency.
Looking Ahead to 2026
Experts at the Atlantic Council point to economic stagnation in 2025, caused by labor shortages and pressure on oil prices, which are unlikely to persist once the war ends. A report from the University of Edinburgh warns that the war economy “borrows time from the future,” as reserves deplete and gas supplies to the EU remain constrained.
– “As long as the international community maintains consistent economic restrictions, and sanctions are enforced and tightened, Russians will find it increasingly difficult to meet the needs for goods and financial flows. This means that over time, as financial reserves dwindle, Russia’s ability to sustain prolonged military operations could be significantly limited,” notes Adam Świerkowski, editor at Defence24.
By 2026, fiscal pressures may curb Russia’s military momentum, even without a crash in the oil market or stricter sanctions, potentially forcing negotiations or triggering social unrest. The European Union plans to continue its sanction packages “as long as necessary,” focusing on intermediaries who help circumvent restrictions.
Full LNG bans and service restrictions could accelerate Moscow’s pivot toward Asia while simultaneously draining its financial reserves more quickly.
