Last week, Russian President Vladimir Putin made a successful trip to China, reinforcing ties with India, establishing a "no limits" partnership with China, and signing the long-awaited Moscow-Beijing gas pipeline deal.

Following Putin's return from Beijing, Russia launched an unprecedentedly large-scale attack on Ukraine involving missiles and unmanned aerial vehicles (UAVs).

The Ukrainian Air Force Command reported that Russia attacked with 9 Iskander cruise missiles, 4 Iskander-M ballistic missiles, and 810 UAVs. For the first time since the war began, a Ukrainian government building in Kyiv was hit, causing a large fire to erupt from the roof.

The Russian Ministry of Defense claimed it did not target any locations within Kyiv but focused on long-range UAV assembly and deployment facilities, the Kiev-67 industrial plant in the western suburbs, and the STS-Group logistics base south of Kyiv, as well as military airfields in central, southern, and eastern Ukraine. However, this record-breaking attack displeased former US President Donald Trump.

On 7/9, Trump hinted at his readiness to impose new sanctions on Russia, as its economy shows warning signs, increasing pressure on the Kremlin with the war showing no signs of ending.

Russian President Vladimir Putin attends the 10th Eastern Economic Forum in Vladivostok on 5/9. Photo: Reuters

Russian President Vladimir Putin attends the 10th Eastern Economic Forum in Vladivostok on 5/9. Photo: Reuters

In the early stages of the conflict, the Russian economy proved more resilient than expected thanks to stable oil and gas prices and increased military spending, which boosted wages and consumer demand.

However, as the war drags on, this growth has stalled, military spending has risen, and the rouble has climbed while oil prices have fallen, forcing the Russian government to face tougher decisions. A stronger rouble means that the amount of USD Russia receives from oil and gas exports, after conversion to the local currency, significantly decreases, putting pressure on the national budget and the ability to fund domestic activities, especially military spending.

The Russian Ministry of Finance reported that from January to August, Russia's energy revenue decreased by 20% compared to the same period in 2024. According to analysts regularly surveyed by the Central Bank of Russia, GDP growth may fall to 1.4% by the end of this year, from 4.3% in 2024. They don't expect it to exceed 2% in the next three years.

"When reserves and oil revenues were plentiful, Russia was confident it could solve social problems with money," said Aleksandra Prokopenko, a fellow at the Carnegie Endowment for International Peace's Russia and Eurasia Program, based in Berlin. "But now, when money is not as abundant as before, it's time to set priorities."

More than three years since the war began, Russia has shown no sign of abandoning its wartime economy. In fact, Putin's trip to China suggests Moscow continues to focus on nurturing the alternative partnerships the Kremlin needs to sustain its campaign in Ukraine.

Simultaneously, economists and former officials believe there's a growing recognition of the limitations of the current domestic economic situation, which cannot be solely alleviated by new trade agreements. While oil and gas revenues slightly increased in July due to quarterly payments, the underlying revenue remains low, and Russia is projected to end the year with a significantly larger budget deficit than planned.

According to Putin, the budget deficit reached 61 billion USD in the first half of 2025, about 2.2% of GDP, compared to the initial target of 0.5% of GDP. The Kremlin said Finance Minister Anton Siluanov recently reported to Putin that the government is seeking "resources" to meet all its necessary commitments.

The Russian government may have to cut budget spending on non-military infrastructure projects and subsidies for non-core areas, such as football clubs or inefficient nursing home projects. According to Anatoly Artamonov, head of the budget committee in the Federation Council, Russia could free up 2.5 billion USD by taking this approach.

Economists believe Russia can cover the remaining deficit through borrowing, which has become easier after the Central Bank started cutting interest rates from a record 21% to 18% in June. This appears to be Putin's preferred option.

"The deficit may increase because Russia's debt burden is not only acceptable but actually low," he said last week at an economic forum in Vladivostok, in Russia's Far East.

Russia could also tap into its reserve fund, but this is considered a less attractive option as Moscow has already spent half of it on the conflict in Ukraine. Russian assets abroad remain frozen due to Western sanctions.

In 2025, Russia faces unprecedented challenges. For the first time, they must consider real budget trade-offs," commented Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs.

While non-energy revenue in 2025 increased by 14% compared to the same period last year, the budget deficit has widened due to a much sharper increase in spending. "There are months when spending doubles or triples. This is a risky strategy," said a former senior government official.

According to Prokopenko, the problems, accumulating since 2022, include inflation, severe labor shortages, and difficulties in cross-border payments following a series of Western sanctions imposed on Russia.

In some sectors, economic strains are exacerbated by sector-specific challenges. For instance, with overloaded rail infrastructure and trade flows redirected eastward, the Russian coal industry is suffering its heaviest losses since the 1990s.

Many banks are also reporting deteriorating loan quality. VTB, one of Russia's largest lenders, has set aside provisions for over one-fourth of its corporate loans to address the risk of non-repayment.

The rouble has gained about 20% against the USD since January. Weakening the currency to boost budget revenue could exacerbate inflation, which Russian officials have only recently brought under control, experts say.

Russian soldiers in Zaporizhzhia in 2022. Photo: Sputnik

Russian soldiers in Zaporizhzhia in 2022. Photo: Sputnik

The Central Bank of Russia's decision to keep interest rates high has helped bring annual inflation down to below 9% in July. This figure exceeded 17.8% in 4/2022. However, it has also angered businesses struggling with high borrowing costs.

Despite mounting pressure, the Russian government maintains its motto of "everything for the front, everything for victory," with military spending nearly doubling since the conflict with Ukraine began.

Even if Moscow and Kyiv reach a ceasefire agreement, this spending spirit is unlikely to change immediately, experts note. According to Kluge, Russia's tank and armored vehicle reserves have been depleted by the conflict, so production plants may have to operate at full capacity "for years" to replenish supplies.

"The state will eventually have to restructure some investment programs," said the unnamed former government official. However, a ceasefire agreement will not cause Russia to "abruptly halt military production" or "drastically reduce the size of the army. The factories will continue to operate," he emphasized.

Vu Hoang (According to FT, AFP, Reuters)