Four years ago, analysts were wrong about Russia. Now the Kiel Institute of World Economics says: not this time. A joint report by the institute and the Stockholm Institute of Transition Economics states that Russia's war economy has come dangerously close to a structural limit.
The buffer has melted
The most concrete indicator is the liquid assets of Russia's National Welfare Fund. At the beginning of the full-scale invasion, they amounted to 6.5% of GDP. By April 2025, this had fallen to 1.8% of GDP. For four years, the Kremlin has been depleting this cushion, financing the gap between oil revenues and military expenditures.
"In the first years of the war against Ukraine, Russia's economy proved more resilient than many expected, but now its reserves are exhausted. The fundamental foundations of the economy have significantly weakened — financial reserves have been largely depleted, growth has stalled, and dependence on China is becoming increasingly acute."
Moritz Schularik, president of the Kiel Institute of World Economics, co-author of the report
Spending exists, production does not
The paradox of Russia's war economy is that it still has money, but the mechanism for converting that money into real products is broken. Unemployment has fallen below 2% — the lowest level in all of post-Soviet history. This sounds like success, but it actually means the economy no longer has a labor reserve: millions of people are at the front, in the defense industry, or have left the country. Any new military order competes for the same workers and resources.
The consequence is inflation. The Central Bank of Russia has raised its key rate to 21% to control it. But the high rate suppresses civilian investment and consumer credit, slowing down the non-commodity sector of the economy. In August 2025, the government lowered its GDP growth forecast from 2.5% to 1.5%, citing weak credit demand.
What could change the trajectory
The report's authors identify two variables that have so far prevented Russia from a sharp collapse. First, oil revenues: they remain the main source of financing for the war. Second, the shadow fleet, which helps circumvent price caps on oil.
That is why Torbjorn Becker, director of the Stockholm Institute of Transition Economics, insists: "Strengthening the price ceiling must become a central element of sanctions policy — including new efforts to restrict Russia's shadow fleet." The authors also recommend stricter export controls on Chinese suppliers of dual-use goods.
- Liquid assets of the National Welfare Fund: from 6.5% to 1.8% of GDP over four years
- Central Bank of Russia's key rate: 21% — a record level to contain inflation
- Unemployment: below 2% — the economy has physically exhausted its labor reserve
- GDP growth forecast for 2025 has been lowered to 1.5%
The Kiel Institute and the Atlantic Council agree on one thing: Russia can still sustain the current level of military spending, but the price is stagflation and degradation of the civilian economy, not a real increase in combat potential.
The report's open question is formulated as follows: if the West truly strengthens the price ceiling on oil and closes loopholes for the shadow fleet by the end of 2025 — will Moscow have enough fiscal space to maintain the current intensity of military operations for at least one more budget cycle?
