Russia’s economic problems are getting worse. The economy narrowly avoided a recession in the first half of the year and the 2.2% forecast budget deficit is looking increasingly unrealistic as growth slides towards zero, but the Kremlin continues to ramp up military spending.

From car factories to crop fields, nearly every sector of Russia’s civilian economy is showing signs of systemic stress. Amid spiralling defence spending and mounting international sanctions, the Kremlin’s economic narrative is breaking down in the face of visible shortages, rising debt, and shrinking industrial output.

“The Kremlin spends 40% of the budget on war, while the civilian economy dreams of a bright future,” said Anton Gerashchenko, former Advisor to the Minister of Internal Affairs and founder of the Institute of the Future, in a social media post.

The data paint a bleak picture. Russia’s budget deficit reached RUB4.88tn ($60.5bn) in the first seven months of 2025, while regional governments posted a combined shortfall of RUB400bn ($5bn) over six months. The high key interest rate, introduced to stabilise the rouble and suppress inflation, is now squeezing credit and investment across the civilian economy.

In the automotive sector, passenger car and truck sales have slumped under the pressure of expensive loans. Tens of thousands of unsold vehicles are stockpiled in factory warehouses. KAMAZ, Russia’s largest truck manufacturer, sold almost one-third fewer trucks in 2024 compared to 2021, and posted a net loss of RUB3.4bn ($42.2mn). “KAMAZ workers even had to be moved to a four-day work week,” Gerashchenko noted. “But while in Europe this is done to boost productivity and take care of employees, in Russia, it’s aimed at cutting production and optimising costs.”

The pattern repeats across industrial sectors. Agricultural machinery output is down 27%, while manufacturers like Rostselmash are also reducing workweeks. Farmers, facing unprofitable conditions due to fuel costs, high rates, and poor weather, are delaying equipment upgrades. “Farmers don’t have the money for new combines, loans are unaffordable, and old machines are reaching the end of their service life,” Gerashchenko said.

In agriculture, two consecutive years of weak harvests in southern regions have raised further alarm. Russia could lose up to 25% of its grain crop in 2025, partly due to climate change. Ukraine is suffering a similar downturn. At the same time, imports of basic foodstuffs—like butter from the UAE and potatoes from Mongolia—have reappeared, once unthinkable in an agricultural powerhouse.

Energy infrastructure is also under strain. Oil output has fallen 4.3%, while gas production continues to decline. “In Primorye, annexed Crimea, and Zabaykalsky Krai, gas can only be bought using coupons,” said Gerashchenko. “Gas prices have risen by 50% since the start of the year.” The shortages, blamed officially on “seasonal demand,” are widely understood to result from Ukrainian drone strikes and OPEC+ output restrictions.

In the last month, Russia has been facing an intensifying fuel crisis, as Ukrainian drone and missile attacks hit and destroy refineries far from the frontline, reducing domestic supplies at a time when the military demand remains elevated. Russian wholesale gasoline prices soared to record levels in August leading to shortages and long queues at petrol stations across the country.

Russia’s aviation and shipbuilding sectors face sanctions-related paralysis. Of the 15 commercial jets planned for 2025, only one has been delivered due to component shortages. Rosmorport cancelled a RUB18.5bn ($230mn) contract to build icebreakers after sanctions made the project unviable. “Russia is effectively hostage to imports of spare parts through third countries,” Gerashchenko observed.

Even consumer electronics have not been spared. Kvant, a TV manufacturer based in Voronezh, ceased production of Irbis televisions in early 2025. Employees have not received wages since the end of 2024, and the company now owes more than RUB60mn ($745,000).

“There is no demand, while wage arrears at construction companies are increasing,” Gerashchenko said, referencing the broader stagnation in building materials and housing development following a short-lived uptick in late 2024.

“The picture that emerges is not of a temporary slowdown, but of an economy structurally reshaped by war and isolation—one where supply shocks, labour uncertainty, and fiscal constraints are the new constants,” Gerashchenko adds.

A race is on. Central Bank of Russia (CBR) governor Elvia Nabiullina chose to slow the economy on purpose using non-monetary policy methods, starting last summer, to bring down sky high inflation. That is working and inflation is falling faster than expected, reaching 8.8% in July from over 10% at the start of the year. But so is growth, leading to a debate over if Russia is falling into a recession or if the economy is merely cooling.

The CBR has already managed to  cut growth-crushing interest rates by 300bp his year and expects to make another 300bp cut by the end of this year, but it remains unclear if this will be enough to stop the slowdown rot.