Endgame: The state of the Russian economy

The contours of a genuine economic endgame are coming into view for Russia. The economy has not collapsed, but the structural foundations have eroded fast. Economic growth has come to a standstill and fiscal buffers are largely exhausted. Higher oil prices as a result of the war in the gulf will likely only bring temporary fiscal effects, as Ukrainian "drone sanctions" have been effective in reducing export volumes. • Russia's current macro stance is not sustainable. High interest rates are stifling the economy, while loose fiscal policy and quasi-fiscal operations are propping up the defense sector. The Q1 2026 budget deficit exceeded the full-year target in just three months. The choice now is between fiscal consolidation or monetary accommodation resulting in even higher inflation. Going forward, export revenues from the sale of raw materials remain the decisive variable for the economic outlook: With fiscal buffers spent, Russia's war capacity is more than ever directly coupled to hydrocarbon export income. • The war has made Moscow increasingly dependent on China. While both countries have derived tangible benefits from the partnership, it is not a coalition of equals, but an increasingly unbalanced arrangement in which China is accumulating structural advantages. Chinanowaccountsfor35 %ofRussia'stotaltradeand76%oftheincrease in its supply of banned critical military components. On its own exports of raw materials, Russia accepts deep discounts as a captive supplier with no alternative buyers. • China also plays the key role when it comes to supplying Russia with sanctioned products, especially the products most likely to contain so-called critical military components. China supplies more than 60% of all critical components while the remaining non-sanctioning countries within the top 10 together amount to only 15%. • Domestically, Russia's full-scale war against Ukraine has led to greater convergence of wages and incomes. Many poorer regions have benefited from a much higher budget for military procurement as well as higher salaries paid for those willing to sign up for the military. However, fiscal stress is mounting at the regional level too. More than two-thirds of Russia's 89 regions ran budget deficits by autumn 2025. • With Russia's economic weaknesses at a critical point, the window of opportunity for consequential Western action is open. Europe's task is to have the tools in place to convert economic pressure into a durable change in Russia's strategic calculus. The past months have shown that enforcement of the sanction regime makes a real difference and more must be done with respect to monitoring of the shadow fleet and the imposition of secondary sanctions. Export controls must be tightened with a particular focus on the role of Chinese firms, potentially linking access to the European market to compliance with export controls. Europe should also use its asymmetric negotiating position and impose a tariff on the remaining trade with Russia. The revenues from this Ukraine Support Tariff could be used to support Ukraine.