In the three and a half years since Russia launched its full-scale invasion of Ukraine, its economy has continued to grow, supported by increased militarization. This resilience is a far cry from Western governments’ prognosis in the early days of the war that sanctions would crash the Russian economy. Sky-high energy prices and hesitation on the part of Western leaders to push for stronger enforcement of sanctions kept the Russian economy afloat in 2022. Meanwhile, deepening economic integration with China has helped supplant the void left by the loss of the European Union (EU) as a market. Overall growth, however, is slowing markedly in 2025 as Russia is increasingly feeling the pressure of “guns versus butter,” the inherent tension between military and social spending.
Fortunately for Ukraine and its Western partners, topline gross domestic product (GDP) figures tell only part of the story. The Russian economy has been overheating—demand is outpacing supply and economic activity is growing at an unsustainable rate—since late 2023. Stubbornly high inflation has forced the Central Bank of Russia (CBR) to raise interest rates to a peak of 21 percent.1 In part, higher inflation (and growth) figures have been driven by Moscow’s wartime spending spree, often described as military Keynesianism. This has been exacerbated by an exceptionally tight labor market by Russia’s standards. The unemployment rate sits at just above 2 percent, less than half of its pre-pandemic levels—which, in addition to boosting inflation even higher, betrays the economy’s limited room left to grow. Demand has been pushed up by government spending beyond the point at which supply can keep up, whether through investment, labor, or productivity gains.
The sanctions landscape has, rather unsurprisingly, become more fractured since President Donald Trump’s return to the White House in 2025. While Ukraine’s partners in Brussels and London have applied additional economic pressure on Moscow, Washington had entirely refrained from doing so until October, when Trump announced sanctions on Russia’s two largest oil producers, Rosneft and Lukoil. On one side of the Atlantic, sanctions—which require constant monitoring and updating to remain relevant—have seemingly been reduced from a tool of economic statecraft designed to inflict costs for and deter bad behavior to a bargaining chip. On the other, the European Union and United Kingdom have continued to expand their sanctions regimes, including by lowering the price cap they impose on Russian oil, but are unable to replicate the reach that the United States Treasury Department has thanks to the dominance of the US dollar and the US ability to enforce secondary sanctions.
The Russian economy is, therefore, in a precarious but manageable position. Its growth has slowed, its oil and gas revenues have slid, and the latest US sanctions on Rosneft and Lukoil directly challenge the prevailing assumption that geopolitical risks and sanctions threats had subsided. Nevertheless, the economy might yet be saved by fickle White House policy. Unless the new sanctions escalation is genuinely sustained, or global oil markets see a further downturn, the current slow downward trends are likely to hold as Russia appears to have hit supply-side constraints in the labor market and investment. This makes a better understanding of where the Russian economy currently stands all the more important. The following sections explore three key wartime developments: the growing role of China, the prioritization of the defense sector, and the positive effects of the war on poorer regions.
Pivot to the East: How China has come to Russia’s rescue
When Russian President Vladimir Putin launched a full-scale invasion of Ukraine, he gambled his country’s future on a quick victory. When that goal proved elusive, he doubled down. Two developments helped make this economically feasible. The first was the spike in energy prices, particularly for natural gas, which was precipitated by the uncertainty that Putin had wrought upon global markets. The second was Russia’s burgeoning trade relationship with China and its role in helping Russia circumvent sanctions.
Economically and politically, Russia’s relationship with China is simultaneously deeply asymmetrical and mutually beneficial. While Moscow has not become Beijing’s vassal—at least not to the extent that it would attack NATO purely to distract the Alliance from a war for Taiwan—Russia is certainly the junior partner in the “no limits” partnership. China has served as a lifeline for Russia, while Russia has supplied China with cheap energy and raw materials.
On one hand, China has easily overtaken the EU to become Russia’s largest trading partner. On the other hand, Russia accounts for just 3 percent of China’s exports and 5 percent of China’s imports as of 2024.2 Russia’s economic importance to China, to be sure, is not fully reflected in these figures; it became China’s top supplier of crude oil in 2023. But even in the case of oil, China buys from an intentionally diversified set of suppliers, in which Russia accounts for less than one-fifth of imports. With an economy nine times the size of Russia’s, China has the same leverage in market power over Russia as the EU, without the structural dependencies on Russian energy.3 Many EU members (including Germany, the bloc’s largest economy) grew structurally dependent on cheap Russian oil and gas for their economic growth in the twenty-first century.4 The Nord Stream 1 and 2 natural gas pipelines from Russia to Germany via the Baltic Sea, which together cost €18 billion to build, best symbolized the relationship.
Even Russia’s energy exports to China are comparatively far more important to Russia. Oil and gas revenues account for nearly one-third of Russia’s budget inflows. Until 2023, Europe was the most lucrative export market for Russian energy and, thus, for Russian state coffers. Nonetheless, by invading Ukraine, Russia slayed its irreplaceable golden goose, leaving it reliant on new partners. And China, well aware of Russia’s lack of alternatives, purchases both oil and gas at a steep discount.
Russia’s trade to and from China could hardly be more different. It sells oil, gas, coal, and raw materials to China, while it buys machinery, vehicles, and electronics (see below).5 In other words, Russia exports what it can extract from the ground and imports what it lacks the technology and industrial capacity to build itself—highlighting the deep asymmetry in the relationship. This is a complete and embarrassing reversal in the relationship compared to the 2000s, when Russia exported higher value-added goods to China.