Russia’s ‘disposable-goods’ war economy is getting busier but poorer, and Trump’s new sanctions could trigger a recession, analysts say

Russia's wartime economy is showing significant strain, with GDP growth decelerating sharply due to exhausted manufacturing capacity, labor shortages, and the non-productive nature of defense spending. New U.S. sanctions on energy giants Rosneft and Lukoil are poised to further reduce crucial oil and gas revenues, increasing the likelihood of a deeper recession, despite official reluctance to fully mobilize the economy. While these mounting economic pressures will raise the cost of the conflict, analysts believe they are unlikely to compel Putin to alter his war aims in Ukraine.

Analysis

Russia's wartime economy, initially resilient, is now facing significant strain, with GDP growth sharply decelerating to 1.1% this year, down from 4.1% in 2024 and 3.6% in 2023. This slowdown is attributed to exhausted manufacturing capacity, labor shortages, and the non-productive nature of massive defense spending, which creates no lasting assets. Experts like Alexandra Prokopenko note that the economy has depleted its reserves of manufacturing capacity and manpower, necessitating a shift to a more comprehensive war footing if further expansion is required.

New U.S. sanctions on energy giants Rosneft and Lukoil are expected to exacerbate economic pressures, particularly on oil and gas revenues, which are the Kremlin's primary funding source. These companies account for approximately half of Russia's oil exports, and Rosneft alone contributes about 17% of the national budget revenue. The sanctions will increase costs for Russian energy exports and may deter some customers, potentially pushing the economy into a deeper recession, as indicated by Capital Economics.

Multiple indicators suggest Russia is either in or on the brink of a recession, with the central bank reporting sequential GDP contraction in Q1 and Q2, meeting the technical definition. Sberbank CEO German Gref described the economy as in "technical stagnation," while Economy Minister Maxim Reshetnikov warned of being "on the brink." Despite these mounting economic costs, analysts from Capital Economics believe it is unlikely to compel President Putin to alter his war aims in Ukraine, though the costs for continuing the conflict will escalate.

Key Decisions for Investors

• Monitor the effectiveness and enforcement of new U.S. sanctions on Russian energy companies, as their impact on global oil supply and pricing could create volatility.
• Evaluate exposure to sectors or companies with indirect ties to the Russian economy or those sensitive to geopolitical risks, considering potential supply chain disruptions or increased operational costs.
• Assess the broader implications of a sustained Russian wartime economy, which, despite internal strains, is unlikely to immediately alter geopolitical stability, maintaining a risk premium for certain asset classes.