Economic Instability in Russia
Russia’s Central Bank is attempting to mask long-term economic instability with short-term fixes, making the country vulnerable to potential secondary sanctions from the US, according to a report by the Institute for the Study of War (ISW). The report, published on July 17, 2025, highlights the Bank’s efforts to maintain a facade of economic stability while implementing policies that increase structural instability.
Short-Term Fixes and Long-Term Consequences
The Russian Central Bank has managed to lower the seasonally adjusted annual inflation rate (SAAR) to 4% in June 2025, aligning with the target inflation rate. However, this decline is unlikely to benefit the economy in the long run, as SAAR is a short-term metric. The Bank’s efforts to keep the ruble strong enhance Russia’s purchasing power abroad, making imported goods cheaper and reducing inflationary pressure on companies reliant on imports.
Secondary Sanctions and Their Potential Impact
The ISW report assesses that secondary sanctions, which Donald Trump’s team has signaled as a possibility, could likely further harm the Russian economy. These sanctions would erode Russia’s oil revenues and its ability to benefit from a strong ruble through cheap imports, both of which are critical to financing the Kremlin’s war in Ukraine.
Military Compensation and Labor Shortages
The report also highlights Russia’s soaring military compensation and ongoing labor shortages, which are likely to further destabilize the economy. The Kremlin’s strategy of offering large signing bonuses to volunteer soldiers and expanding its defense industry requires massive financial outlays, both for recruiting fighters and staffing its arms industry. This competition for labor between defense and civilian sectors is pushing up average wages and service prices overall.
Economic Growth and Military Production
The growing disparity between goods and services prices recorded by the Central Bank limits Russia’s economic growth and its capacity to expand its military and defense production. The ISW maintains that Russia cannot indefinitely offset current troop losses without a forced mobilization of reservists, something Vladimir Putin appears unwilling to implement. At the same time, the Russian economy cannot afford to keep increasing recruitment payments.
Burning the Candle from Both Ends
The ISW concludes that Russia is essentially burning the candle from both ends, loosening monetary policy to stimulate short-term growth while ramping up budget spending to sustain its war effort. This strategy will likely hurt the economy, eroding consumer purchasing power, devaluing the ruble in the medium and long term, and generating deeper macroeconomic instability.
Concerns Over Bad Loans
Russian bankers have begun voicing private concerns over rising rates of overdue and unpaid loans, despite official Central Bank reassurances about stability. The share of bad loans issued by Russian banks has increased by 1.2% in 2025 and may rise from 4% to 6-7% by 2026. The collapse of any major Russian bank would severely undermine Putin’s long-standing narrative that neither the war in Ukraine nor Western sanctions are damaging Russia’s economy.
Conclusion
In conclusion, Russia’s economic instability is a pressing concern, with the Central Bank’s short-term fixes potentially leading to long-term consequences. The country’s vulnerability to secondary sanctions, soaring military compensation, and labor shortages all contribute to a fragile economic landscape. As the situation continues to unfold, it is essential to monitor the developments and assess the potential implications for Russia’s economy and its ability to sustain its war effort in Ukraine.
