Russia’s economy grew 1.3% in the second quarter of 2026, returning to expansion after its first contraction since 2023, but economists warn the headline figure masks deep structural damage from the war in Ukraine and surging military expenditure.
The rebound, reported by state statistics agency Rosstat on August 13, outperformed government and Central Bank forecasts. Yet the recovery was driven almost entirely by military-industrial output and a temporary spike in oil revenues from the Iran conflict, while civilian manufacturing contracted 3.2% year-on-year and fell 4.6% compared with 2024 levels, according to the Center for Macroeconomic Analysis and Short-Term Forecasting.
Military Spending Outpaces All of Europe
According to the International Institute for Strategic Studies, Russia’s total defense spending this year will rise 13.7% to 15.6 trillion rubles, equivalent to 7.5% of GDP and nearly 40% of the federal budget. That figure now exceeds the combined defense budgets of all European nations, the IISS reported on August 13. Federal budget spending rose 16% in the first half, with roughly one-third directed to military and weapons production.
The data underscores the Kremlin’s pivot to a full wartime footing. Russia’s military-industrial sector has continued to expand rapidly, with Deputy Defense Minister Colonel-General Alexandr Sanchik claiming on August 1 that weapons deliveries had increased fivefold and ammunition supplies twelvefold since the February 2022 invasion.
Civilian Economy Under Pressure
The picture outside the defense sector is far bleaker. High interest rates set by the Central Bank to combat inflation above 10%, combined with disruption from long-range Ukrainian drone strikes on oil refineries and logistics infrastructure, are weighing heavily on ordinary Russians. Households are increasingly trading down to cheaper, store-brand foods, according to CNBC reporting published on August 15.
Ukrainian drone strikes, which initially targeted oil refineries and later devastated major Wildberries warehouses, are “quite seriously undermining the Russian economy,” economist Vladislav Inozemtsev told Republic magazine. He forecast that inflation would overshoot previous estimates by 2 to 3 percentage points, living standards would stop improving, and thousands of business owners could go bankrupt.
Stagnation or Worse Ahead
Liam Peach, an economist at Capital Economics, told Bloomberg that Russia is likely to “remain in a state of stagnation” for the foreseeable future, with high interest rates and the ongoing fuel crisis continuing to drag on growth. First-half GDP expansion of 0.6% was half the pace recorded a year earlier and nearly seven times slower than during the wartime boom of 2023-24.
Yet Inozemtsev argued that the Kremlin’s own policies posed an even greater threat than external pressures, citing tax increases, the seizure of private businesses, and increasingly onerous regulation. The possibility of another military mobilization looms as the most severe risk. “If it begins, it will be the end of the entire Russian economy,” he warned.
The figures arrive as President Putin prepares for the September 18-20 State Duma elections, which the Kremlin is seeking to frame around a pro-war platform. Russian Foreign Minister Sergei Lavrov reiterated on August 14 that Moscow will not accept any ceasefire that freezes the current frontline, signaling the war economy will remain in place for the foreseeable future.
Sources: CNBC; The Moscow Times; IISS; Capital Economics; Bloomberg; Center for Macroeconomic Analysis and Short-Term Forecasting
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