What Russia's financial situation really is and how the war in Ukraine could play out: 'This is not a collapsing economy'
Russia is entering an increasingly complicated phase of the war in Ukraine, both militarily and economically. After years of conflict, Moscow's spring offensive has failed to produce major progress on the front, while Ukraine has stepped up its attacks on Russian territory. At the same time, the Russian economy is beginning to show clear signs of slowing down, and the pressure on the labor market and the war industry is increasing.
Russia's paradox: peace could cause economic problems. AFP photo
In an analysis on the Foreign Policy podcast, history professor Adam Tooze, director of the European Institute at Columbia University and author of Chartbook, warns, however, that Russia is not on the brink of economic collapse, but in a period of “permanent pressure” caused by the costs of war.
“This is not an economy that is collapsing, but it is an economy that is no longer growing at the rate it was at the beginning of the war”, says Adam Tooze.
Russia's economy is slowing down sharply
According to Adam Tooze, Russia had economic growth of around 4% in 2023 and 2024, a performance considered remarkable for an economy under international sanctions. However, after a slight contraction in the first quarter of 2026, estimates for the full year point to growth of just 0.4%.
The renowned professor points out that this slowdown is all the more surprising as high oil prices, fueled by tensions in the Middle East and conflict between Iran, Israel and the US, should have benefited Russia.
The Kremlin blames the economic problems on labor shortages, Western sanctions and public spending deemed “unproductive”. In an attempt to control inflation, the Russian authorities maintain extremely high interest rates of around 14.5%, which affects investment and lending.
“We don't see a general loss of confidence in the economy, although money flows are tightly controlled“, he explains.
At the same time, Russia's fiscal position remains relatively stable. The budget deficit is estimated at 2.5% of GDP in the first months of the year, a level that Adam Tooze compares to that of the United States, where the deficit is much larger.
However, the economic slowdown is causing political tensions in Moscow. Vladimir Putin recently summoned his economic leaders to ask them for an explanation of the low rate of growth.
The labor market crisis: Russia is missing millions of employees
One of the biggest problems of the Russian economy is the acute labor shortage. According to the data presented in the podcast, 73% of Russian companies report staff shortages, and the unemployment rate has dropped to just 2.3%, a record low.
Adam Tooze states that the Russian economy is feeling both the human toll of the war and the mass exodus of the population after the 2022 invasion.
About 650,000 people left Russia after the start of the war, and most never returned. In addition, the flow of migrant workers from Ukraine and Central Asia, which previously supported the Russian economy, has significantly reduced.
Russian economists estimate that the country urgently needs about 2.3 million additional workers: 800,000 in industry and 1.5 million in services and construction.
“It is an economy under pressure, where everyone is employed, but growth is not coming”, says Adam Tooze.
To cover the shortage of personnel, Russia is beginning to attract workers from other areas of the world, including India. According to Adam Tooze, about 65,000 Indian workers are already working in Russia, especially in low-paid sectors that the Russians are no longer willing to accept.
Ukraine is changing the rules of war with the help of drones
Another important point of analysis concerns the transformation of modern warfare and the role of drone technology developed by Ukraine.
The renowned professor criticizes the statements of the CEO of Rheinmetall, who described the Ukrainian drones as “simplistic and improvised”, arguing that the actual experience on the front shows exactly the opposite.
Putin's war machine is showing signs of catching up. Companies that thrived on the war economy, in trouble
“There was a very active debate even recently, at the Munich Security Conference earlier this year, an internal debate in Germany, where on the one hand Rheinmetall argued for more conventional, more technologically advanced and more expensive weaponry, and German experts spoke on behalf of the booming German drone industry – firms like Helsing, which are unicorns now valued at over a billion euros – arguing for a much more technologically advanced vision, much more close to the kind of drone swarms the Ukrainians are deploying.
So this is all I want to say, that as absurd as it would be for a pompous German businessman to dismiss Ukraine's efforts in the way he did, this is not limited to the crazier parts of the German industrial system. In fact, there is a major ongoing conversation in Europe about what lessons need to be learned and how to apply them to complex defense contracting systems, which frankly elude anyone's efforts to optimize them. I mean, show me the efficient military industrial complex that reliably generates battlefield-tested weapons. And probably the only place you could look would be Ukraine. But of course it's not some big-money European defense contractor's idea of what they want to happen, because it's being shaped in an extremely brutal Darwinian process by the immediate needs of a poor nation under immense pressure. So it's an inherently difficult problem going forward and not one that has simple solutionsTooze said.
He recalls that Ukrainian units participated in the Hedgehog military exercise in Estonia in 2025, where they managed to “completely annihilate” NATO forces using precisely these systems considered improvised.
“Ukrainian experience will change the game on the battlefield”, warns Tooze.
According to him, a major debate is already underway in Europe regarding the future of the defense industry: investment in very expensive conventional weaponry or orientation towards flexible technologies and swarms of drones similar to those used by Ukraine.
Adam Tooze argues that Ukraine has practically become one of the few examples of a military industry quickly adapted to the realities of modern warfare, in a “Darwinian” process dictated directly by survival.
Russia's paradox: peace could cause economic problems
The analysis also raises a delicate question: What would happen to the Russian economy if the war were to end?
Russia's war economy generated years of economic growth, high employment, and massive investment in military industry. A sudden cessation of conflict could cause a difficult period of adjustment.
However, Adam Tooze believes that the war will not be decided on economic grounds.
“Russia is not waging this war for economic reasons, and it will not stop it for economic reasons”, says Adam Tooze.
He says Ukraine is actually the economically more vulnerable side, while Russia still has significant resources and a stable enough economy to continue the conflict.
The Russian economy, more fragile than it seems and could even go into a major economic shock, claim the Swedish secret services
Russia could work on the reconstruction of Ukraine, on account of reparations
In the event of a peace agreement, Adam Tooze sees several possible scenarios. One of them would involve the involvement of Russian companies in the reconstruction of Ukraine and the reintegration of Russia into the global energy economy.
“If Russia ends the war, it is very likely that it will have to pay reparations for any imaginable deal that would be suitable for the Ukrainians. How could it do that? One option would be for Russia itself to carry out reconstruction work in Ukraine, which would involve Russian firms. And we should not forget, after all, what motivates the Trump administration's peace efforts. I mean, they do not hide the fact that, ultimately, one of the reasons for which insists on peace has nothing to do with Ukraine or territorial aggrandizement, but a desire to reconnect Russia to the global energy economy. And I think we should take this as such, because it again confirms the hypothesis of belligerent Keynesianism. In other words, what may very well be a future of peace will, in fact, return to the excessive dependence on fossil fuels that characterized the pre-war periodand,” Tooze stated.
In his opinion, the Donald Trump administration is pursuing precisely this goal: reconnecting Russia to international energy markets.
“A future of peace could mean Russia's return to the fossil fuel dependence that characterized the pre-war period,” warns Adam Tooze, concluding that while the Russian economy is slowing and feeling the pressure of war, there are no signs that Moscow is close to collapse or that economic problems could quickly end the conflict.
