Carnegie Expert Says Russian Economy Faces Prolonged Stagnation as War Costs Balloon
Carnegie’s Alexandra Prokopenko warns the Russian economy faces prolonged stagnation, rising war costs and a widening budget gap for Moscow amid sanctions.
Strong warning on growth prospects
Alexandra Prokopenko, a Carnegie Russia specialist and former adviser to the Central Bank of Russia, warns that the Russian economy will not flourish in the coming decades. She says the country is unlikely to achieve growth rates comparable with the global economy and will struggle to return to sustained two- to three-percent annual growth. The assessment frames the economy as structurally constrained rather than in imminent collapse.
Supply restrictions, sanctions and an increasingly closed economic model limit the scope for long-term recovery, Prokopenko argues. The picture she paints is of slow, managed contraction in many civil sectors while resources are diverted elsewhere.
Central Bank retains de facto independence
Prokopenko stresses that the Central Bank still exercises a measure of independence despite political pressure, citing personal trust between President Vladimir Putin and Governor Elvira Nabiullina. Putin’s public suggestion to lower rates did not amount to a direct order, she noted, and the bank’s policy response has remained cautious. That dynamic, she says, is both a source of strength and a vulnerability for monetary governance.
However, the central bank’s independence is fragile because it rests heavily on relationships rather than institutional insulation. If key individuals or political calculations change, the bank’s autonomy could be quickly eroded.
Banks remain profitable but risks have risen
Despite a high policy rate, Russia’s financial sector remains one of the more profitable parts of the economy, Prokopenko observes. Non-performing loans have increased as expensive credit squeezes borrowers, yet most of the outstanding portfolios are concentrated in large state-owned banks that policymakers are unlikely to allow to fail. Smaller institutions and certain cooperative banks face greater stress and could be sources of localized instability.
The regulator acknowledges elevated risk levels but, for now, sees the situation as manageable rather than catastrophic. That assessment hinges on continued state support and the unwillingness to permit systemic banking collapses.
War spending has flipped the fiscal balance
Prokopenko points to the war against Ukraine as the primary driver of Russia’s ballooning budget deficit, noting that military and related expenditures have far outpaced earlier plans. Moscow initially budgeted for a sizeable deficit in 2026, but spending through the first five months already exceeded the planned annual shortfall by a wide margin. Rising troop and equipment costs, plus growing recognition of casualties previously listed as missing, have produced large, unforeseen fiscal outlays.
The economist says that the intensity and changing character of the conflict make armed operations inherently unpredictable and expensive. As a result, federal and regional budgets are under mounting strain, and conventional fiscal tools have been exhausted in many areas.
Oil price gains deliver only partial relief
Higher global oil prices have not translated into proportional fiscal windfalls for Moscow, Prokopenko explains, because of Russia’s tax structure and constraints on exports under sanctions. The state must rebate portions of certain payments to producers, and logistical bottlenecks and damaged refining capacity reduce the immediate benefits of price spikes. Attacks on oil-processing infrastructure can force costly repairs and lower future receipts, undermining the long-term budgetary impact of temporary price gains.
Consequently, any oil-related boost to public finances is nonlinear and limited, and cannot by itself close a rapidly widening budget gap.
Limited policy levers and shrinking fiscal room
According to Prokopenko, Moscow has already squeezed much of the easy savings out of the federal budget, cutting infrastructure and national project spending where possible. Remaining avenues for consolidation are increasingly political or accounting-based, including shifting costs to regions or reconfiguring revenue-sharing arrangements. The finance ministry’s growing willingness to accumulate debt signals that conventional balancing methods are no longer sufficient.
This narrowing fiscal space forces the government to become more creative in financing the state, increasing economic fragility and raising the political costs of prolonged conflict.
Political cohesion may hold but not indefinitely
Prokopenko argues that social decline and a deteriorating standard of living do not necessarily produce immediate regime collapse; rather, they create long-term erosion of welfare and opportunity. The current elite remains largely loyal because the political landscape has been cleansed of viable alternatives and because many officials see no credible pathway to a different outcome. Still, she warns that the absence of a coherent vision for the country’s economic and political future leaves a vacuum that could be filled by new projects or figures if conditions change.
For any significant shift in elite allegiance, her analysis suggests, both internal confidence and external pressures would have to align — a combination that is possible but not imminent given present fiscal and military dynamics.
The Russian economy, as portrayed by Prokopenko, faces a prolonged period of constrained growth driven by sanctions, heavy war-related spending and limited fiscal flexibility, leaving policymakers with shrinking options as they try to balance military priorities and domestic needs.
