Russia’s wartime economy faces growing pressure

After four-and-a-half years of full-scale war with Ukraine, Russia has become a two-tier economy.

“If you are lucky and you’re employed by a tank production company, then everything’s good. Otherwise, you are probably facing problems,” Alex Kolyandr, director for Europe at consulting firm Eurasia Group, told CNBC.

Russia’s wartime economy has been brought into sharper focus in recent weeks by Ukraine’s long-range drone attacks on oil refineries and delivery warehouses.

Though it has defied expectations and is even growing slowly, according to recent data, analysts say this masks problems, such as the Kremlin’s reliance on military spending, higher taxes and subsidized bank lending.

But they question whether this will drive Russia to give up its war. Indeed, Kolyandr warned the worsening economy could incentivize President Vladimir Putin to escalate the conflict.

“If I were Putin, God forbid, I would probably decide that it is in my interest to escalate now and try to finish the war on my terms, than wait until the money ends sometime in the future,” Kolyandr said.

The Russian Embassy in London and Russia’s Foreign Ministry did not immediately respond to CNBC’s request for comment.

Kolyandr said the Kremlin could balance the books with some “bookkeeping acrobatics,” but its economic problems “will not go away and are still mounting.”

He added: “It has already started, through inflation, through the slowdown in the non-military economy, through higher interest rates.”

For the first time since 2023, Russia’s economy returned to growth in the April to June period. The country’s gross domestic product grew 1.3% year-on-year in the second quarter, according to official data published this week, while GDP expanded by 0.6% through the first half of the year. The second-quarter figures surpassed government and central bank forecasts.

The data suggest that government spending on its industrial-military complex and a recent boost in oil and gas prices have helped prop up Russia’s wartime economy.

But Charles Lichfield, director of economic foresight and analysis at the Atlantic Council’s GeoEconomics Center, said the best metrics for understanding what’s going on are the deficit and inflation.

“They are on course to double the deficit they had in 2025 and that was already double what they had in 2024,” Lichfield said, highlighting the country’s depressed energy revenues, despite higher fossil fuel…