Raising the pressure Trump is hitting Russia with sanctions that even Biden shied away from. Can its war-weary economy handle them?

The Russian economy is under pressure, with civilian industries struggling and growth barely holding up. The Central Bank has so far acted cautiously, cutting its key rate by just half a percentage point. Inflation, meanwhile, shows no signs of slowing, keeping loans expensive and demand muted. On top of that, the U.S. has sanctioned Russia’s biggest oil companies, threatening to further weaken revenues and strain the broader economy. How serious could the impact be? Meduza examines the myriad challenges now facing Russia’s economy.

Why didn’t Russia’s Central Bank cut its key rate more?

On October 24, the Russian Central Bank lowered its key interest rate by 50 basis points — from 17 percent to 16.5 percent. This half-measure reflects the regulator’s effort to balance several conflicting forces within the country’s economy:

• Russia’s war-weary economy continues to lose steam. GDP is still showing modest growth in the third quarter, driven largely by the defense sector, while civilian industries remain in decline. But in its updated October forecast, the Central Bank projects that GDP could shrink by 0.5 percent or grow by no more than 0.5 percent in the fourth quarter. For 2025 as a whole, the Bank has cut its growth outlook to 0.5–1 percent, down from 1–2 percent in its July forecast. Sustaining even this fragile growth will require reviving lending and demand — which, in turn, calls for lower interest rates.
• At the same time, inflation — the main reason the Central Bank has kept the rate in double digits — remains high and shows no sign of slowing, preventing the regulator from cutting the rate further. Bringing inflation back to target remains the Bank’s top priority, but it now admits it’s at risk of missing that goal even by 2026. The inflation forecast has been raised from four percent to 4–5 percent, and inflation for the end of 2025 is expected to be around 6.5–7 percent.
• On top of that, U.S. President Donald Trump’s oil sanctions — imposed over Russia’s “lack of serious commitment to a peace process to end the war in Ukraine” and hitting Rosneft and Lukoil, which together account for half of Russia’s oil production — bring neither clarity nor optimism for regulators in Moscow.

According to a senior economist at a Russian think tank speaking on condition of anonymity, the Central Bank couldn’t avoid cutting the rate. At the same time, he pointed to short-term factors that could accelerate inflation, such as the Kremlin’s recent VAT hike from 20 to 22 percent and the likely weakening of the ruble as oil prices fall.

In its updated forecast, the Central Bank raised its prediction for the average key rate in 2026 from 12–13 percent to 13–15 percent. That means borrowing costs will remain high for quite some time, keeping credit expensive across the economy.

One clear beneficiary of the Bank’s position is the ruble. Economist Dmitry Polevoy noted on Telegram that it will likely stay relatively firm for now, gradually weakening later as exports decline.

Meanwhile, the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), a think tank with ties to the Russian government, warns of a growing risk of recession. Its surveys indicate that both public and corporate sentiment toward the economy have turned persistently negative.

What shape is the Russian economy in today?

The combination of sluggish economic growth and high inflation has prompted a growing number of experts to warn about the risk of stagflation. Analysts and the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) echoed this concern in their latest report.

Back in November 2024, Elvira Nabiullina, the head of Russia’s Central Bank, told the State Duma that she didn’t see such risks. “In essence — and we can look at the experience of other countries that have gone through stagflation — this happens when monetary policy is kept unjustifiably loose, when in fact it should be tightened,” she explained to lawmakers.

Indeed, demand in the economy still hasn’t fallen below potential, and unemployment isn’t rising, so it’s too early to call this stagflation, a chief economist at a European bank told Meduza. The economy’s weak growth, he said, is largely the result of resources being siphoned from the civilian sector into the military and the impact of sanctions.

“I’m not too fond of calling the current situation in the Russian economy stagflation,” agreed an economist from a Russian analytical center, “as long as production capacity and the labor force remains fully employed.”

According to Russia’s Federal State Statistics Service, Russia’s unemployment rate fell to 2.1 percent of the active labor force in August, marking a new historic low.

Why are Trump’s oil sanctions such a threat to Russia?

The new sanctions against Rosneft and Lukoil, which the U.S. Treasury announced on October 23, are a serious blow to the Russian economy. They could trigger a cascade of harmful effects: a weaker ruble, shrinking oil and gas revenues, and a recession coupled with high interest rates and inflation. Yet, as the years since February 2022 have shown, much will depend on how strictly the sanctions are enforced and monitored.

The U.S. has warned that any foreign companies — including banks, refineries, ports, and shipping firms — that continue doing business with Russia’s oil giants will face secondary sanctions. Washington has given Rosneft’s and Lukoil’s trading partners one month to wind down existing deals and complete all transactions. In practice, though, payments under those contracts have already stopped, since the companies’ accounts are frozen.

Vladimir Putin’s argument that “a sharp reduction in Russian oil and petroleum products on the global market will drive prices up” also carries weight. Immediately after the U.S. Treasury’s announcement, the price of Brent crude jumped five percent.

Even so, the timing of the sanctions works in Trump’s favor. Unlike in the immediate post-2022 period — when Joe Biden’s administration hesitated to sanction Rosneft and Lukoil for fear of fueling oil price shocks and inflation — the market outlook is now bearish. Analysts expect Brent to trade between $60 and $70 a barrel by late 2025–2026, and possibly lower, sanctions expert George Voloshin told RBC. The International Energy Agency (IEA) predicts a record global oil surplus in 2026. The Russian Finance Ministry itself expects a gradual $1-per-year decline in the base oil price in the federal budget until 2030; by 2026, it expects a price of $59 per barrel.

For Russia, the key now lies in the actions of China and India, its two biggest oil buyers. Over the first nine months of this year, 84 percent of Russian crude exports — 2.1 million barrels per day to China and 1.9 million to India — went to those markets. The infrastructure to bypass sanctions already exists or can be set up quickly. Rosneft and Lukoil will likely have to offer bigger discounts and cut back on new investment, but ultimately everything depends on whether Beijing and New Delhi are willing to risk U.S. penalties. It also remains to be seen whether Washington has the political will to sanction Chinese giant CNPC and its subsidiary PetroChina.

According to Bloomberg, India’s purchases of Russian oil could drop to zero, while Reuters reports that Chinese state companies have already refused to buy seaborne Russian crude. Still, as the outlet The Bell noted in a sanctions analysis, past experience shows a familiar pattern: large Chinese state firms, especially those with foreign shareholders or Western contracts, tend to comply with sanctions, while smaller traders continue buying restricted Russian oil without hesitation.

There’s also precedent for sanctions on major Russian oil producers. Surgutneftegaz and Gazprom Neft were included in the final round of Biden-era sanctions, recalled Sergey Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center in Berlin. “And what happened? Nothing. Those companies kept trading oil as before. There was a brief panic — not so much about those companies, but about Biden’s broader sanctions package — that lasted about a month. The spread between Russian oil and Brent widened for a while, but by March everything was back to normal,” he told Deutsche Welle.

Whether Trump’s sanctions will prove more effective remains to be seen. “Maybe the problem before was that they were Biden’s sanctions, so Trump didn’t care if they worked,” Vakulenko suggested. “He might take his own sanctions more seriously and make sure they’re properly enforced.”

Based on past experience, he believes the most likely outcome is that India will temporarily cut back purchases, while China will maintain current volumes but not replace India’s share. That would mean a drop in Russian oil exports of at least 700,000 barrels per day, reducing foreign currency oil revenues by about 15 percent. “That will certainly create difficulties for both the government and oil companies,” Vakulenko concluded, “but they’re unlikely to be serious enough to change Putin’s stance on the war.”