Russia's war economy hits its limits: reserves near depletion, growth stalls, and dependence on China deepens, Kiel Institute study finds
More than four years into the invasion of Ukraine, a new study by the Kiel Institute and the Stockholm Institute of Transition Economics finds Russia's fiscal reserves largely exhausted, growth at a standstill, and a structural dependence on China that weakens Moscow's long-term position.
Fiscal buffers depleted
Russia's liquid state fund assets have shrunk from 6.5 percent of GDP at the start of the war to just 1.8 percent in April 2026, according to the Kiel Report released on Thursday. The federal budget deficit already exceeded the government's full-year target within the first three months of 2026. Oil and gas revenues collapsed 45 percent in the first quarter compared to the same period a year earlier.
In the first years of the war against Ukraine, the Russian economy proved more resilient than many expected. But now the reserves are used up. The economic fundamentals have weakened considerably.
Growth stalls, inflation risk rises
The Russian government recently cut its own 2026 growth forecast from 1.3 percent to 0.4 percent. The Kiel authors argue even that may be too optimistic, pointing to signs of labour shortages and supply bottlenecks. Outside military priorities, fixed investment has nearly ground to a halt, and Russia's foreign trade volume sits at its lowest level in 15 years.
The fundamental constraint Russia faces today is not access to money, but access to labour, technology, and production capacity.
With record labour shortages and sanctions in place, higher government spending increasingly risks fuelling inflation rather than boosting military capability. The central bank's key rate remains at 14.5 percent, leaving little room to ease pressure on businesses.
China dependency deepens
China now accounts for roughly 35 percent of Russia's total foreign trade and supplies the overwhelming majority of critical dual-use goods and militarily relevant components still entering the country. The report estimates China is responsible for about three-quarters of the increase in Russian imports of sanctioned, critical military components since 2022.
The term 'limitless partnership' masks a growing asymmetry. Russia has gained an economic lifeline, but China has gained leverage.
The authors argue Moscow is turning to Beijing out of necessity, not choice, creating a dependency that props up the war economy in the short term but erodes Russia's economic independence and bargaining power over time.
A window for Western policy
The report frames Russia's growing economic vulnerability as an opening for more effective Western action. The authors call for stricter enforcement of oil price caps, renewed efforts to curb Russia's shadow fleet, tighter export controls especially targeting Chinese suppliers, and new measures to reduce Russian export revenues.
Enforcement of price caps must be at the centre of sanctions policy.
- Russia invades Ukraine; National Wealth Fund liquid assets at 6.5% of GDP.
- Russian government forecasts 1.3% GDP growth for 2026.
- Federal budget deficit already exceeds full-year 2026 target; oil and gas revenues down 45% year-on-year in Q1.
- National Wealth Fund liquid assets fall to 1.8% of GDP.
- Kiel Institute and Stockholm Institute of Transition Economics publish report describing Russian economy in 'end stage'.
Financial system under strain
The Kremlin is increasingly relying on off-budget financing, rapid credit expansion, and indirect support through the banking system to sustain military spending. Corporate debt has risen sharply since the invasion began, as banks channel resources into war-related sectors. The report warns that rapid credit growth in defence-linked industries, weak corporate balance sheets, and growing pressure on bank capital are deteriorating asset quality across the financial system.
