Moscow says the war economy is resilient and Western sanctions have failed. The sacking of a state development bank’s chief economist, and the numbers behind his warning, tell a more complicated story.
Within the space of a single week in August, the world was handed two irreconcilable accounts of the same economy.
In the first, Russian officials told global media that the domestic economy has kept a strong and healthy profile despite what they described as unprecedented foreign pressure since the full-scale invasion of Ukraine in early 2022.
The Russian embassy in London told CNBC that the country’s fiscal position remains ‘significantly stronger’ than that of many Western economies, pointing to foreign public debt of around $57 billion, and noting that this is ‘considerably less’ than what the United States, the United Kingdom, Italy or France spend on debt servicing alone.
In the second account, Andrei Klepach, for twelve years the chief economist of the state development corporation VEB.RF and before that a deputy economy minister, was removed from his post on August 16 after remarks he made in May began circulating in Russian media.
He had told a gathering of economists at the Moscow Exchange’s Nikitsky Club that the country was losing the technological and economic contest, that it would not win a war of attrition, and that the country was heading towards a social crisis.
Both accounts contain truths. The gap between them is where the real story sits.
Absorbing four-and-a-half years of sanctions
Russia has been the target of the most extensive sanctions regime ever applied to a major economy, but it has not collapsed. It has not come close.
The adaptation happened along three main lines. Trade was redirected, with crude and refined products rerouted from Europe to India, China and Turkey, moved on a shadow fleet of ageing tankers that has grown faster than Western authorities can designate it.
The European Union’s twentieth sanctions package, adopted in April 2026, added 46 more vessels to the port access ban, taking the designated total past 630, which is itself an indication of how large the fleet has become.
Second, the state stepped into the vacuum left by departing Western firms. Public spending, above all the defence order, replaced private investment as the engine of demand. In 2023 and 2024 that produced growth above 4% a year, which was less a boom than a fiscal injection with a growth rate attached.
Third, the macroeconomic plumbing held. The central bank under Elvira Nabiullina defended the rouble aggressively, ran a genuinely orthodox inflation-targeting policy, and imposed rates that reached 21% before easing began. Inflation was brought down from around 9.5% to below 6%. Sovereign external debt stayed low, which is exactly the point the embassy is making.
So, the headline claim survives scrutiny. Russia’s external public debt is modest, its banking system has not seized up, its shops are stocked, its currency has not spiralled, and unemployment sat at 2.2% in June. Anyone who predicted a 2022-style implosion was wrong.
Where things have actually deteriorated
Low foreign public debt is partly a symptom of exclusion rather than a sign of health. Russia cannot borrow abroad because foreign capital markets are shut to it, so the debt it does not owe overseas is a measure of what it cannot access, not of what it has chosen to avoid. The pressure has simply moved to the domestic balance sheet, and there the numbers are less comfortable.
Between January and July 2026, the federal budget ran a deficit of 6.46 trillion roubles, roughly $79 billion. That is already well beyond the full-year target of 3.79 trillion roubles, which was set at 1.6% of GDP.
Depending on the GDP base used, the seven-month gap works out at somewhere between 2.5% and 2.8% of output. Former deputy central bank chairman Sergei Aleksashenko expects the full-year figure to land between 7 and 7.5 trillion roubles, roughly 3% of GDP.
The composition of that gap matters more than its size. Oil and gas revenues fell 16.8% year on year to 4.6 trillion roubles, despite a Middle East conflict that briefly pushed crude sharply higher. The domestic fuel damper mechanism, which compensates refiners for selling into the home market below export parity, consumed most of the windfall.
Meanwhile, spending has run ahead of plan, with government procurement including the state defence order up around 40% year-on-year to 8.44 trillion roubles by the end of July, some 80% of the entire annual allocation.
The finance ministry raised 2.3 trillion roubles through OFZ bond issuance in the first seven months, largely absorbed by state banks, and then paused placements because yields near 16% made the exercise punitively expensive. Debt servicing has become one of the largest single lines in federal spending.
Around 460 billion roubles was drawn from the ‘National Wealth Fund’, about 200 billion roubles came from selling nationalised assets, and roughly 3.5 trillion was covered by running down Treasury balances parked in commercial banks, with a little over 4.5 trillion left in that pool.
The cushion that made the first years of the war survivable has largely gone. Before February 2022, the National Wealth Fund held around $113 billion in liquid assets, equal to 7.3% of GDP. It is now worth roughly a third of that in real terms, at about 2% of GDP. A fund designed to co-finance pensions has been spent covering a war.
The corporate picture behind those aggregates is weakening in parallel. More than half of Russia’s large companies closed 2025 with lower profits, and many have cut or frozen investment programmes outright.
The coal sector, hit by falling global prices, sanctions and rising rail tariffs, has been running at a loss across a majority of its enterprises. Regional finances have deteriorated alongside, with the great bulk of Russia’s regions running deficits simultaneously for the first time. None of this shows up in a sovereign external debt figure.
The rest of the bill has been passed on to households and firms. VAT went to 22% at the start of 2026, the highest rate since 1992, and the revenue threshold at which smaller businesses must register for it was cut sharply. VAT receipts rose almost 25% in the first seven months. That is not economic growth. It is a transfer from the private sector to the treasury, and it is being made in an economy where growth has already stalled.
What Klepach actually said
Klepach’s speech on May 21 was not a dissident manifesto. It was a technical diagnosis delivered to a room of professional economists, which is part of why it was so damaging when it surfaced.
He began by apportioning blame for the slowdown. Around half of it, he argued, came from the central bank’s extremely tight monetary policy, which had crushed investment and, in combination with reduced subsidised lending, dampened consumer demand.
Roughly 30% he attributed to industrial policy failure, citing the surrender of the vehicle market to Chinese manufacturers, who now account for close to half of passenger car sales and more than 70% including local assembly, and 60% of trucks.
He then went through the sectors. Design and technical problems in the new domestic civil aircraft programme. Weak demand in construction materials and metallurgy. Raw material shortages and import dependence in light industry.
His conclusion on monetary policy was pointed. Not every barrier, he said, comes from the central bank, and even a substantial rate cut would not deliver rapid growth.
His medium-term ceiling for the economy, assuming the war continues and sanctions hold, was 2% to 2.5% a year. Then came the passages that ended his career.
“We won’t win the competition in this war of attrition,” he said, adding that Russia was losing not only to China and the United States but in some ways to Ukraine, which he acknowledged was an unpleasant thing for him to say.
Ukraine’s economy is partly destroyed and demographically shattered, he noted, but it is being financed by the West at a scale that dwarfs Russian capital outflows. The assumption that it would simply collapse has not held, and will not hold.
His summary was that Russia would not fall apart and would not suffer economic collapse, but that its lag would keep widening, and that he was almost certain the country was heading for a social crisis. He added that these things arrive when nobody expects them, and reminded his audience that ‘no one expected the February Revolution either’.
VEB.RF Chairman Igor Shuvalov reportedly acted after a call from above. An acquaintance told the business daily Vedomosti that the dismissal was related to personal and harsh assessments that could not be reconciled with the corporation’s official position.
Testing his analysis against the data
The striking thing about Klepach’s assessment is how closely it tracks the official numbers, including the ones Rosstat published after he spoke.
Second-quarter GDP grew 1.3% year-on-year, beating both the central bank’s 0.8% estimate and the economy ministry’s 0.9%. Taken alone, it reads as vindication for Moscow. Taken in context, it does not. The first quarter contracted 0.2%, the first decline since 2023, so first-half growth came to just 0.6%, around half of last year’s pace and a fraction of the wartime surge of 2023 and 2024.
The quarterly rebound also rests on temporary supports. There were 5% more working days than a year earlier. Federal spending in the quarter rose about 13% to 11.5 trillion roubles, with government procurement up 38.5%. Retail turnover jumped 7.2%.
The economy ministry itself cut its 2026 growth forecast threefold in May, from 1.3% to 0.4%, and the central bank in July projected a range of zero to 1%.
Underneath the aggregate, the two-speed structure Klepach described is visible in the data. Industrial output growth accelerated only because a defence complex flush with orders offset declines elsewhere.
Civilian manufacturing, excluding oil, fell 2.1% in June and remains close to 4% below its 2024 monthly average, on calculations by the Centre for Macroeconomic Analysis and Short-Term Forecasting. Civilian industry as a whole has been contracting by more than 3% year-on-year.
The energy picture has deteriorated faster than he could have anticipated in May. Sustained Ukrainian drone strikes have pushed Russian refinery runs to roughly 3.6 to 3.9 million barrels a day in July, the lowest in more than two decades and about a third below the seasonal norm, with 18 refineries targeted in that month alone.
The resulting petrol shortages forced export restrictions and drove the central bank to raise its 2026 inflation forecast to between 6% and 7% while cutting the key rate by only a quarter point to 14%. Most of the damage will not appear in the national accounts until third-quarter data.
The labour market completes the picture. Unemployment of 2.2% sounds like strength, but it reflects a workforce hollowed out by casualties, emigration and recruitment, with authorities projecting a shortfall of around 3.1 million workers by 2030. An economy cannot grow out of stagnation with no spare labour, no spare capital, and a central bank rate in double digits.
Reading the social crisis warning
Klepach was careful about his terms, and the care is the substance of the argument. He explicitly ruled out collapse. What he described is slower, less dramatic, and harder to reverse.
The mechanism runs roughly as follows. Growth settles near zero while inflation stays around 6%, so real incomes barely move. Growth in real disposable income could be as little as 0.6% this year.
Inequality, which narrowed in 2023 and 2024 as military wages and defence sector pay lifted incomes in poorer regions, has begun widening again. Pensions are falling further behind wages. Tax rises are squeezing small and medium-sized businesses hardest, and those firms employ the people who are not on the defence payroll.
Klepach also cited survey evidence that perceived healthcare quality is deteriorating, which is what happens when nearly 40% of federal spending goes to defence and security.
There is also a quieter adjustment happening beneath the headline employment figure. Vacancies have been falling while the number of CVs in circulation rises, a pattern that usually signals hidden unemployment rather than a tight market.
Employers have responded to cost pressure by cutting hours, freezing pay, and shedding administrative staff rather than by making formal redundancies, which keeps the official rate low while incomes stagnate. Demand for second jobs has risen sharply.
A labour market can look fully employed and still be delivering falling living standards, and that combination is exactly what produces political surprises.
The politics of this are more delicate than the economics. The war economy created a large constituency of beneficiaries, from contract soldiers and their families to defence plant workers in regions that had seen no investment in decades.
A social crisis in Klepach’s sense is what happens when that constituency stops growing and starts shrinking, when the payments stop rising in real terms, when the coal towns and civilian factories that were already unprofitable finally close, and when veterans return to a labour market with no room for them. His invocation of February 1917 was not a prediction of revolution. It was a reminder that this category of breakdown is not forecastable from a spreadsheet.
Slow decline
The embassy is right that Russia is not about to default or implode, and Western policymakers who keep waiting for a cliff edge will keep being disappointed. Klepach is right that an economy running at 0.4% growth, financing a war by taxing its own citizens and draining its Treasury balances, with its refining base under weekly attack and its technological gap widening, is not healthy in any sense that matters over a decade.
The indicators worth tracking are the full-year deficit against Aleksashenko’s 7 to 7.5 trillion rouble estimate, the resumption or otherwise of OFZ issuance, third-quarter GDP once the fuel crisis lands in the data, and real disposable income growth into 2027.
The most telling signal, though, has already been given. When a state corporation dismisses one of the country’s most respected macroeconomists for describing the contents of its own government’s forecasts, the problem is no longer only economic.