(MOSCOW) – As the war in Ukraine enters its fifth year, Russia’s economy is showing increasing strain, with its oil industry under growing pressure from falling revenues, high borrowing costs and a rise in bankruptcies.
During the first two years of the invasion, Russia’s economy outperformed many forecasts. Gross domestic product growth was supported by sharply increased military spending and record oil and gas revenues. Since then, however, the Kremlin has struggled to control inflation. Interest rates have surged and growth has stalled.
In recent weeks, the energy sector has faced particular difficulties. Reports indicate that about half of Russia’s oil fields are now unprofitable. A wave of bankruptcies has affected small and medium sized oil companies. The deterioration of the energy industry has direct implications for Russia’s ability to sustain its war effort.
Russia’s military spending since 2022 was largely financed by oil and gas income, which typically accounts for around 30 to 35 percent of federal budget revenues. When the Russian dictator Vladimir Putin launched the full scale invasion, Brent crude traded at about 100 US dollars per barrel. In the months that followed, geopolitical disruption pushed prices higher, peaking in mid June 2022. Despite selling at a discount, Russia was earning up to 1 billion US dollars per day.
By late 2024, conditions had changed. Oil prices fell to around 70 US dollars per barrel, reducing foreign currency earnings. The Kremlin responded with looser fiscal and credit policies. Inflation, which had fallen to 2.5 percent in April 2023, rose again, exceeding 10 percent in early 2025.
The central bank raised its key interest rate to 21 percent by the end of 2024. Higher borrowing costs weighed on businesses and households. Growth, which had appeared resilient earlier in the war, has since stagnated, with near zero expansion forecast for the foreseeable future.
Despite domestic weaknesses, oil and gas exports continued to fund the war. Western sanctions limited access to European markets, but Russia redirected supplies to Asia, notably India and China.
Over the past year, however, energy revenues have declined further. Income from the sector reached 93 billion euros in 2025, equivalent to about 101 billion US dollars, down from an initial forecast of 120 billion euros, or about 130 billion US dollars.
Several factors contributed. A stronger ruble, which appreciated by 45 percent against the US dollar last year, reduced the local currency value of export earnings. A global oversupply of crude lowered prices. Additional sanctions also had an impact. After the United States imposed restrictions in October on major producers including Rosneft and Lukoil, the discount on Russian oil compared with Brent widened to about 27 US dollars per barrel, more than double the level at the start of 2025.
Demand has also been affected by a European Union ban on imports of fuels refined from Russian crude, which came into force last month. India agreed to curb purchases under a recent trade deal with the United States. Last year India was the largest buyer of seaborne Russian oil, importing about 1.7 million barrels per day, roughly half of Russia’s seaborne exports. In January, imports fell to about 1.1 million barrels per day, despite discounts reportedly as low as 25 US dollars per barrel. Further declines are expected.
China may absorb some additional supply, but its inventories are already high by historical standards. Russia accounted for around one fifth of China’s crude imports last year, and Beijing has traditionally avoided excessive reliance on a single supplier.
With export revenues falling and borrowing costs elevated, domestic producers are under strain. According to official statistics agency Rosstat, half of oil and gas companies are unprofitable. Between January and November they reported combined losses of 575 billion rubles, approximately 6.3 billion US dollars. Profitable firms saw earnings more than halve to 3 trillion rubles, about 33 billion US dollars, over the same period.
By the end of 2025, two oil companies had filed for bankruptcy and another had been declared bankrupt. The central bank said banks had restructured 2.7 trillion rubles in loans to the sector, roughly 30 billion US dollars, making oil and gas the largest category of loan restructurings.
Drilling activity has slowed markedly. Industry data show production drilling in 2025 fell to its lowest level since the pandemic. In January 2026, crude output averaged 9.22 million barrels per day, more than 300,000 barrels below Russia’s OPEC quota and the first time in recent years that production fell below the agreed level.
Public finances have also deteriorated. The budget deficit widened to 2.6 percent in 2025, significant for an economy facing 6 percent inflation and restricted access to international capital markets. The government has drawn on the National Wealth Fund, its reserve of foreign currencies and liquid assets including gold. A report by Gazprombank’s Centre for Economic Forecasting warned that the fund could be depleted within 15 months if current oil prices persist.
Despite mounting pressures, the Russian dictator appears unlikely to alter course. He may be hoping for a rise in global oil prices. Some analysts note that escalation in the Middle East could lift prices. More broadly, the Kremlin seems to be betting that Western political support for Ukraine will weaken before Russia exhausts its financial reserves.
