Study: Russia's War Economy on the Brink of Collapse

A new European research collaboration shows that Russia's war economy is in its final phase: the national welfare fund has been depleted, the 2026 budget deficit exceeded the full-year limit in the first quarter alone, and hidden government debt through the banking system has risen to a dangerous 50 percent of GDP. Economist Moritz Schularick analyzes why Putin's system may be on the verge of collapse.

A new European research collaboration has highlighted worrying signals about Russia's economic situation. According to experts, the Kremlin's war economy has reached its final stage. The research findings show that the country's national welfare fund has been largely depleted, meaning Moscow no longer has a significant buffer against economic shocks.

Budget Deficit and Hidden Debt

Particularly concerning is the fact that Russia's planned 2026 budget deficit was already exceeded in the first quarter, meaning more was spent in the first three months than budgeted for the entire year. Additionally, hidden government debt channeled through the banking system has risen above safe levels, reaching an estimated 50 percent of GDP. Such concealed debt burden makes Russia's financial system extremely fragile.

German economist Moritz Schularick explains that Putin's economic model has fundamental structural weaknesses that become increasingly acute as the war drags on. In his assessment, the combination of depleted reserves, rapidly growing deficits, and hidden debt is a sign that the system is unsustainable.

What Does This Mean for Europe?

From a European security perspective, Russia's economic fragility is an important factor. On one hand, economic difficulties may pressure the Kremlin into peace negotiations; on the other, it could lead to unpredictable behavior. According to experts, Europe must be prepared for both scenarios and continue strengthening its defense capabilities.

The research findings underscore that Western sanctions and the pressure of military spending affect Russia's economy far more severely than the Kremlin's official rhetoric admits. In Schularick's assessment, the coming months may shed light on whether Russia can economically sustain its current military effort.