Russia’s Wartime Economic Boom Is Fading: Can Lower Interest Rates Revive the Economy?

Mr. Shirov suggests that a reduction in interest rates will begin positively impacting consumer demand and revive investment by reducing borrowing costs, thereby increasing production.

“Demand is the factor that will drive the economy forward,” he said. “Because if there is demand, new products will be produced, production capacity will be utilized, investment will resume, and this will mark the beginning of a gradual recovery in economic momentum.”

He also recommended that the government redirect spending toward sectors with the greatest potential to support growth, including purchases of domestically manufactured goods for public needs such as ambulances and supporting industrial projects launched in 2022-24 in response to the departure of foreign companies.

According to Mr. Shirov, preserving newly created production capacity would require limited budget resources while helping position the economy for a recovery in demand.

“This capacity (built after foreign companies left the Russian market) could be very useful when demand revives. Supporting this capacity doesn’t require a huge amount of money, and I believe the government can find it, despite all the budget constraints,” he said.

It appears that the Russian government’s thinking is somewhat in line with Mr. Shirov’s assessments and recommendations.

On May 14th, the Russian Industry and Trade Minister, Anton Alikhanov, acknowledged that the civilian industries are increasingly feeling the effects of what he described as a broader economic cooling, and said that the government is looking for additional sources of subsidies for them while pointing to weakening demand, growing debt burdens, and the impact of elevated borrowing costs on manufacturers outside the defense sector.

That said, the aforesaid problems are cyclical in nature and are relatively easier to address than the more entrenched structural challenges stemming from defense-sector prioritization, international sanctions, and long-term demographic deterioration.

The Deeper Challenges Facing Russia’s Economy

Investment activity, often viewed as a key measure of future economic performance, has weakened considerably in the case of Russia.

Fixed capital investment fell by 14.3% year-on-year during the first quarter of 2026. The decline represents one of the steepest contractions in investment activity since the global financial crisis and raises questions about the sustainability of future growth.

According to a Russian Lawmaker from Siberia, the declining investment sentiment stems from the Russian government’s military expenditure, which constitutes around 40% of federal spending.

“What development, investment, or capital expenditure can we even talk about? Neither tanks nor shells have consumer value: the economy produces them, but they can’t be consumed by the population. They’re pure expenses,” Renat Suleimenov, a State Duma representative from Siberia, said in an interview with Continent Siberia.

Mr. Suleimenov rightly notes that defense production can support employment and wage growth, but it does not directly contribute to consumer demand and comes at the expense of social and investment spending.

He also points out that even if hostilities in Ukraine end, restructuring Russia’s federal budget will be easier said than done, cause it will come with its own set of challenges.

“Adopting a budget that reduces military spending isn’t the most difficult task. But what will happen to those employed in the defense industry? To those currently serving in the armed forces? A million people will return to civilian life. Where are the jobs, decent wages, and social adaptation? The problems won’t subside,” said Mr. Suleimenov.

“Moreover, the issue of rebuilding new territories will arise. I saw Mariupol in 2022 and the steppes of the Kherson region in 2023: there were no houses left, no Soviet irrigation systems. Rebuilding has already begun. But colossal budget expenditures will continue,” he continued.

Also, as stated earlier, Russia’s profits in the oil and gas sector dropped by 63.9% in 2025, which should be a cause of significant concern because the energy sector remains a major source of government revenue and foreign currency earnings.

This drop in profits in the energy sector is caused by several factors, including persistent Western sanctions that have forced deeper discounts on Ural crude, complicated logistics via the shadow fleet, and raised compliance and insurance costs, alongside Ukrainian strikes on refineries and infrastructure that are disrupting operations and investments.

In the long term, these challenges could become even more severe, causing technological isolation due to sanctions, ageing fields requiring costly maintenance, and over-reliance on a few export routes and buyers.

For instance, there had emerged a trend around September 2025 wherein Russia’s Urals crude had begun to lose its demand among China’s refiners due to lengthy shipping distances for Far East Asian end-users, several sanctions-related complications.

Experts in Russia have already begun voicing concerns that the country’s oil exports could soon become dependent on only one buyer – China.

Per the data put out by the Institute for Energy and Finance (IEF) in Russia – which claims to actively participate in Russia’s foreign energy policy and energy diplomacy, and in the development of state and corporate strategic planning documents – China accounted for 43% of total Russian oil exports in 2025, and its share could reach up to 50% by 2026.

The IEF further pointed out in a post on Telegram on February 13th that given the observed decline in seaborne Russian oil shipments to Turkey, as well as the complete cessation of oil supplies from Russia to the European Union by the end of 2027, China’s dominance as the main buyer of Russian oil will only increase.

Other than that, Russia is also contending with a severe demographic decline, which is contracting its working-age population. The labor shortage across several sectors in Russia other than defense, observed in the years following the Ukraine conflict, was merely an exacerbation of an already existing trend.

To put this in perspective, in 2024, the Bank of Russia reported that 73 percent of the country’s businesses were understaffed. In that same year, Kremlin spokesman Dmitry Peskov described Russia’s low birth rate as “catastrophic for the future of the nation,” according to state-media reporting cited by Reuters.

Rosstat data showed that 195,400 children were born in Russia in January-February 2025, down 3% from the same period a year earlier. Demographer Alexei Raksha said the country likely experienced its lowest quarterly birth rate since the early 1800s, while February’s figure was the lowest monthly total in over 200 years.

Currently, Russia’s total fertility rate is estimated at approximately 1.36–1.37 children per woman, significantly below the replacement rate of 2.1 needed to maintain population stability without immigration.

Tanmay Kadam is a geopolitical observer based in India. He has experience working as a Defense and International Affairs journalist for EurAsian Times. He can be contacted at tanmaykadam700@gmail.com.