In August 1998, Russia endured a financial crisis that laid bare the fragility of the state’s public finances and dragged it into the realm of banks, wages, and savings. The ruble devaluation, the partial debt-service moratorium, and banking restrictions swiftly eroded the confidence of households and businesses. Queues outside financial institutions, the depreciation of deposits, and official statements urging calm transformed a fiscal crisis into a social ordeal.
That episode left a lasting impression on Russian politics: the stability of power depends also on its ability to protect the material life of the population. Vladimir Putin built much of his legitimacy on the promise that that would not happen again. Putinism was a restoration of national pride, but also of material predictability: pensions paid, wages up to date, and cheap gas as a symbol of a strong state. Afterward came war, and for a time it seemed that that promise could endure even the frenzy. Many concluded that the Russian economy was stronger than the West had imagined. Perhaps the interpretation was too simplistic. Russia has not shown as much strength as the ability to postpone costs.
“In Russian politics, the stability of power depends also on its ability to protect the material life of the population”
Moscow will likely find resources to keep financing the war. Some money can always appear when a state controls banks, companies, judges, statistics, and fear. What matters is who pays for this war now. In the first two years, it was sustained by extraordinary energy revenues, the cushion built up through prior austerity, and a society that cannot ask too many questions. In 2026, that scaffolding begins to crumble. Not because the Kremlin will run out of rubles tomorrow, but because every new ruble buys less stability and causes more internal damage.
The first point of erosion is the National Wealth Fund, the war chest with which the Kremlin could present itself as besieged yet solvent. According to the Endgame report, from the Kiel Institute and the Stockholm Institute of Transition Economics, the fund’s liquid assets have fallen from 6.5% of GDP at the start of the invasion to barely 1.8% in April 2026. Before the war, the fund held about $210 billion; since then, cash on hand has been reduced by $60 billion. An authoritarian state can function for a long time without welfare, but it functions worse without a cushion.
The federal budget no longer sets priorities: it covers holes. In only the first quarter of 2026, the deficit surpassed 5.9 trillion rubles, above the target for the entire year, while revenues from oil and gas fell by about 45% year-over-year. In 2025, military spending reached around 16 trillion rubles, about 7.5% of GDP. To compensate, Putin raised the VAT from 20% to 22% starting January 1, 2026. War is not a policy of economics; it is a way of reorganizing the economy around that which does not produce a civil future.
“Only in the first quarter of 2026, the deficit exceeded 5.9 trillion rubles, above the target for the whole year”
A wartime economy can grow GDP while impoverishing the country at the same time. Producing shells, drones, and armored vehicles generates activity, but absorbs workers, credit, and investment that would otherwise go to housing, health, or education. The result even appears in official forecasts: Vice President Alexander Novak admitted in May that GDP would grow by barely 0.4% in 2026, versus 4.1% in 2024. The official inflation figure hovers around 6%, but independent economists place it closer to 20%, with staples approaching 30% in some estimates. Russia can show resilience in big numbers, but that resilience rests on an economy where the military displaces the civil and inflation acts as a silent tax.
The Central Bank has attempted to act as the last adult in a room full of generals and propagandists. The tension peaked in June 2026, when Governor Elvira Nabiullina disappeared from public life for nearly two weeks: she skipped the St. Petersburg Economic Forum, a Kremlin meeting, and several scheduled appearances. The Kremlin said she was ill and Peskov urged not to feed conspiracy theories. Days earlier, Putin had publicly told top government officials that “there are grounds to expect a rate cut,” an explicit pressure on an institution that is supposed to be independent. When Nabiullina reappeared on June 19, the central bank cut only 25 basis points, to 14.25%, half of what businesses and banks were expecting.
According to the Financial Times, Russian authorities have begun discussing candidates to replace her before the end of her mandate in 2027. Among the names circulating is Piotr Fradkov, head of Promsvyazbank, the state bank historically linked to the military-industrial complex. Fiscal policy is stepping on the accelerator while monetary policy tries not to crash into the wall. If Nabiullina’s successor comes from the defense sector, that contradiction will stop being managed and will begin to be resolved in favor of the war.
Another crack opens in energy. Ukraine has understood that not all sanctions are signed in Brussels: some are imposed by force. The drone campaign against refineries, depots, and ports has turned Russia’s interior into a perforated rear. In June 2026, gasoline production fell by about 25% versus the same month a year earlier. Several regions faced restrictions and queues. The Moscow refinery was damaged and would need at least half a year to regain capacity. Russia, one of the world’s major oil producers, has had to contemplate fuel imports. It is an oil state forced to ration the calm it once sold as abundance.
“Russia, one of the world’s major oil producers, has had to contemplate fuel imports”
The banking sector is the third sensitive point. A bank freeze does not seem imminent, but it cannot be ruled out either. Russia can impose limits, force conversions, recapitalize entities, and punish any panic narrative. Yet since 2022, the Kremlin has compelled banks to extend preferential loans to the armaments industry, creating what researcher Craig Kennedy calls a “hidden war debt” estimated between $207 billion and $249 billion. When banks finance defense industries, refinance zombie companies, and soak up public debt while soothing anxious depositors, they cease to be mere financial intermediaries and become engines of mobilization. Russian banking does not have to fail to be dangerous: it is enough for it to become a mechanism of internal extraction.
Putin does not need to squeeze the economy all at once. He can do it by accumulation: inflation, taxes, forced debt, negative real interest rates, capital controls, and the slow deterioration of civil services. As The Moscow Times noted in early 2026, “the spike in wartime military spending is fading and its costs will be shifted through higher taxes.” Long wars are financed with thousands of small transfers from everyday life into the state machinery. A liter of gasoline more expensive, a loan that remains out of reach, a pension that buys less, a young man going to the front because the military wage exceeds any local expectation: that is how war is socialized.
The great external support for this scheme is China. Moscow is not isolated from the world; it is reintegrated into it in a closer and more subordinate way. Beijing buys, sells, supplies components, and prevents Russia from falling into autarky. But every month of war reduces Russia’s room for maneuver and increases its dependence on a power that does not need to save Moscow out of historical affection, but to manage it as a useful supplier. A power that in 2022 claimed to fight for its strategic sovereignty is becoming, in 2026, less sovereign.
“Economic exhaustion does not automatically produce political moderation. Sometimes it yields the opposite: more violence, more haste”
Europe should view this process without triumphalism. The Russian economy is not about to completely crumble. Authoritarian regimes can metabolize a notable amount of poverty, fear, and deterioration: they hide statistics, jail complaints, shift costs to distant provinces, and convince part of the population that suffering is a form of patriotism. Russian history is full of states capable of losing a lot without surrendering quickly. Economic exhaustion does not automatically produce political moderation. Sometimes it yields the opposite: more violence, more haste, more need to achieve on the battlefield what the economy can no longer sustain indefinitely.
If the Russian war enters a phase of diminishing returns, Europe should not interpret fatigue as a sign of end, but as an opportunity. Strengthening Ukrainian defense, tightening the enforcement of the oil price cap, pursuing the phantom fleet, reducing residual purchases of Russian energy, closing avenues of technological triangulation, and sustaining pressure on refineries, logistics, and finances are not loose moral gestures. They are ways to accelerate turning the war into a political cost for the Kremlin. It is not enough to sanction Russia; one must prevent Russia from turning every sanction into a commission paid to intermediaries.
In the first week of September 1998, when the default had already struck banks, the ruble, and presidential authority, The Wall Street Journal declared: “The Russian economy is not a defective market system; it is a highly sophisticated feudal system disguised as capitalism.” The phrase pointed to the persistence of a form of power in which the economy never fully emancipates itself from hierarchy, property never separates from favor, and wealth circulates less as a right than as a concession.
“The war economy has recovered the most Russian principle of feudalism: all property is a concession of power”
This continuity links 1998 with today’s Russia. The country has changed reserves, partners, language, and enemies, but has not completely broken with the old patrimonial logic in which society exists as the state’s available depth. Once it was banks, oligarchs, privatizations, and the ruble. Now it is refineries, directed credit, military salaries, inflation, and provinces that deliver men in exchange for income. The war economy has revived the most Russian feudal principle: all property is a concession of power and every life can be claimed as service.
The contradiction closes the circle. Putin promised to redeem the humiliation of 1998 by building a state capable of protecting the country from chaos. The war has slowly inverted that promise. The power no longer protects society from fragility; it manages society’s fragility to protect itself. Perhaps the Russian power will manage to save itself again. The country, in turn, may emerge from that salvation smaller, poorer, and more captive to its own history.
