Russia economy meltdown as Putin faces prospect of 'very severe stagnation'

For the first time in his second term, U.S. President Donald Trump has imposed Ukraine-related sanctions on Russia, targeting the country’s oil giants Lukoil and Rosneft, which together produce nearly half of Russia’s oil output.

The move has triggered an immediate economic reaction in Moscow. On Friday, the Russian Central Bank raised its 2026 inflation forecast to 4–5%, up from its previous estimate of 4%. The bank cited the impact of new U.S. sanctions, along with higher fuel costs and the upcoming VAT increase, as major inflation drivers.

President Vladimir Putin called the sanctions “serious” and admitted they would cause “certain losses,” but he insisted that Russia’s overall economy would remain stable.

However, many economists see trouble ahead. Yevgeny Kogan, an independent Russian economist, warned on Telegram that “the Central Bank is essentially hinting at severe economic stagnation next year.”

Russia’s economy is already feeling the strain growth is expected to slow to around 1% in 2025, while high interest rates continue to suppress investment. On Friday, the Central Bank cut its key rate slightly from 17% to 16.5%, a move analysts called more symbolic than substantial.

Some experts argue that the bank should lower rates more aggressively to stimulate spending and investment, while others say maintaining higher rates is necessary to control inflation, especially with rising fuel and food prices.

Businesses, however, are pushing back. They claim that borrowing costs remain too high and are stifling production. Many firms say interest rates need to drop to 12–14% to revive growth.

Meanwhile, the Central Bank is walking a tightrope. As Politico notes, Governor Elvira Nabiullina faces the challenge of balancing foreign sanctions, domestic inflation, and the high demand for military production amid Russia’s ongoing war in Ukraine.

In its latest outlook, the bank revised its average interest rate estimate for 2026 upward from 12–13% to 13–15% signaling that tight monetary conditions are likely to continue well into the next year.