Russia’s war economy: Can Putin withstand Trump’s pressure in Alaska?

As Russian President Vladimir Putin heads to Alaska for a high-stakes summit with US President Donald Trump, his battlefield strategy in Ukraine may be colliding with a new front, economic survival. Behind the Kremlin’s confident rhetoric, signs of strain are emerging that could give Washington unexpected leverage.

According to Bloomberg, Russia’s economic growth has slowed sharply, oil revenues have fallen, and the budget deficit has ballooned to its highest level in more than three decades. Inflation is high, interest rates are at their most punishing in over 20 years, and insiders in the banking sector are warning of a looming debt crisis.

War machine vs. economic reality

When Putin ordered the invasion of Ukraine in February 2022, Moscow bet it could finance a long war without destabilising the home front. Military and national security spending has now soared to nearly $172 billion in 2025, about 8 per cent of GDP, as per Alexandra Prokopenko of the Carnegie Endowment for International Peace, quoted by Bloomberg.

To keep the war economy running, Russian banks, many state-controlled and run by Putin loyalists, were compelled to give “preferential” loans to defence contractors at below-market rates. Harvard’s Craig Kennedy estimates that from mid-2022 to late 2024, corporate debt surged by up to 71 per cent, or about 36.6 trillion rubles ($460 billion), with most of it concentrated in military-linked industries.

The oil price blow

For much of the war, rising energy prices shielded Russia from sanctions. But now, global crude has slipped to around $60 per barrel, and Russia’s discounted oil sells for even less. As per the Bank of Finland’s analysis cited by Bloomberg, this has delivered a heavy hit to state coffers, pushing July’s monthly deficit to 4.9 trillion rubles, even worse than the peak of the Covid-19 pandemic.

The shortfall is draining the National Wealth Fund, Russia’s key fiscal cushion. Economists at the Gaidar Institute warn it could be fully depleted by the end of 2025, stripping Moscow of a major buffer against sanctions.

Despite Russia’s war-driven fiscal expansion, oil and gas revenues, which accounted for roughly 30 per cent of federal income in 2024 are expected to stagnate at around 8 trillion rubles annually through 2027. Bloomberg notes this is a sharp contrast to earlier wartime windfalls, with global crude prices slipping to $60 per barrel and discounted Russian grades fetching just $55 by mid-2025. The resulting shortfall has widened the monthly budget deficit to a record 4.9 trillion rubles in July, forcing Moscow to draw heavily on its National Wealth Fund.

Banking on trouble

High interest rates, raised to 21 per cent in October 2024, the highest in two decades are crushing both consumers and businesses. Many banks are trapped: they must pay high rates on deposits and borrowing while sitting on mountains of low-yield war loans. Even defence firms, supposedly flush with state work, are struggling to repay debts.

The Central Bank of Russia, under Governor Elvira Nabiullina, has quietly allowed banks to roll over bad loans and loosened monitoring rules for the defence sector. That makes it difficult to know the true scale of risk, but senior figures in Moscow’s own banking system, quoted anonymously by Bloomberg, fear a systemic crisis within a year.

A tale of two economies

Defence-linked industries are running hot; the civilian economy is barely ticking over. GDP growth fell to 1.1 per cent in Q2 2025 from over 4 per cent in 2024. The IMF has cut its 2025 forecast to just 0.9 per cent. Sectors like construction, retail and agriculture are seeing rising bankruptcies and falling demand.

Janes’ data, cited by Bloomberg, shows that the majority of Russia’s record $172 billion military budget in 2025 is being absorbed by personnel costs soldier salaries, allowances and benefits, leaving a smaller share for procurement, maintenance and R&D. This spending pattern underscores Moscow’s focus on sustaining troop numbers in Ukraine rather than investing in advanced weapons systems, a choice that could weaken long-term military capability if economic pressures persist.

Trump’s leverage

As per Bloomberg, Trump has openly said Russia’s weak economy could force Putin’s hand in Ukraine talks, even suggesting that lowering oil prices by $10 a barrel would leave Moscow with “no choice” but to scale back the war.

Putin arrives in Alaska asking for sanctions relief, while demanding that Ukraine cede all of Donbas and Crimea. Kyiv and European capitals, excluded from the talks have rejected the terms outright. If Trump uses Russia’s economic fragility as a bargaining chip, it could test how far Putin’s war economy can bend before it breaks.

Russia’s war economy has so far defied Western pressure, but the combination of falling oil revenues, high borrowing costs, and mounting debt risk is eroding its resilience. Whether Putin can sustain his war footing now depends on two things: global oil prices and Trump’s willingness to press his advantage in Alaska.

If Washington turns the screws, through lower energy prices or tighter sanctions, the Kremlin may be forced into compromises it has long resisted. The coming summit could reveal whether Russia’s economic armour is already cracked.

(With inputs from the agencies)