How strong is the Russian economy? Can it compete with Donald Trump's might?

President Donald Trump is combining diplomatic overtures with economic threats to persuade Russia to end its war in Ukraine. Trump raised the stakes of his approach this week, when he announced plans to meet President Vladimir Putin, on the same day that he said he would punish India for buying Russian oil by doubling U.S. tariffs. Over the past month, Trump has repeatedly threatened to cripple Russia's war economy if Putin doesn't agree to a ceasefire, either by imposing new sanctions or by closing off the remaining markets for Russian oil. The Kremlin has so far brushed off Trump's ultimatums, saying it intends to push ahead with its latest offensive.

Russia significantly increased state spending after launching its invasion in 2022, engineering an economic boom. That boom is over. The country's economy is expected to grow 1 per cent to 2 per cent this year, down from 4.7 per cent in 2024, NYT News Service reported.

Oil revenue is falling. Most civilian industries have stopped growing. High interest rates are stifling private investment, and large companies are starting to furlough workers.


"The largest Russian companies are unable to spend money on their development, on building new power plants, building new factories, pipelines, railways," Dmitri Gusev, a pro-government Russian lawmaker, said a news conference Tuesday. "The investment programs are shrinking."

Putin's experienced team of economic firefighters has so far prevented the slowdown from turning into a crisis. Some policymakers have even welcomed the cooling economy. Russian consumers and businesses are more cautious about spending and that has reduced runaway inflation, slowed down speculative lending and eased labor shortages.

"The economy is returning to more balanced growth," Elvira Nabiullina, the widely respected Russian central bank chief, said in July.

Russia's inflation stands at about 9% a year, and interest rates are at 18%. That has so far had a muted effect on many ordinary Russians, because wages in many sectors rose faster than prices, and because Russians with money in the bank are collecting high interest.

Paradoxically, despite the tremendous human toll, the war raised the living standards of an average Russian to the highest level in a decade, according to a recent research paper by Sinikka Parviainen and William Pyle, economists at the Bank of Finland.

The slowdown is eating into those gains -- and the political stability that they brought -- but at a pace that at the moment is not fast enough to deter the Kremlin's war strategy.

Q: What are the risks?

A: The biggest risk to Russia's economy comes from declining oil revenue, which has fallen 18% so far this year, primarily because of weaker global oil prices.

Lower revenue has already forced the Russian government to raise its estimates for this year's budget deficit from 0.5% to 1.7% of gross domestic product.

Analysts expect the government to bridge the budget gap by using the remainder of the country's sovereign wealth fund, by selling debt to local banks and by cutting social spending and infrastructure investment.

These measures are unlikely to affect Putin's ability to wage war, analysts said.

The government has protected military spending, currently at about 8% of gross domestic product, and it is expected to spend at least the same amount next year, said Alexandra Prokopenko, a Russia economy expert at the Carnegie Russia Eurasia Center, a Berlin-based research organization.

Q: Will Trump's measures make a difference?

A: Even Trump has cautioned that economic pressure on Putin, through tariffs on his trade partners or further sanctions, may not work.

Trump's main target is Russia's oil revenue, which provides about a third of the federal budget.

"Putin will stop killing people if you get energy down another $10 a barrel," Trump said in an interview with CNBC on Tuesday.

Trump's first salvo was to threaten India with an additional 25% import tariff for buying Russian oil.

India has substantially increased imports of Russian crude since the start of the war to benefit from the discounts offered by Russian traders to offset the loss of Western customers. India is now the second largest buyer of Russian oil after China.

Indian officials pushed back against Trump's tariffs and said they intend to continue buying Russian oil. But Indian refiners already appear to be getting a larger discount on Russian oil to compensate the geopolitical risks, according to analysts.

Over the past two weeks, the difference in the price of Russia's main crude blend and global benchmark widened by $5 a barrel on the Indian market, Homayoun Falakshahi, an analyst at oil data firm Kpler, wrote Wednesday, adding that he expected the gap to increase.

A $10-a-barrel drop in the price of Russian oil would raise Russia's budget deficit by 0.8% of its GDP, according to Prokopenko. "This is not catastrophic for the Kremlin," she said. "The Kremlin is convinced that even low oil prices are not threatening its defense industry."