Sanctions and the Russian Economy: 2026 Mid-Year Assessment

KSE Institute presents a new edition of its biannual assessment of the state of the Russian economy and the impact of sanctions, Sanctions and the Russian Economy, covering the first half of 2026. It examines key developments in sanctions policy, documents the state of the Russian economy, shows how macroeconomic and fiscal vulnerabilities are deepening, and presents a comprehensive set of sanctions proposals.

Sanctions policy advanced in several important areas during 2026, including the continued targeting of the shadow fleet and its ecosystem, anti-circumvention measures, and broader restrictions on Russia’s financial and military-industrial infrastructure. However, serious disruptions to global energy flows caused by the Iran war have prevented more transformative measures against Russian energy exports, leaving the overall sanctions architecture largely unchanged. The EU has also struggled with member states’ opposition to certain stricter measures, delaying the adoption of packages and requiring exemptions.

Soaring energy prices provided Russia with considerable additional revenues and moderately improved its near-term economic outlook. Oil export earnings rose from an average of $10.4 billion per month in January-February to $19.1 billion in March, $21.5 billion in April, and $20.8 billion in May. The resulting windfall amounted to at least $35.7 billion over March–June. However, it provided less support to the federal budget than headline export earnings suggest as Russia spent around 620 billion rubles in April–June to contain domestic fuel prices and subsidies to energy companies increased significantly. As a result, although base oil and gas revenues rose by 1.6 trillion rubles in the second quarter, their additional contribution to the budget amounted to only around 0.8 trillion rubles.

Ukraine’s renewed campaign against Russian refining and fuel infrastructure also partially offset the gains from higher global energy prices. At the peak of the attacks, around 40% of Russia’s refining capacity was disrupted or operating under constraints, while gasoline production fell roughly 25% below its June 2025 level. By constraining refinery throughput and exports of higher-value petroleum products, Ukrainian strikes curtailed Russia’s ability to maximize the energy windfall and generated additional fiscal, inflationary, and economy-wide costs.

Importantly, the windfall did not remove Russia’s fundamental economic and fiscal challenges. The economy remains in stagnation and contracted by 0.6% quarter-on-quarter and 0.2% year-on-year in the first quarter. Growth continues to be constrained by tight monetary policy, slowing domestic demand, labor shortages, limited access to technology, and broader sanctions- and war-related distortions. Russia’s federal budget deficit reached 5.7 trillion rubles, or 2.7% of GDP, in the first half of the year. This was higher than the deficit recorded for all of 2025, 51% above the initial plan, and 19% above the revised target. The improvement in the monthly budget balance in May and June largely reflected lower expenditure rather than higher energy revenues, while underlying fiscal pressures remain significant.

Financing the deficit is becoming increasingly challenging. Russia relied heavily on domestic borrowing and Treasury cash balances during the first half of the year, while using the National Wealth Fund only to a limited extent. Toward the end of the period, rising borrowing costs and weaker demand from domestic banks led to failed or cancelled government bond auctions. The government can likely continue placing debt through state-owned banks, but only at a higher effective cost or through greater reliance on floating-rate instruments.

At the same time, the conflict between monetary and fiscal policy has become more pronounced and has swung in favor of fiscal expansion. The Central Bank of Russia is seeking to contain war-related inflation through tight monetary policy, while the government is expanding spending and borrowing to finance the war. Recent legislative changes allow expenditures and state debt to exceed the limits established in the budget law, increasing concerns about fiscal dominance. Further monetary easing could destabilize the bond market, while persistently high interest rates would continue to constrain private-sector activity and increase the cost of financing government debt.

The outlook for the second half of 2026 will depend heavily on the pace of normalization in global energy markets and the continuation of Ukraine’s strikes on Russian energy infrastructure. A prolonged global oil crisis would continue to support Russian export and budget revenues, but would not resolve the domestic fuel crisis or bring the budget deficit to a sustainable level. A faster return of the global oil market to surplus would expose Russia more fully to lower oil revenues, continued stagnation, and mounting fiscal and financing pressures.

The authors emphasize that Russia’s growing economic and fiscal vulnerabilities create additional opportunities to intensify sanctions pressure. They propose preparing new energy, financial, and export-control measures and implementing them as soon as geopolitical conditions allow. Priorities include ending all fossil fuel imports from Russia, increasing pressure on the buyers of Russian oil and gas, imposing a ban on maritime services for the transport of Russian oil, targeting the shadow fleet and its ecosystem, expanding sanctions on Russia’s financial sector, strengthening technology sanctions, cracking down on third-country facilitators of sanctions circumvention, and tightening controls on cryptocurrency and alternative payment systems.