Institute for the Study of War: Russian economy showing strains of Ukraine war in higher wages, rising inflation and lower consumer demand

The Russian people are increasingly feeling the effects of the Kremlin’s continued prioritization of the Russian defense industrial base (DIB). In a January 12 meeting with Russian President Vladimir Putin, Russian First Deputy Prime Minister Denis Manturov highlighted Russia’s industrial development growth in 2025, primarily within the Russian DIB.[1] Manturov claimed that investment in the manufacturing sector grew 23 percent or roughly five trillion rubles (roughly $64 billion) in the first nine months of 2025 and that manufacturing industries were growing at the rate of about three percent at the end of 2025 despite recent cooling of the Russian economy. Manturov said that the Russian government’s Industrial Development Fund, which provides low-interest loans to Russian manufacturers, was the main driver of growth in the manufacturing sector. Manturov stated that the Russian DIB employs 3.8 million people, having added an additional 800,000 workers over the last three years. The Russian government has struggled to find financing for its DIB amidst heavy Western sanctions and restrictions and has introduced a series of measures to increase the capital available to the Russian DIB, including through the Industrial Development Fund, off-budget subsidies, and policies strongarming banks into providing preferential lending to defense industrial enterprises.[2] The Russian Central Bank also lowered its key interest rate four times in 2025, likely as part of the Russian government’s efforts to make more capital available for the Russian DIB and to lower the price of borrowing money for DIB producers.[3]

Putin’s prioritization of the Russian DIB is costing the Russian people as Russian banks pass lending pressures from the Russian DIB onto consumers. Russian labor shortages and competition between Russia’s defense and civilian sectors have raised average wages across Russian industries, fueling inflation and causing price spikes.[4] Several major Russian civilian manufacturers have introduced a four-day work week and announced layoffs in the second half of 2025 due to falling demand.[5] Russian civilians are struggling to afford homes, with most Russian commercial housing rates estimated at 20 percent or higher in January 2026.[6] Putin also signed a law in November 2025 increasing the Value-Added Tax (VAT), a federal tax imposed on most Russian goods and services domestically, from 20 to 22 percent — placing more of the burden of Russia’s costly war in Ukraine on the Russian people.[7] ISW continues to assess that increased Western economic pressure on Russia, along with helping Ukraine maintain and even increase pressure on the battlefield, remains critical to changing Putin’s calculus and forcing Putin to face more serious tradeoffs between continuing to pursue his maximalist war aims and sacrificing the quality of life of the Russian people.[8]

The Russian Ministry of Defense (MoD) stated that the Russian Oreshnik intermediate-range ballistic missile (IRBM) launched on the night of January 8 to 9 struck a Ukrainian defense industrial enterprise in Lviv City, which is consistent with the available visual evidence.[9] The Russian MoD claimed on January 12 that the Oreshnik IRBM strike against the Lviv State Aircraft Repair Plant in Lviv City halted operations at the plant.[10] The Russian MoD further claimed that the strike damaged production workshops, drone warehouses, and infrastructure at the plant’s airfield. ISW has not observed confirmation or Ukrainian official reporting about the Russian MoD’s claims of the damage. Geolocated footage published on January 9 of the Oreshnik attack indicated that Russian forces struck in the vicinity of southwestern Lviv City, and OSINT analysts on X (formerly Twitter) and Russian milbloggers assessed that the geolocated footage indicated that Russian forces were targeting the Lviv State Aircraft Repair Plant.[11]

Dozens of shadow fleet tankers off the coast of Venezuela have reportedly switched to using Russian flags in recent months. The Wall Street Journal (WSJ) reported on January 11 that Lloyd’s List Intelligence identified more than 15 tankers involved in shipping sanctioned oil that re-registered as Russian-flagged in the past two weeks (since roughly December 29), and Lloyd’s List editor-in-chief Richard Meade noted that changing flags is likely an attempt to gain protection against raids.[12] The WSJ reported that most of the shadow fleet had sailed until recently under “obscure,” “convenient,” or “bogus” flags from countries like Gabon, Liberia, East Timor, and Malawi. The WSJ noted that S&P Global Market Intelligence reported that 25 tankers switched to the Russian flag from October to December 2025, with 18 switching in December 2025 alone. Sixteen of the tankers are under US or UK sanctions. The BBC reported on January 11 that the UK has identified legal mechanisms to enable the UK military to board and detain vessels transporting sanctioned oil in the shadow fleet that are not legitimately flagged.[13] Ukrainian President Volodymyr Zelensky applauded the approach that governments are taking against elements of the shadow fleet.[14]

Ukraine’s Western partners continue to provide weapons and military equipment to Ukraine. German arms manufacturer Rheinmetall reported on January 12 that Ukraine will receive its first five Lynx KF41 infantry fighting vehicles from a December 2025 contract as early as the beginning of 2026.[15] The UK Ministry of Defense (MoD) reported on January 11 that the UK is developing the Nightfall short-range ballistic missile, with a likely range of more than 500 kilometers, a 200-kilogram warhead, and the ability to operate in areas with heavy electromagnetic interference.[16] The UK MoD reported that Ukrainian forces will be able to launch the missile from a range of vehicles, fire multiple missiles in quick succession, and withdraw quickly. The UK MoD noted that the UK will produce 10 missile systems per month at a maximum price of £800,000 (roughly $1 million) per missile. The UK will award contracts to three enterprises in March 2026 to design, develop, and deliver their first missiles within a year for Ukrainian forces to then test.Ukrainian President Volodymyr Zelensky stated on January 11 that he met with Ukrainian Ground Forces Commander Colonel General Oleksandr Syrskyi to discuss air defense supplies from Ukraine’s partners.[17] Zelensky noted that Ukraine’s first priority is procuring more missiles for air defense, including through the Prioritized Ukrainian Requirements List (PURL) initiative, which funds NATO states’ purchases of US-made weapons for Ukraine. ISW continues to assess that Russia’s long-range drone strikes seek to exploit Ukraine’s scarcity of air defense systems, underscoring Ukraine’s urgent need for point-defense air defense systems to defend frontline areas and critical infrastructure in the rear in the face of such a geographically pervasive threat.[18]

Key Takeaways

1. The Russian people are increasingly feeling the effects of the Kremlin’s continued prioritization of the Russian defense industrial base (DIB).
2. The Russian Ministry of Defense (MoD) stated that the Russian Oreshnik intermediate-range ballistic missile (IRBM) launched on the night of January 8 to 9 struck a Ukrainian defense industrial enterprise in Lviv City, which is consistent with the available visual evidence.
3. Dozens of shadow fleet tankers off the coast of Venezuela have reportedly switched to using Russian flags in recent months.
4. Ukraine’s Western partners continue to provide weapons and military equipment to Ukraine.
5. Neither Russian nor Ukrainian forces advanced on January 12.