Russia’s Central Bank continues efforts to maintain the facade of domestic economic stability by pursuing economic policies that will likely exacerbate Russia’s economic instability. Bloomberg reported on July 17, citing the Russian Central Bank’s June 2025 monthly report, that Russia’s seasonally adjusted annual rate (SAAR) of inflation decreased to four percent in June 2025, in line with Russia’s four percent target inflation rate.[1] Bloomberg assessed the decrease in the SAAR of inflation as the first indicator that the Central Bank’s efforts to lower the inflation rate have been successful. The Russian Central Bank report cautioned that the official annual inflation rate remains at nine percent, but assessed that if the current trajectory continues, the inflation rate could hit the target of four percent sometime in 2026. The SAAR is a short-term measurement, however, and its decrease is unlikely to positively impact the Russian economy in the long term. The Russian Central Bank reported that the cost of interest-bearing instruments — financial assets that generate interest — significantly decreased in June 2025, and that investors expect an average key interest rate below 18 percent between August 2025 and October 2025. The Russian Central Bank’s report claimed that a strong Russian ruble significantly contributed to the SAAR decrease. A strong ruble increases Russia’s purchasing power on the global market, which in turn decreases the ruble cost of imported goods such as machinery and technology, lowering input costs (expenses to produce goods or services) and inflationary pressure (that increases the price of goods and services over time) on firms that rely on imported components. A strengthened ruble softens the blow of Western sanctions as it makes parallel imports cheaper and keeps substitutes affordable. ISW assesses that secondary sanctions will likely further impact the Russian economy by undercutting Russian oil revenues and cheaper imports using the strengthened ruble, both of which are essential for the Kremlin’s financing of its war against Ukraine. The Russian Central Bank reported two potential complicating factors in lowering the interest rate: the eventual waning of effects from earlier bouts of ruble strengthening that helped slow price growth in June 2025, and the ongoing rise in the cost of services, despite a stabilization of the exchange rate and cost of goods sensitive to credit.
Russia’s unsustainably high payments to soldiers and the impacts of the resulting domestic labor shortage will likely further destabilize the Russian economy, regardless of the Kremlin’s claims of economic stability. Russia’s strategy of incentivizing volunteer recruitment by offering large one-time payments to recruits and simultaneous efforts to rapidly expand its defense industrial base (DIB) since 2022 has required Russia to significantly increase payments to both sustain military recruitment and to augment the DIB’s labor force.[2] Russia has had to significantly increase the federal and regional one-time bonuses to incentivize Russians to sign military contracts rather than take other jobs, given high Russian casualty rates.[3] Competition between Russia’s DIB and civilian enterprises is raising the average salary for these positions and is raising prices in service industries writ large. These factors, coupled with labor shortages in the civilian and defense sectors, are likely contributing to the divergence between the cost of goods and services in the Central Bank’s report by limiting Russian economic growth, force generation efforts, and defense industrial production. ISW continues to assess that Russia cannot indefinitely replace its forces at the current casualty rate without an involuntary reserve mobilization, which Russian President Vladimir Putin has shown great reluctance to order, nor can it sustain increasingly high payments to recruits, which the Russian economy cannot afford.[4] Russia is effectively burning the candle at both ends by simultaneously loosening monetary policy to stimulate short-term growth, while expanding fiscal expenditure to feed the military effort. This strategy will likely adversely affect the Russian economy by weakening consumer purchasing power, devaluing the ruble in the medium- to long-term, and creating deeper macroeconomic instability.
Russian bankers are reportedly privately expressing concerns over a growing number of non-performing (late and unpaid) loans despite the Russian Central Bank’s claims of economic stability. Bloomberg reported on July 17 that unspecified top executives at “some of Russia’s largest banks” have privately discussed seeking a state-funded bailout if the level of non-performing loans on their books continues to grow through 2025.[5] Bloomberg reported that it reviewed documents that indicate that three of Russia’s systemically important lenders (financial institutions whose potential failure could disrupt the broader financial system and economy) may need to recover funds lost from the non-performing loans. Bloomberg reported that non-performing loans issued by Russian banks have grown by 1.2 percent in 2025 and could rise to six or seven percent from their current rate of four percent by 2026. ISW is unable to independently verify Bloomberg’s report about these unspecified large Russian banks and lenders, but has observed indications that Russian officials are growing concerned about economic stability in the wake of Russian Central Bank policy changes. Russian Central Bank Chairperson Elvira Nabiullina previously downplayed the risk of systemic economic crisis, claiming that the Russian banking system has capital reserves of eight trillion rubles (about $102.5 billion).[6] Bloomberg reported that the Russian Central Bank has advised lenders to focus on restructuring credit with the borrowers and absorbing the bad loans, reflective of Russia’s risky and contradictory economic policies, rather than recognizing the full extent of sourcing loans.[7] The Russian Central Bank is therefore likely disinterested in bailing out Russian major banks – an action that could cause liquidity problems and, in the worst case, cause bank failure. Any failure of a major Russian bank would undercut Russian President Vladimir Putin’s long-standing narrative that neither the war in Ukraine nor Western sanctions are hurting the Russian economy.[8]
Reports that Ukrainian forces targeted Moscow City and St. Petersburg overnight on July 16 and 17 are likely overreacting to standard Russian statements about Ukraine’s longstanding deep strike campaign aimed at degrading Russia’s defense industrial base (DIB). The Russian Ministry of Defense (MoD) claimed that Russian forces downed two Ukrainian long-range Neptune missiles and 308 aircraft-type drones overnight on July 16 to 17 over Bryansk, Orlov, Belgorod, Lipetsk, Oryol, Kursk, Smolensk, Voronezh, Moscow, Kaluga, Leningrad, and Tula oblasts.[9] Moscow Mayor Sergei Sobyanin claimed that Russian forces downed three drones flying toward Moscow City, and Leningrad Oblast Governor Alexander Drozdenko claimed that Russian electronic warfare (EW) systems downed two drones over Kirovsky Raion.[10]
Ukrainian drone strikes against Russian DIB assets in areas around Moscow and St. Petersburg, including Smolensk and Tula oblasts, may be mischaracterized as targeting St. Petersburg and Moscow Oblast, respectively, due to their geographical proximity and the direction of flight. Tula Oblast Governor Dmitry Milyaev claimed that Russian forces downed seven drones over Tula Oblast.[11] Russian opposition outlet Astra and Ukrainian Center for Combatting Disinformation Head Lieutenant Andriy Kovalenko reported that the Shchekinoazot United Chemical Plant in Pervomaysky, Tula Oblast, suspended operations after at least four drones struck the facility and caused a fire.[12] Kovalenko noted that the chemical plant manufactures industrial chemical products, including ammonia, methanol, and urea, that support the production of explosives, solid rocket fuel, and synthetic materials.[13] Smolensk Oblast Governor Vasily Anokhin claimed on July 17 that Russian forces downed 14 drones in Smolensk Oblast.[14] Astra reported on July 17 that a drone may have struck Russian state-owned defense conglomerate Rostec’s 720th Flight Support Equipment Repair Plant in Roslavl, Smolensk Oblast.[15] It is unlikely that Ukrainian drones struck targets in either Moscow or Leningrad oblasts, given the lack of footage and Russian and Ukrainian official reporting that ISW typically observes accompanying successful strikes against Russian DIB assets, particularly those in or near major cities such as Moscow and St Petersburg. Ukrainian drone strikes in the direction of or against Moscow and Leningrad oblasts do not represent an inflection in Ukraine’s long-range strike campaign, as Ukrainian forces regularly conduct strikes against legitimate military and DIB targets in these oblasts and oblasts between the Ukrainian border and Moscow and St. Petersburg cities. Ukraine’s strike campaign differs from Russia’s in that Ukrainian forces chiefly target legitimate military targets and avoid incurring disproportionate civilian casualties, whereas Russian strike packages are designed to maximize damage to civilian areas. The Kremlin previously employed an informational campaign that leveraged unsubstantiated claims of Ukrainian strikes to discredit Ukraine during temporary ceasefire periods and may recycle this campaign in an attempt to influence Western policy discussions regarding support for Ukraine.[16]
Ukraine and Russia conducted another exchange of the bodies of soldiers killed in action (KIA) on July 17, in accordance with agreements reached during negotiations in Istanbul on June 2. The Ukrainian Coordination Headquarters for the Treatment of Prisoners of War (POWs) reported that Russia released the bodies of 1,000 deceased Ukrainian soldiers and that Ukrainian authorities will examine and identify the bodies.[17] Russian Presidential Aide Vladimir Medinsky stated that Ukraine released the bodies of 19 deceased Russian soldiers.[18] Kremlin newswires TASS and RIA Novosti claimed that a source close to the Russian negotiation team reported that Russia is prepared to exchange the bodies of 3,000 deceased Ukrainian soldiers in accordance with Russian President Vladimir Putin’s previous statement and that the July 17 exchange is the first exchange involving these 3,000 bodies.[19] ISW has previously observed Ukrainian reports that Russian authorities included the bodies of Russian soldiers KIA in previous KIA exchanges, likely to artificially inflate the number of bodies Russia claims to return to Ukraine and undermine the efficacy of this confidence-building measure.[20]
The Ukrainian Verkhovna Rada approved the appointment of former Ukrainian Minister of Economy Yulia Svyrydenko as Ukraine’s new prime minister, and Ukrainian President Volodymyr Zelensky appointed former Justice Minister Olha Stefanishyna as a special representative to the United States. The Rada supported Svyrydenko’s new Cabinet of Ministers on July 17, including former Prime Minister Denys Shmyhal as defense minister; former Digital Transformation Minister Mykhailo Fedorov as first deputy prime minister; former Deputy Minister of Economics Tara Kachka as the deputy prime minister for European integration; former Energy Minister Herman Halushchenko as the justice minister; former Environmental Protection and Natural Resources Minister Svitlana Hrynchuk as the energy minister, and former First Deputy Minister of Economy Oleksiy Sobolev as the minister of economy.[21] Ukrainian Foreign Minister Andriy Sybiha and Internal Affairs Minister Ihor Klymenko remain in their positions. Zelensky appointed Stefanishyna as the Ukrainian presidential special representative for the development of cooperation with the United States.[22]
Key Takeaways:
- Russia’s Central Bank continues to posture Russian economic stability and growth to maintain the facade of economic stability by pursuing economic policies that will likely exacerbate Russia’s economic instability.
- Russia’s unsustainably high payments to soldiers and impacts of the resulting domestic labor shortage will likely further destabilize the Russian economy, regardless of the Kremlin’s efforts to posture stability.
- Russian bankers are reportedly privately expressing concerns over a growing number of non-performing loans despite the Russian Central Bank’s claims of economic stability.
- Reports that Ukrainian forces targeted Moscow City and St. Petersburg overnight on July 16 and 17 are likely overreacting to standard Russian statements about Ukraine’s longstanding deep strike campaign aimed at degrading Russia’s defense industrial base (DIB).
- Ukraine and Russia conducted another exchange of the bodies of soldiers killed in action (KIA) on July 17, in accordance with agreements reached during negotiations in Istanbul on June 2.
- The Ukrainian Verkhovna Rada approved the appointment of former Ukrainian Minister of Economy Yulia Svyrydenko as Ukraine’s new prime minister, and Ukrainian President Volodymyr Zelensky appointed former Justice Minister Olha Stefanishyna as a special representative to the United States.
- Ukrainian forces recently advanced near Pokrovsk. Russian forces recently advanced near Borova.