The war in Ukraine started exactly four years ago today. The Kremlin was hoping for a blitzkrieg victory but the heroic resistance by the local forces caught the Russian forces and Ukraine’s Western allies unawares. Four years on and Ukraine remains locked in a grinding war of attrition, but shows no sign of giving up yet and is prepared to fight on, if the current peace talks fail.

But Russia was surprised too. Its economy has proved far more resilient than many expected and defied the most extreme sanctions regime in history. However, it is now entering a period of prolonged stagnation marked by rising financial vulnerabilities and growing isolation, according to Liam Peach, senior emerging markets economist with Capital Economics.

“Russia’s economy has proven remarkably resilient since the war in Ukraine began four years ago, underpinned by military-related stimulus, an ability to adapt to Western sanctions and disciplined macroeconomic policy,” he said. “However, we think Russia has now entered a period of prolonged stagnation accompanied by rising financial vulnerabilities.”

Military Keynesianism exhausted

Gross domestic product growth accelerated to 4-5% per annum in 2023-24, leaving the economy 8% larger than in 2021. That expansion was driven by fiscal stimulus concentrated in the military, a credit boom supported by state-directed lending and an extremely tight labour market, the so-called military Keynesianism effects. But that model has exhausted itself. The entire economy has been put on a war footing and military production is now in surplus producing more arms than are needed on the battlefield. But that has come at the cost of a twin speed economy where the civilian part is starved of resources. A central bank induced slowdown to bring down sticky inflation has worked too well: economic growth will be next to nothing this year and only slowly recover in the next year – maybe.

“That expansion phase is over and the economy has moved into a period of stagnation,” Peach said, forecasting growth at or below 1.0%.

Russia’s economy is hurting, but it is not going to collapse, according to Alexandra Prokopenko, a political economy analyst, writing recently in The Economist, but it structural problems means it is now in what she calls the “death zone”, like a mountain climber trapped at the top of a peak, where there are not enough resources so the economy is eating itself from inside. Nevertheless, she admits this is a long slow process.

Much has been made of the 2.8% of GDP budget deficit last year – high by Russian standards – and a similarly large, or larger deficit expected this year. Still, that is less than the EU’s excessive deficit mechanism trigger of 3% of GDP – a level that France, Italy, Poland, Belgium, Hungary and Slovakia are currently all in breach of. The UK and France are both approaching the need to ask for a Greek-crisis-like IMF bailout as debt and interest rate payments are becoming so large. The French government has become dysfunctional, unable to bring a 5.5% of GDP deficit down and the UK public finances have been likened to “a ponzi scheme” by Liam Halligan, the lead economics columnist at the Daily Telegraph.

Russia is also seeing its share of interest payments in government expenditure rise alarmingly, but there is still some RUB20 trillion ($220bn) in liquidity in the banking sector the Kremlin can tap. And that is before it starts to raise taxes; on January 1 VAT went up two percentage points, the first tax hike during the war, which alone counts for 40% of government revenues, compared to 25% it earns from the minerals (oil) extraction tax. All said and done, while the Russian economy is clearly stressed, President Vladimir Putin can afford to fund the war for several more years if he chooses.

Ukraine’s economy is worse

By comparison the Ukrainian economy is in far worse shape. It's running a budget deficit of some $50bn a year, or 21% of GDP, all of which is supplied by foreign donors who stopped since the start of last year. The US has sent no money at all and used to account for 40% of Ukraine's financial aid. The US has also cut off direct military aid that is all provided by Europe via the Prioritised Ukraine Requirements List (PURL) programme, but as bne IntelliNews reported, since this system was launched, Europe has failed to offset the end of US military aid and is struggling to fund its own military modernisation, let alone cover that of Ukraine as well. Having said that, Ukrainian President Volodymyr Zelenskiy recently announced that Ukraine now provides 60% of its military needs from its own resources, up from next to nothing at the start of the war – a remarkable feat.

While Ukraine remains entirely dependent on outside assistance, the €90bn EU loan granted in December, together with other monies collected from the G7 and elsewhere, will be enough to keep Ukraine funded for another two years according to a recent paper from Kyiv School of Economics (KSE).

Nevertheless, Ukraine is suffering far worse at Russian hands than the Russian economy is suffering from a sustained attack on Russian refineries that started last autumn.

The sustained missile war that Putin launched last May has escalated and only 20% of the energy sector’s generating capacity is left functioning according to some estimates. By January Ukraine’s economy was starting to shut down due to myriad problems, starting with the lack of power. Businesses from supermarkets to metallurgy are halting commerce and production as they simply don't have the energy to run their shops. The impact of the onslaught estimates show up in the macroeconomic statistics: Ukraine's GDP in 2025 was 21% below pre-war levels. Industrial production was down 2.5% last year after growing 3.6% the year before on the same sort of military Keynesian effects Russia enjoyed, and a chronic manpower shortage is plaguing everything.

Mood blackening

The people have been living in "survival mode" for four years and are giving way to a quiet exhausting desperation, according to CEO of Hope for Ukraine, Yuriy Boyechko. He recently questioned if Ukraine could recover at all if the fighting stopped tomorrow or if Ukraine would remain a EU-dependant, doomed to several decades of decline before reaching its nadir, weighed down by demographic catastrophe, lack of capital and paucity of resources and power.

Boyechko referred to a “'new poor' of teachers, engineers, and small business owners who once lived comfortably but now scan supermarket shelves for the cheapest bread”. He added: “The war hasn't just destroyed factories and power plants; it has liquidated the life savings of an entire generation.”

World Bank predictions of poverty rates soaring to 37% have come to pass and a dream of a stable EU future has been traded for the daily maths of survival: “deciding whether to buy warm boots for a growing child or paying for the fuel needed to run a generator during another blackout,” says Boyechko.

The mood is blackening. With mortality rates running at three times fertility rates, the population is collapsing and Ukraine faces the worst demographic crisis in the world. That is starting to weigh on the public mood. While the polls suggest Ukrainians remain resilient and are prepared to fight on, refusing point blank to give up an occupied territory, the reality is that death and destruction is ever present while European relief is not.

The recent Munich Security Conference brought a fresh round of heroic statements and promises of support, but former presidential press secretary Iulia Mendel caught the mood, posting an ode to the European leaders highlighting the emptiness of the platitudes offered.

Where suits proclaim Ukraine's unbreakable might,

a juggernaut of pure heroic light.

"Russia's crumbling, weak, a has-been bear on knees!" They clap for drones and PowerPoints, ignoring pleas.

While children freeze in basements, blackouts stretch for days,

Mothers bury sons in fields turned endless graves.

The humanitarian cry? A footnote, drowned in cheers

— "Resilient nation!" they toast, wiping dry their tears.

How noble, how detached, this chorus of the grand, Praising strength that bleeds in silence across the land.

Ukraine stands tall, they say, while bodies pile and rot

— But suffering's inconvenient; best left forgot.

Bravo, diplomats, your platitudes shine like gold;

Meanwhile the dying wait for aid that's never told.

The Ukrainians are becoming tired of the rhetorical triumphing of their “resilience” when the words come with the West’s perennial “some, but not enough” assistance that has marred the entire war since 2022.

Mendel’s poem is an echo of the sarcastic tweets the crowd on Maidan square were sending whenever Brussels criticised the Yanukovych administration’s brutality with messages of its “grave concern” while doing nothing concrete to force the exiled president's hand in the face of mass protests.

EU divided

The EU continues to demonstrate its disunity and disarray with the debacle surrounding what should have been a headline twentieth sanctions package targeting Russia’s shadow fleet and cutting the Kremlin off from its oil revenues. Rather than ram the measure through, it has descended into petty squabbling amongst the member states. Greece and Malta have blocked the measures to ban EU ships from working for the shadow fleet as they make too much money. Hungary and Slovakia have threatened to cut off emergency supplies of power to Ukraine unless their deliveries of Russian oil and gas that were halted on January 27 are resumed.

Sanctions have been a failure. They have reshaped but not broken the economy, according to Peach.

“Russia has become more financially isolated and technologically constrained under sanctions since 2022, but it has adapted in important ways,” he said, pointing to a reorientation of trade towards China and India and the development of channels to circumvent restrictions. The main flaw, in his view, is that “sanctions have not sufficiently targeted the core of Russia’s economy: its energy sector”, although they have reduced access to advanced technology and weighed on potential growth.

On fiscal policy, he argued that deficits of 2-3% of GDP are manageable, but “an oil sector shock – through lower prices or reduced export volumes – that widens the deficit beyond 4% could force policymakers to make more difficult decisions”. On this point, Putin must be praying for Trump to launch a new war on Iran, just the threat of which has already pushed oil prices up $10 and would raise them to over $100 a barrel should the rockets start flying.

Despite mounting strains, Peach does not expect economic pressure alone to end the conflict. “Russia’s economy is not yet at the pain thresholds that would likely force President Putin to change tack,” he said, adding that “Putin seems willing to bear heavy economic costs to achieve his goals around issues of Ukraine’s sovereignty, security and territory”. The “most likely outcome is a frozen conflict”.

Demographic catastrophe

Increasingly the fate of the war will depend on demographics. The manpower shortage in the Armed Forces of Ukraine (AFU) is already acute, with kilometre-long holes appearing in the defences that allowed Armed Forces of Russia (AFR) to simply walk into the frontline town of Pokrovsk at the end of last year.

Commander-in-chief of Ukraine's Armed Forces, Oleksandr Syrsky, stated that last year the Russian army's losses surpassed its rate of replenishment for the first time. The Kremlin was able to mobilise about 406,000 people for military service, while total casualties, including killed and wounded, reached approximately 418,000 military personnel, Syrsky said.

Yet despite the horrific figures of more than one million men killed and wounded in the last four years, Russia still has a very deep pool of manpower to draw on. The active military personnel and the armed forces Russia estimated at somewhere around 1.3mn people from a total population of 146mn. That puts the active armed forces at roughly 0.9% of the total population. If reservists are included, then the total number in the Russian army is around 2mn or 1.5% of the whole population although not all of them are on active duty.

Ukraine is fielding the second largest army in Europe – three times larger than that of Turkey – with some 800,000 men under arms out of the total population estimate of around 30mn people. That means the Ukrainian army accounts for between 2.5 and 3% of the total population. However, the pool of military aged men has been depleted after some 7mn people fled the country. Ukraine has been forced to run a mandatory conscription programme since the very start of the war, which is causing a huge amount of resentment amongst the remaining population. Putin continues to run a voluntary system paying enormous sums for men to sign up. While that is slowly running into trouble as the amounts paid keep rising in order to keep the flow of men coming, until recently Russia has been able to recruit enough men to cover its losses on the battlefield.

A Wall Street Journal article on a secret meeting last week claims that Zelinskiy told his top aides to prepare for three more years of war which would need another quarter of a million men to start; however those men are simply not available not even by ratcheting up the mandatory conscription programme. The only way to fill the ranks of this army is if the recruitment age was dropped from 25 years old to 18. Ukraine’s demographics are already horrific with a deep gouge out of the 20 something cohort. To drop the age again would hollow out yet another generation and the country’s future for several generations to come.

Bankova immediately denied the Wall Street Journal report although the European Union's plan has been to provide a €90bn loan specifically to allow Ukraine to fight on for at least two years and two thirds of that money is dedicated to military spending.