Britain’s economy is growing again — just not fast enough to spare Chancellor Rachel Reeves from another difficult budget. The UK expanded by roughly 0.1% in August, keeping the economy on track for about 0.2% growth in the third quarter, but that modest rebound won’t be enough to close a fiscal hole opening beneath the government’s plans, according to analysis from FXStreet.

Where the £25 billion gap comes from

The Office for Budget Responsibility is expected to downgrade its economic assessment this autumn relative to its Spring Statement forecast, chiefly on weaker productivity assumptions. Combined with higher gilt yields and a series of policy reversals over the past year, that downgrade is projected to blow a roughly £25 billion annual hole in the public finances compared with the position Reeves described in March, per the same FXStreet analysis. A separate assessment attributes some of the UK’s recent resilience to a substantial rise in government spending — departmental budgets have grown roughly 4% in real terms — a tailwind officials do not expect to persist into the next fiscal year.

This follows an already-large tax package. Reeves’s autumn 2025 budget delivered more than £26 billion in new tax measures, according to Allianz Trade’s UK economic outlook, on top of £41.5 billion in tax increases the year before. Much of that revenue is earmarked for higher welfare spending, leaving comparatively little room for growth-focused stimulus.

The government’s counter-narrative

Downing Street has framed its record differently. In its own Spring Forecast presentation, the government pointed to inflation falling faster than expected, GDP per person growing more than projected in the original Budget, and household energy bill relief as evidence its plan is working, according to the UK government’s own Spring Forecast statement. Officials also cite the UK’s growth rate as the fastest in the G7 among European economies in 2025.

The Bank of England, meanwhile, has penciled in third-quarter growth of around 0.4% — a target that already looks difficult to reach given the pace of expansion through August and September, according to FXStreet’s assessment of the BoE forecast gap.

Why global finance is watching

For institutional investors from Singapore to Dubai, the UK’s fiscal trajectory matters beyond domestic politics. Persistently elevated gilt yields make UK sovereign debt more attractive on a relative-yield basis but signal continued fiscal strain — a dynamic that has already accelerated the migration of UK-domiciled wealth toward lower-tax jurisdictions including Singapore and the UAE (see our companion report on the non-dom exodus). A credible autumn budget, or the absence of one, will shape whether that capital flow accelerates further.

Gasoline shortages have begun appearing at filling stations in and around Moscow, a striking domestic symptom of strain in an economy the Kremlin has long held up as proof that Western sanctions have failed, even as gold reserve liquidation and a collapsing growth outlook point to deepening fiscal pressure from four years of war.

Fuel Shortages Reach the Capital

Images circulating from Moscow filling stations in mid-July showed pylons signalling “no gasoline” at pumps operated by domestic retailer Neftmagistral, according to reporting by TIME on the state of Russia’s war economy. Fuel shortages inside Russia’s own borders — as opposed to sanctions-driven export disruption — mark an escalation of a squeeze that has been building for months across the domestic refining and distribution network.

Growth Grinds Toward a Standstill

Russia’s economy is now projected to grow just 0.4% in 2026, down from an already anaemic 1% in 2025, when the country narrowly avoided outright recession, according to analysis published by Forbes. That trajectory stands in sharp contrast to the 4.1% rebound Russia posted in 2023, when the economy adapted to initial sanctions by forging new trade relationships — a bounce that has since proven unsustainable as wartime spending exhausted its stimulative effect and energy prices softened.

The same analysis notes that Russia has liquidated 71% of its gold reserves to help fund a civilian sector now stagnating alongside an overheating military-industrial complex, a combination that has pushed interest rates higher and squeezed non-defence business investment. Russia’s oil and gas revenues, which fund roughly 40% of the federal budget, reportedly halved in January 2026 before a temporary reprieve arrived via the Middle East conflict, when Brent crude surged more than 55% and the Trump administration eased some sanctions on Russian oil exports.

Gasoline shortages have reached Moscow filling stations in 2026 as Russia’s war economy shows deepening strain: GDP growth is projected at just 0.4% for the year, gold reserves have been 71% liquidated, and the EU has extended sanctions through July 2027, targeting energy revenue and shadow-fleet oil shipping.

Sanctions Extended Through 2027

The European Union has moved to lock in pressure for the medium term. The Council of the EU formally extended its economic sanctions regime against Russia for a further twelve months, through 31 July 2027, covering trade, finance, energy, and dual-use technology sectors first imposed in 2014 and dramatically expanded since February 2022. The bloc has said it remains determined to keep weakening Russia’s war economy, specifically citing plans to further curb shadow-fleet oil shipping operations and constrain the country’s banking system.

Enforcement has intensified in parallel. UK authorities reported seizing sanctioned goods on 58 occasions in the 2025/26 financial year and issuing a £1.1 million settlement for a sanctions breach, according to a summary of enforcement activity published by Fieldfisher.

The Iran War’s Double-Edged Lifeline

The Middle East conflict has proven a complicated boon for Moscow. While the oil-price spike has temporarily bolstered Russia’s export revenue, the same instability has undermined Russian energy and infrastructure ambitions in Iran itself — two Russian-backed power plant projects have reportedly been paused, along with oil and gas exploration work tied to a planned transit corridor linking Russia to India via Iranian territory, according to the Forbes analysis. In other words, the war that briefly rescued Russia’s energy revenues has simultaneously stalled one of its key long-term strategic diversification projects.

What Comes Next

With GDP growth cooling to near-zero, gold reserves depleted, and domestic fuel shortages now visible to ordinary Russians in the capital, the gap between the Kremlin’s public resilience narrative and underlying fiscal strain appears to be widening. Whether this translates into changed battlefield calculus or fresh diplomatic flexibility remains the central open question for Western policymakers as EU sanctions lock in through mid-2027.

Introduction

The European Council formally extended its economic sanctions against Russia for another full year on 25 June 2026, keeping restrictive measures in place until 31 July 2027 (Council of the EU). More than four years into the war, the headline story of Russia’s economy has shifted from whether sanctions would work to a more nuanced question: how much longer can the Kremlin keep financing the war before the accumulated strain becomes impossible to hide behind favorable official statistics.

The Sanctions Architecture, Renewed Again

The EU’s economic measures against Russia, first introduced in 2014 and dramatically expanded after the February 2022 full-scale invasion, now span trade, finance, energy and dual-use technology restrictions, alongside asset freezes and travel bans on a broad range of individuals and entities (Council of the EU). Since February 2022, the EU has adopted 20 separate sanctions packages, and the European Council has explicitly stated it remains determined to keep weakening Russia’s war economy by further reducing its energy revenues, curbing shadow-fleet oil shipping operations and constraining its banking system (Council of the EU). Separately, on 3 July 2026 the EU sanctioned six individuals connected to the poisoning and death of opposition figure Alexei Navalny, underscoring that the sanctions regime continues to expand on human-rights grounds as well as economic ones (Council of the EU Sanctions Timeline).

The Headline Numbers Beijing-Style Optimism Can No Longer Explain Away

Russia’s GDP is now put at roughly $2.51 trillion, the world’s eleventh-largest economy — comparable in size to South Korea despite Russia’s vastly larger landmass and resource base — with 2026 growth projected at just 1.0% and inflation running at 5.2% (Statistics of the World). More pessimistic estimates put full-year 2026 growth even lower, at around 0.4%, which would be worse than 2025’s already-weak 1% expansion and would mark a sharp deceleration from the 4.1% growth Russia posted in 2023 as it forged new trading relationships to route around initial sanctions (Forbes).

Oil and gas revenues — historically around half of Russia’s state income — have fallen to roughly a quarter, a deliberate outcome of Western sanctions strategy that targets how much Russia earns from exports rather than blocking those exports outright (Stockholm School of Economics/SITE). Russia’s oil and gas budget revenues reportedly halved in January 2026 alone, with crude prices falling below $73 a barrel before the Middle East conflict briefly reversed the trend, sending Brent surging more than 55% to near $120 a barrel at its peak (Forbes).

The Middle East War: A Temporary Lifeline With Long-Term Costs

The spike in oil prices tied to the Iran conflict, combined with a period of eased US sanctions enforcement on Russian oil under President Trump, offered Moscow unexpected fiscal breathing room in mid-2026 (Forbes). But that same conflict has undermined Russia’s longer-term energy diversification ambitions in the region: two Russian-backed power plant projects in Iran have been put on hold, along with oil and gas exploration work and plans to build new transit routes linking Russia to India via Iran (Forbes).

The Gap Between Official Statistics and Underlying Reality

Perhaps the most important analytical point from recent research is not about any single data point but about the reliability of Russian statistics themselves. Torbjörn Becker of the Stockholm Institute of Transition Economics has argued the real test of sanctions is not whether they end the war overnight, but how much they erode the Kremlin’s capacity to finance it — and by that measure, the evidence points to deeper strain than headline GDP figures suggest (Stockholm School of Economics/SITE). Becker notes that Russia’s economy grew only modestly in 2022 despite oil prices rising sharply that year — a gap between expected and actual performance that implies a considerably larger hidden economic hit than the official contraction figures showed (Stockholm School of Economics/SITE). Compounding the problem, Russian authorities have stopped publishing several key statistics since 2022, making independent assessment of inflation, consumption and real economic conditions increasingly difficult — leading Becker to conclude that “statistics have become part of the narrative” rather than a neutral measure of economic reality (Stockholm School of Economics/SITE).

The Military-Civilian Economic Split

A recurring theme across recent analysis is the growing bifurcation between Russia’s overheating military-industrial sector and a stagnating civilian economy. This imbalance has pushed interest rates higher and forced the liquidation of a striking 71% of Russia’s gold reserves to help fund continued war spending (Forbes). Russia’s total fossil fuel export revenue is estimated at roughly €734 million per day, underscoring just how central hydrocarbon income remains to the entire war financing model even as that revenue stream shrinks (Forbes).

The Counter-Narrative: Wages Still Rising

It would be inaccurate to describe Russia’s economy as in freefall. CSIS research notes that Russian salaries rose 17.8% in nominal terms and 8.7% in real terms in 2024 compared to 2023, with disposable incomes up 6.1% in 2023 and 7.3% in 2024 — growth rates not seen in Russia in almost two decades (CSIS). Government budget projections still expect real salaries to rise, albeit at a decelerating pace: 7% in 2025, 5.7% in 2026 and 4.1% in 2027 — a marked slowdown from the 2024 peak but still roughly double the pre-invasion decade average (CSIS). This wage growth, driven substantially by wartime labor shortages and military-adjacent spending, is precisely the kind of headline-stabilizing data point that has allowed Putin to argue publicly that sanctions have failed to cripple his economy (Fortune) — even as think tanks describe the broader trajectory as pushing Russia toward what one report calls an “economic, political, and military abyss” (Fortune).

What Comes Next

Renewed legislative pressure in Washington — including the Sanctioning Russia Act introduced with strong bipartisan support — signals appetite in the US for tightening the screws further, even as the loss of a key congressional champion for that effort has complicated the political path forward (TIME). Whether the EU’s renewed sanctions regime, continued oil price pressure, and constrained reserves ultimately force a shift in Kremlin calculus toward negotiation remains the central open question for 2027.

Key Takeaways

1. The EU has extended Russia sanctions for a further year, through 31 July 2027, continuing a regime built from 20 separate packages since 2022.
2. Russia’s 2026 GDP growth is forecast between 0.4% and 1.0%, a sharp deceleration from 2023’s 4.1% post-shock rebound.
3. Oil and gas revenue’s share of Russian state income has fallen from roughly half to about a quarter as Western sanctions target export earnings specifically.
4. Russia has liquidated a large share of its gold reserves to sustain war financing amid a widening split between an overheating military sector and a stagnating civilian economy.
5. Official Russian statistics likely understate the true economic strain, according to independent economists who cite a widening gap between reported and expected performance.

Sources: Council of the EU, Council of the EU Sanctions Timeline, Stockholm School of Economics/SITE, Forbes, Statistics of the World, CSIS, Fortune, TIME