MUNICH—The broad consensus among Russia-watchers is that the country is facing a prolonged bout of stagflation. Growth this year is unlikely to exceed 1%, and inflation is still stuck at 6% (or more). Moreover, the most promising option for reviving the economy is the least likely to be pursued, because it requires President Vladimir Putin’s willingness to end the war on Ukraine.

The downside risks are legion. Russian troops have barely advanced in Ukraine this year, and Russia cannot spend more on its military without triggering financial instability. Meanwhile, Ukraine has brought the war to Russia, with its drones decimating oil and gas facilities and even e-commerce warehouses, thus souring Russians on Putin’s war. A Russian friend in exile recently characterized Putin’s plight as Zugzwang, a chess term for when a player’s only options will leave him in a worse position.

The most obvious vulnerability is public spending. The 2026 budget surprised analysts by allocating $183 billion to national security and defense, about the same as in 2025. The implication was that Putin had accepted a war of attrition, rather than trying to raise expenditures and clinch a decisive victory. But would he really accept such a limitation? In fact, though he stuck to a budget deficit of about 2% of GDP during the first three years of the war, this share rose to 2.6% in 2025, and in the first seven months of 2026, he allowed the deficit to balloon to 2.8% of GDP—almost twice what was planned.

Such an imbalance is fiscally untenable. Russia has no sources of government financing other than taxes and domestic loans. Not even China offers it credits, and its federal revenues are lingering around 18% of GDP despite repeated increases in corporate taxes, value-added taxes, and personal income tax. At this point, more tax hikes would be purely detrimental.

Slava Ukraine!