Russia’s transformation into a war economy has solved some short‑term problems but created a structural trap: the country can afford prolonged conflict in Ukraine far more easily than it can absorb the economic, social, and political shock of peace.
Key Points
- Defense spending now anchors Russia’s growth, accounting for roughly 7–8% of GDP and about one‑third to two‑fifths of federal spending, pushing the system toward a militarized economic model.
- Millions of jobs, regional budgets, and elite patronage networks depend on military contracts, while civilian industries stagnate — making abrupt demilitarization economically destabilizing.
- The political regime is well insulated against economic pain and can sustain high military outlays for years, but that same insulation delays reforms and deepens long‑term stagnation.
- A post‑war adjustment is technically feasible; modelled scenarios point to stagnation rather than collapse, yet the social costs — especially veteran reintegration and regional fiscal stress — are likely to be severe.
- The core risk for Russia is not running out of money for war, but lacking a viable path to prosperity and stability once the guns fall silent.
From Petro‑State to War Economy: How Military Spending Became the Growth Engine
For most of the post‑Soviet era, Russia’s economic fortunes were driven by hydrocarbons: oil and gas exports underwrote budget stability, social spending, and the accumulation of reserves. That balance shifted sharply after the full‑scale invasion of Ukraine in 2022. Military expenditures more than doubled compared with the pre‑war period, and by the 2025 budget cycle defense spending had reached roughly 7.2% of GDP — the highest share since late Soviet times — and about 32% of federal expenditure. When broader “national security” line items are included, independent analysts put combined defense and security spending nearer 8% of GDP and about 40% of total federal spending.
This reallocation is not merely an accounting change; it is the central mechanism by which Russia has maintained headline growth under sanctions and decoupling from Western markets. War‑related industries — metals, electronics, transport equipment, protective gear — have recorded spectacular output increases, underpinning an overall GDP expansion that would be considerably weaker without defense demand. As Carnegie and other observers have noted, “guns, not oil” now drive the industrial upswing, even as real household incomes stagnate or decline. In effect, the Kremlin has substituted external resource rents with internally directed military spending as the main engine of economic activity.
Employment, Patronage, and the Rise of a Defense‑Based Elite Coalition
High military outlays translate directly into employment and patronage. The military‑industrial complex now employs around 3.5 million people — roughly 5% of Russia’s labor force — at a time when civilian sectors such as automotive manufacturing and consumer appliances have stalled or contracted. Defense enterprises are clustered in specific regions and company towns, where they dominate local labor markets and tax bases. Shutting down or sharply scaling back these plants after a war would not be a marginal adjustment; it would be a concentrated economic shock hitting communities that have few alternative sources of livelihoods.
Equally important is how these flows reshape elite incentives. State‑dependent sectors — defense, energy, and security services — have seen rents and budgets expand, and with them opportunities for patronage, informal kickbacks, and asset acquisition. Nationalizations and forced transfers of property during wartime have created “new owners” whose wealth and status hinge on continued favor from the Kremlin; they are acutely aware their holdings could be reversed in any future political settlement. In such an environment, loyalty to the regime becomes a rational strategy, since exits to Western markets or alternative political patrons are blocked by sanctions and domestic coercion.
This coalition does not necessarily require permanent war to exist, but its material interests are aligned with high state spending on security and defense. A durable peace that forced a meaningful demilitarization of the budget would, almost by definition, reduce rents flowing to these groups and intensify intra‑elite competition over shrinking spoils.
Fiscal Strain and the Paradox of Sustainability: Why War Is Affordable, Development Is Not
On the surface, Russia still has the capacity to sustain its war expenditures. Oil and gas revenues have come under pressure — estimates suggest they fell by about 25% in one recent year due to lower prices and sanctions‑driven discounts on exports — but they remain the main source of hard currency for the budget. The state has also turned to internal borrowing, allowing national debt to grow by more than 20% in 2025 alone, yet analysts at RAND and elsewhere judge the aggregate fiscal burden to be sustainable for several years.
At the same time, the macroeconomic trade‑offs are becoming more pronounced. High defense outlays coexist with tight monetary policy; interest rates of around 21% have driven trillions of rubles into bank deposits, suppressing consumption and starving civilian sectors of credit. Growth, while positive, is increasingly unbalanced and driven by sectors linked to the war. As one Russian‑language analysis framed it, “deathonomics” — the reliance on wartime production to generate output — has exhausted its role as a growth engine and now merely sustains a militarized status quo. International forecasts, including those of the IMF, expect Russia’s GDP growth to slow toward 1% as the combined impact of sanctions, decoupling, and warped investment patterns compounds over time.
This is the core paradox: Russia can afford the war in a narrow financial sense, but that affordability rests on sacrificing investment in health, education, infrastructure, and innovation. As more of the budget is locked into defense and debt servicing — roughly 40% for military and security plus about 9% for interest payments in some estimates — the fiscal room for long‑term development shrinks. War is not pushing the economy into immediate collapse; instead, it is hard‑wiring a trajectory of stagnation.
Veterans, Crime, and Social Risks When Soldiers Come Home
Economic structures do not operate in isolation from social realities. One of the least discussed yet most consequential aspects of Russia’s war economy is the eventual return of hundreds of thousands of combat veterans to civilian life. Many have been exposed to extreme violence, trauma, and a permissive environment regarding the use of force. Evidence from Russia’s own criminal statistics indicates that since 2022 nearly 8,000 veterans have been convicted of civilian crimes, including over 900 violent offenses ranging from murder to grievous bodily harm.
Russian lawmakers have begun to warn publicly about this trend. Nina Ostanina, a State Duma deputy, has described returning soldiers as a potential “time bomb,” highlighting insufficient psychological support and reintegration programs. The costs associated with treating post‑traumatic stress disorder, monitoring high‑risk individuals, and providing employment opportunities will rise after any ceasefire, just as the fiscal benefits of war‑driven growth diminish. If demobilization coincides with budget cuts in defense industries and tighter social spending, the combination of unemployed veterans, underfunded services, and weakened regional economies could be volatile.
These dynamics do not guarantee unrest or regime change — Russia’s political system has significant capacity to repress, co‑opt, or buy off potentially disruptive groups — but they turn peace into a complex management problem rather than a simple fiscal release valve.
Is Peace Destabilizing? What the Counter‑Case Gets Right
Some of the most serious analytical work on Russia’s wartime economy pushes back against the notion that the Kremlin “needs” war to survive. The Royal United Services Institute, among others, argues that Russia’s political system is explicitly insulated from translating economic dissatisfaction into pressure for regime change; elites, it notes, are more dependent on the regime now than before, and exit options are limited. In this view, economic pain does not automatically translate into political fragility, and predictions of imminent collapse or uncontrollable turmoil at the end of the war are overstated.
There is also evidence that a post‑war adjustment is technically manageable. Scenario modelling by Russian and international economists suggests that a phased rollback of defense contracts to pre‑war levels would produce a temporary GDP loss on the order of 1.6–1.8% over one and a half to two years, followed by stagnation or modest annual declines of around 1% as the economy rebalances. A gradual reduction in military spending, they argue, would make it possible to restore a more balanced budget within two to three years of peace, without systemic collapse.
These studies underscore an important point: structurally militarized economies can, in principle, transition back to civilian priorities if political leadership is willing to absorb short‑term costs and undertake reforms. Russia’s challenge is not purely economic capacity; it is the alignment of its current elite interests, institutional habits, and ideological framing with a prolonged confrontation against the West.
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The Structural Trap: Why War Is Easier Than Reform
When we weigh the evidence, a pattern emerges that explains the article’s central thesis. On one side, Russia demonstrably has the resources to fund a long war: high military spending is currently sustainable, sanctions have not exhausted fiscal reserves, and the regime’s coercive apparatus can manage discontent. On the other, the economic model that has emerged from this wartime period is heavily skewed toward defense demand, elite patronage tied to security structures, and a labor market partially reoriented around military‑industrial employment.
Ending the war would therefore confront the Kremlin with three simultaneous tasks. First, it would have to reallocate tens of billions of dollars’ worth of budget spending away from defense without collapsing key regions or alienating powerful beneficiaries. Second, it would need to reintegrate a large veteran population under conditions of narrowing fiscal space and cooling growth. Third, it would have to articulate a credible development strategy that replaces war‑driven industrial activity with productive civilian investment, all while sanctions and geopolitical mistrust constrain access to Western capital and technology.
Authoritarian systems have navigated such transitions before, but historical experience is not encouraging. Comparative research on war economies shows that conflict often becomes a self‑sustaining business: interests and institutions grow around violence, and those actors resist demobilization that would cut off their income streams. Authoritarian regimes also tend to devote a greater share of GDP to militaries than democracies, deepening the adjustment shock when external or internal pressures force change. Russia’s current trajectory fits this broader pattern.
The upshot is that Russia can afford war in the medium term, financially and politically, but the longer it sustains a defense‑based economy, the harder it becomes to afford peace in a deeper sense: peace as a return to diversified growth, social stability, and reduced reliance on coercion. The war has not only remade Russia’s economy for conflict; it has raised the price of leaving conflict behind.
Sources:
bti-project.org, youtube.com, gov.uk, carnegieendowment.org, atlanticcouncil.org, cepa.org, fletcherforum.org, bruegel.org, csis-website-prod.s3.amazonaws.com, europeanleadershipnetwork.org, osw.waw.pl, nato-pa.int, sciencedirect.com
