Russia’s War Economy: Growth Built on Unsustainable Foundations 

Official figures show that Russia’s GDP grew by 4.1 per cent in 2024, exceeding initial forecasts. Yet this growth was driven almost entirely by wartime spending and state intervention, not by improvements in productivity or structural reforms. The underlying fragility of this war economy is increasingly evident in widening budget deficits, soaring inflation, labour shortages and the deterioration of essential public services.  

The Russian government injected massive amounts of funding into the economy to support its war effort. Between 2022 and 2024, budgetary and quasi-budgetary injections exceeded 10 per cent of GDP, with over 3 per cent in 2024 alone. These funds propped up both demand and supply: soldiers and their families received cash transfers and pensions were indexed, while military industries benefitted from subsidies, tax breaks and preferential loans. 

Manufacturing sectors tied to defence experienced double-digit growth, fuelling overall GDP expansion. At the same time, core civilian sectors such as coal and oil declined. By the end of 2024, more than 50 per cent of Russian coal companies reported financial losses. Mining and non-military industries have been largely sidelined in favour of supporting the war effort, deepening the distortion within the economic structure. 

In 2025, Russia’s federal budget allocates 15.5 trillion roubles – approximately $160 billion – to national defence. This figure represents 7.2 per cent of GDP and accounts for 37 per cent of total federal spending. However, actual military expenditure is even higher when including classified items and additional wartime social payments. 

To accommodate these priorities, the government will be reducing transfers to the Pension and Social Insurance Fund by 1.4 trillion roubles, more than US$17 billion, in 2025. This trade-off is emblematic of a larger trend: civilian needs are increasingly subordinated to military goals. While the official 2025 budget deficit is forecast at just 0.5 per cent of GDP, early-year figures already show a significant gap: spending in the first two months of the year totalled over 8 trillion roubles, with revenues at just 5.3 trillion, producing a 2.7 trillion rouble shortfall. 

Oil and gas revenues are also declining, undermined by falling global prices. The average price of Urals oil has already fallen sharply towards $50 per barrel in 2025, compared to the budgeted assumption of $69.70. As revenues tighten, the government is increasingly reliant on domestic borrowing. 

The fiscal stimulus has overheated the economy, contributing to rising prices. By late 2024, inflation reached 9.5 per cent year-on-year, well above the Central Bank’s 5.1 per cent target. Food prices in particular surged, straining household budgets. In response, the Central Bank raised its key interest rate to 21 per cent, making borrowing significantly more expensive and dampening investment prospects for the private sector. 

These monetary tightening measures may curb inflation, but they also stifle economic dynamism in the private sector. Businesses face rising capital costs, while households struggle with declining real incomes. The high-interest environment adds further strain to an already imbalanced economy.

Russia is also experiencing one of its worst labour shortages in recent history. The unemployment rate fell to 2.3 per cent nationally, and even lower, 1.5 per cent, in key industrial regions. Russia’s army is 3 per cent of the country’s labour force and has roughly doubled since 2020. Wage growth has outpaced productivity, contributing further to inflation and creating mismatches in labour allocation. The war economy is draining talent and resources from essential public services. Healthcare and education are suffering acute staff shortages, outdated infrastructure and lack of investment. These problems are particularly severe in rural and less developed regions, where services have deteriorated to crisis levels. 

Russia’s war economy is driving short-term growth at the cost of long-term viability. The model depends on ever-increasing state spending, primarily directed at defence, while civilian needs and productive sectors of the economy are neglected. Inflation is high, investment is constrained and essential and productive services such as education, social security and healthcare are eroding. The government’s fiscal manoeuvring – cutting social transfers, drawing from reserves and borrowing domestically – can delay, but not resolve, these problems. 

This approach may produce the illusion of economic stability, but it is built on a narrow and brittle foundation. Without a pivot away from militarised spending and towards structural reform, innovation and balanced development, Russia’s economic trajectory remains unsustainable.