Despite more than three years of full-scale war in Ukraine and unprecedented Western sanctions, Russia’s economy continues to function and seems stable, as the state poured money into sectors needed to support the war effort. However, describing it as a “wartime economy” may still be an overstatement. What Russia has created so far is not the equivalent of the Soviet command economy – where nearly all sectors were subordinated to military needs – but rather a hybrid model aimed at preserving market dynamics, private property, and elite wealth, while sustaining the war at a manageable intensity. Understanding this gives us a clearer, more grounded view of what the Kremlin might realistically do next – stripped of illusions and dramatic assumptions.
The growth of Russia’s economy is merely a statistical sleight of hand
The official narrative about Russia’s economic “resilience” rests heavily on surface-level indicators. The IMF and World Bank have repeatedly revised their forecasts upwards, suggesting GDP growth between 2.5% and 3% for 2024. However, much of this is a statistical rebound from the contraction in 2022. Real income growth is uneven, and inflation-adjusted wages are under pressure in many sectors. What looks like recovery is, in reality, stagnation dressed up as growth.
More crucially, the much-discussed “new economic model” never materialized. Russia’s economic structure remains largely unchanged. Instead of transformation, the country has undergone an adaptation – redirecting trade routes, shifting import strategies, and using fiscal stimulus to sustain basic economic functions.
Russia’s avoidance of full-scale economic collapse is not due to internal reforms but rather external workarounds and easing the legal framework for business operations. Unlike Iran, Russia is not entirely isolated. It maintains robust trade ties with China, India, Turkey, and several Middle Eastern and Latin American countries. Energy exports continue to bring in revenue, even if at discounted prices and with logistical hurdles.
Government-driven investments in logistics, infrastructure, and defense industries have also cushioned the economy. However, these investments come almost exclusively from public or quasi-public sources. The private sector remains cautious, with capital flight and corporate anxiety dominating the business climate.
Foreign direct investment is negligible and largely symbolic – restricted to “friendly countries” with geopolitical motives, such as the UAE and China. The so-called “windfall tax” imposed on large Russian businesses in 2023 has further shaken investor confidence. Likewise, the idea of restarting privatization looks hollow when property rights are ambiguous and political loyalty determines business survival.
The growing dominance of state-controlled corporations and the creeping absorption of large private businesses into government oversight mark a distinct shift toward state capitalism. However, this is not central planning in the Soviet sense. It is a tactical response: the government boosts defense-sector spending, hands out regional subsidies, and selectively enforces regulations to ensure loyalty.
The military-industrial complex may boost GDP, but it doesn’t necessarily raise consumer welfare. Internal demand remains weak, and inflation erodes real purchasing power. Regions newly annexed from Ukraine are financial drains rather than growth engines.
Why Russia is not yet a full-fledged wartime economy
Despite all the rhetoric, Russia has not abandoned its market foundations. Unlike the Soviet economy, today’s system allows price adjustments, supply-chain reconfigurations, and even limited competition. There are no widespread shortages of basic goods. Inflation is real, but it is a product of demand overheating and import constraints, not rationing or centralized distribution failures.
Even military recruitment avoids coercion where possible. The Kremlin has largely relied on financial incentives to attract contract soldiers, avoiding full mobilization. The partial mobilization in fall 2022 triggered social discontent and highlighted the limits of state control over society. It disrupted propaganda narratives and weakened the perception of stability. Since then, Moscow has preferred market-style incentives over direct enforcement.
A curious feature of the Russian response has been a quiet form of federative experimentation. Regional governments are being tasked with solving military-related logistical issues, managing social discontent, and even meeting informal quotas for contract enlistment. While the federal government retains strategic control, regional actors are granted limited autonomy – as long as they deliver results. This pragmatic decentralization is far from constitutional reform, but it reflects the Kremlin’s understanding that full centralization under wartime pressure could backfire.
The use of budget allocations to placate regional leaders – without changing the power hierarchy – has proven effective. It allows the Kremlin to maintain loyalty while outsourcing some of the burden of war management. The “KPI model” applied to governors increasingly includes war-related metrics such as contract enlistment levels or local trust in federal authorities.
Perhaps the most significant reason why Russia’s economy cannot yet be considered truly militarized is the nature of its elite. There is no cohesive military-industrial lobby capable of steering national economic priorities in the way Soviet defense ministries once did. Russia’s political-economic class remains largely rent-seeking. Their primary interest is asset preservation and income continuity – not ideological victory or military dominance. While the highest ranks of Russia’s leadership – shaped by age and personal convictions – may well harbor messianic visions of the country’s global role, these ideas find little resonance lower down the power ladder and are unlikely to be broadly shared within the wider elite.
This explains the absence of total economic mobilization. A truly militarized economy would involve mass reallocation of resources, mandatory employment shifts, and suppression of private consumption. None of this is occurring. The kleptocratic underpinnings of Russia’s economy remain intact. War spending is significant, but it does not dominate all aspects of national life.
Even major asset seizures – such as those targeting expatriated owners or politically disloyal tycoons – are not part of a systematic economic reorganization. They are tactical moves aimed at reinforcing elite discipline, not steps toward structural overhaul.
Militarization or prolonged stagnation?
Russia’s economy now stands at a critical juncture. On one hand, defense spending has reached 32.5% of the federal budget in 2024. Forecasts suggest it may rise to nearly 40% in 2025. The model increasingly resembles historical wartime economies – from Napoleonic France to Reagan-era Pentagon budgets.
Yet this path is unsustainable. The nominal wage growth of 18% and real income growth of 8% are not matched by productivity. Inflation is surging, while monetary tightening threatens the private sector. Growth is projected to slow down dramatically in the second half of 2025. Without structural reforms, a mild 1–2% GDP increase combined with 8–10% inflation in 2025 could tip the economy into stagflation.
If interest rates remain high (some analysts expect a base rate of 20–25%), business lending could collapse, triggering defaults and potentially a localized banking crisis. Civilian sectors are already under stress: construction of apartment buildings in large cities has plummeted, industrial profits in metallurgy and timber are declining, and IT sector layoffs have begun.
Labor shortages are becoming acute, especially for manual and semi-skilled labor. Skilled professionals are migrating toward the defense sector, where salaries are rising. Agricultural and retail sectors are lagging in wage growth, exacerbating inequality.
The ruble is likely to continue weakening into 2025, possibly reaching 100–120 per dollar. Inflation is fueled not only by budget injections but also by logistical bottlenecks and declining import availability. The Central Bank’s tools are limited: interest rate hikes have diminishing impact in the face of massive government spending and price controls.
The housing market is also shifting. Demand for new properties is weakening, while rental prices soar as many families can no longer afford mortgages. Rent inflation in major cities could hit 50% over two years.
Poverty statistics remain officially low, but only due to artificially low poverty thresholds and targeted aid. Plans to roll out food stamp programs for low-income residents in several economically struggling regions have stalled – not due to a lack of political will, but because local budgets are stretched to the limit and no federal support has been allocated to get these initiatives off the ground.
Real pensions are falling behind inflation: they declined by about 2% in real terms in 2024, despite nominal indexation.
Strategic Uncertainty Ahead
Ultimately, 2025 may force a decision point. Will the Kremlin double down on military spending, risking macroeconomic destabilization? Or will it attempt to recalibrate toward stability by reducing defense outlays and reintroducing cautious integration with the global economy?
One path leads toward full-scale militarization: a Soviet-style economy dominated by defense industries, strict controls, and isolation. The other is a painful but potentially recoverable model of stagnation, still loosely embedded in the globalized system of the late 20th century.
Russia’s economy is not yet a wartime economy – but it is drifting dangerously close. Whether it crosses the threshold will depend not just on military needs, but on the political will to sacrifice economic interests for geopolitical ambitions. So far, Moscow has tried to avoid making that choice. But the clock is ticking.
