Throughout the conflict in Ukraine, massive government spending on the military has propped up Russia’s output and blunted the impact of Western sanctions. Weapons factories geared up, while outfits from clothing brands to bakeries retooled to make balaclavas and drones. The transformation has made Russia’s economy reliant on the war for jobs, wages and growth. Weaning it off that military sustenance, in a peace deal being pushed by President Trump, is an economic risk for the Kremlin.
Stepping back from a war footing, economists say, would leave Russia’s economy in a perilous position. Depleted by three years of conflict, it is grappling with stubborn inflation, labor shortages and few paths to growth, apart from the war.
If peace is agreed, any resulting reduction in Russia’s military spending would likely leave a crater in the Kremlin’s finances that would be tough to fill. At least 40% of its economic growth last year was directly driven by war-related production, not including the spillover effects of increased consumption resulting from higher salaries and war-related payouts, Heli Simola, senior economist at the Bank of Finland Institute for Emerging Economies, estimates.
Further, payments to families of Russian soldiers fighting in Ukraine have raised the fortunes of some of the country’s poorest areas. Stopping that stimulus would dent domestic consumption, economists say.
“The question for the Russian government is how to transition from a war economy to a civilian economy when the entire economy has been mobilized to support the war effort.” Maria Shagina, a Berlin-based senior fellow at the International Institute for Strategic Studies, a think tank.
Russia is in the grip of a brain drain, technological decline and economic stagnation, Shagina said. In that context, she added, “What will be the new source of economic growth?”
War outlays coupled with a steady stream of oil-export revenue have helped the Russian economy defy predictions of a collapse since Moscow invaded Ukraine in February 2022, when most economists forecast a long and deep economic recession in Russia. Instead, the country’s gross domestic product fell by only 1.4% that year and grew by 4.1% in both 2023 and 2024, according to official statistics.
“If the Kremlin wants to avoid an economic collapse, it will have to continue spending at current levels long after the war is over,” said Janis Kluge, an expert on Russia at the German Institute for International and Security Affairs. “If military spending were to be cut, it would lead to job losses and general disenchantment in many Russian regions.”
To be sure, the Russian economy would see gains from a conclusion to the war, including the potential lifting of some sanctions, improved trade relations and business confidence.
The conflict itself created economic problems. The Central Bank raised interest rates to record levels to counteract the inflationary pressures of wartime stimulus.
Russia also needs to continue pumping money into its defense sector to restore combat capabilities after suffering significant losses in Ukraine. That, some analysts say, could provide an economic soft landing from any conclusion to the war.
“Putin will need to replenish arsenals which means military expenditures will remain elevated for a couple of years after the war,” said Alexandra Prokopenko, a former Russian central-bank official who is now a fellow at the Carnegie Russia Eurasia Center. “A peace deal will be another shock for the economy, but a manageable shock.”
But maintaining the current level of military spending in peacetime would be difficult. This year’s federal budget allocates 13.5 trillion rubles, or around $160 billion, for defense, or over 6% of GDP, rivaling peaks seen during the Soviet era. Russia has been running a budget deficit throughout the war, and two-thirds of the liquid assets of its rainy-day fund, the National Wealth Fund, have been consumed since its invasion of Ukraine.
A fall in spending levels could result in a slowdown or even a recession in the near term, Capital Economics said in a note to clients.
The budgetary focus on military production also means that civilian sectors have been neglected. Combined military and national-security spending accounts for over 40% of budget spending, surpassing expenditure on healthcare, education and social policy combined.
Russian economic figures “depict a shift to military-industrial activity and cannibalization of longer-term consumer welfare and social safety nets,” the Bank of Finland Institute for Emerging Economies wrote in a recent report.
Businesses that spent time and money shifting to a war economy will also need time to recalibrate for peace.
Russian clothing brand Gloria Jeans recently decided to close two of its Russian factories because they weren’t profitable. The company told local media that it struggled to retain workers because they either go to the front line or to work elsewhere for higher salaries. Last month, two other Gloria Jeans factories were bought by a company making military clothing.
As the war wears on, military manufacturers are increasingly looking for factories and office spaces across Russia. Last year, a drone maker leased an entire business center in St. Petersburg where previous tenants had been IT and energy companies.
With hundreds of thousands dead on the front or having fled abroad, Russian businesses have been hollowed out—lacking everyone from programmers and engineers to welders and oil drillers. While returning soldiers will help address some labor shortages after a peace deal, economists anticipate challenges in filling especially highly skilled roles, since combatants are often drawn from less-educated and less-well-off backgrounds and lack the necessary qualifications and abilities.
Winding down what economists have dubbed “deathonomics” would be a further drag on the economy in peacetime. High salaries for soldiers, compensation to the families of those killed or injured in battle and other payments totaled 1.5% of Russia’s GDP as of mid-2024, according to Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.
They also accounted for more than 3% of overall consumer spending, he said.
“With further hikes in war-related payments in the second half of last year, their importance to the Russian economy has likely increased, meaning that cutting them would represent a negative shock to private consumption and GDP growth,” Astrov said.
Russian officials have predicted U.S. companies would return to Russia in droves as relations with Washington thaw, but few analysts see such a trend materializing, even under a peace deal.
U.S. investors are likely to be wary of returning to Russia because of the geopolitical and reputational risk, coupled with chronic problems like red tape and weak property rights, Shagina from the International Institute for Strategic Studies said.
Much is unknown about the contours of a potential peace deal, but the details will be fundamental to the future trajectory of the economy. Even if a lasting peace is agreed and Russia eventually benefits from increased global economic links, analysts say the war will have long-lasting consequences for its economic prospects.
“A fundamental shift in Russia’s political and business environment, as well as its relationship with the West, would be needed to boost its long-run growth outlook,” Capital Economics said in a note to clients. “For now, this still seems to be off the cards.”