The militarisation of the Russian economy

Four years after the full-scale invasion of Ukraine, the Russian economy has not collapsed. 

Despite more than twenty rounds of sanctions imposed by the EU, the U.S. and the UK, Moscow has managed to preserve macroeconomic stability: growth has not imploded, unemployment remains at record lows, inflation has been contained, and public debt is still modest by international standards.

The explanation lies in a profound structural shift. Since 2022, Russia has effectively militarised its domestic economy, using defence spending as the primary engine of growth.

From shock to war-driven stabilisation

The initial shock in 2022 was severe. The abrupt reduction in European gas purchases, financial restrictions and supply-chain disruptions pushed the economy into recession. 

Military expenditure surged, while external financing channels narrowed sharply.

Yet in 2023 and 2024, the economy stabilised. Growth returned, supported by large-scale fiscal stimulus, expanding defence production and the rapid substitution of Western financial channels with domestic and non-Western alternatives. 

Trade flows were redirected towards China, India and Turkey, cushioning the impact of Western embargoes.

By 2025, however, the structural consequences of this shift had become clearer. 

The World Bank noted that the economy was becoming increasingly militarised, not only in manufacturing but also in technology allocation, financial flows and labour dynamics.

Sanctions bite, slowly

Sanctions have not been cost-free. According to the World Bank’s Macro Poverty Outlook, restrictions are weighing on foreign financing, raising trade costs, reshaping export composition and limiting access to advanced technologies. 

These pressures are expected to reduce productivity and potential growth over the medium to long term.

Energy-related restrictions have proven particularly significant. Price caps, forced discounts and market reallocation have compressed profit margins and weakened fiscal revenues. 

Oil and gas income declined in 2025, contributing to a marked slowdown in overall growth.

After four years of conflict, Russia closed 2025 with effectively zero GDP growth. IMF sources estimate a marginal expansion of 0.6 per cent. 

Many analysts describe this as near-stagnation, with output sustained largely by defence-related public spending rather than private investment or productivity gains.

From shock to war-driven stabilisation

One of the war economy’s paradoxes is persistently low unemployment. Labour shortages have intensified due to military mobilisation, outward migration and demographic decline. 

At the same time, the defence-industrial complex has absorbed a significant share of the workforce.

In July, the Bank of Russia reported seasonally adjusted unemployment at 2.2 per cent, describing it as an all-time low. Data through December suggest that tight labour conditions have persisted.

This dynamic supports household incomes in the short term but also risks overheating certain sectors and limiting longer-term efficiency.

Rising Deficits, Manageable Debt

Public debt remains relatively low. The World Bank projected it at 18.6 percent of GDP for 2025, which is modest compared with most advanced economies, though higher than pre-war levels. 

This provides Moscow with some fiscal space.

The more immediate concern is the federal deficit. In 2025, it widened to an estimated 2.6 percent of GDP, or roughly 5.6 trillion roubles (about €61 billion). The deterioration reflects falling hydrocarbon revenues alongside sharply increased public and military spending.

While not yet a fiscal crisis, the shift signals growing structural pressure. So far, however, it has not translated into visible urgency in Moscow’s approach to negotiations with Kyiv.

From shock to war-driven stabilisation

If one area illustrates the impact of sanctions most clearly, it is foreign direct investment. UNCTAD data show a dramatic contraction. In 2010, Russia attracted over $31 billion in FDI. After the first wave of sanctions in 2015, inflows fell to $11.9 billion. 

By 2024, they had dropped to just $3.35 billion.

Western corporate withdrawals and reputational risks have severely curtailed long-term capital inflows, reinforcing Russia’s increasing economic isolation.

Inflation eases, for now

Inflation showed signs of moderation in 2025. The reported annual figure stood at 5.6 per cent, down from 9.5 per cent in 2024, though still above the central bank’s 4 per cent target. 

Some estimates suggest the final figure could settle between 6 and 7 per cent.

The Bank of Russia’s tight monetary stance has helped stabilise prices, but the structural constraints imposed by sanctions, labour shortages and heavy fiscal spending complicate the outlook.