Russia’s War Economy: Structural Dependence on Conflict-Driven Growth

A Whitepaper on the Transformation of the Russian Economic Model in the Wake of Prolonged Military Engagement

Published: July 2025

Executive Summary

Since its full-scale invasion of Ukraine in 2022, the Russian Federation has experienced a profound shift in its economic architecture. This whitepaper explores the transformation of Russia into a war-dependent economy, where growth, employment, industrial output, and state revenue are increasingly tied to ongoing conflict and military expenditures.

In defiance of global sanctions and economic isolation, the Kremlin has reoriented the economy around militarization, central planning, and autarky. While this has enabled short-term stability and even growth in some sectors, it raises serious risks for long-term sustainability, economic diversification, and societal welfare.

I. Introduction

Russia's economy has long relied on resource extraction—particularly hydrocarbons—as its primary engine of growth. However, the Ukraine war and subsequent sanctions regime have upended this model. With constrained access to Western markets, technology, and capital, the Kremlin has aggressively pursued military-industrial expansion as both a substitute growth strategy and a political necessity.

Key themes addressed:

• Economic militarization as state policy
• Structural reliance on arms production and state orders
• Sanctions-induced autarky
• Decline of civilian industrial diversification
• Long-term risks of dependency on perpetual mobilization

II. The Shift Toward a War Economy

1. War as an Economic Engine

Defense spending now constitutes over 40% of the federal budget (2025), up from 17% in 2021. Military expenditures exceeded 9% of GDP in 2024—surpassing all post-Soviet records.

Arms manufacturing, logistics, and state-controlled military suppliers have absorbed a disproportionate share of industrial capacity, labor, and R&D. Over 5 million Russians are directly or indirectly employed in defense-related industries, according to Moscow’s Ministry of Industry and Trade.

2. State Orders Driving Industrial Output

Due to sanctions and isolation, civilian industries are stagnant or contracting. However, state procurement—especially for tanks, ammunition, missiles, drones, and uniforms—has sustained industrial activity. Factories that once produced tractors, automobiles, or machine tools now serve military contracts.

For example:

• Uralvagonzavod has converted over 80% of its production to armored vehicles.
• Kalashnikov Concern has expanded drone and loitering munition lines by 350%.
• Aircraft manufacturers in Kazan and Ulyanovsk have suspended most civilian aviation programs.

III. Sanctions and Autarky

1. Limited Trade Partners and Import Substitution

The EU, U.S., UK, Japan, and other G7 nations imposed severe export bans, freezing assets and excluding Russia from SWIFT. In response, Russia pivoted to China, Iran, North Korea, and the Global South for both imports and military-industrial partnerships.

Import substitution remains largely aspirational. Although domestic production has increased in some areas (e.g., agriculture, small electronics), high-tech goods like semiconductors and optical systems are still imported via gray markets or military smuggling networks.

2. Collapse of Consumer Economy

Retail, services, and construction have declined significantly. Over 50% of major Western brands exited Russia by mid-2023. Consumer goods shortages and inflation (which peaked at 19.8% in 2023) have diminished household purchasing power.

With low foreign investment and minimal private capital inflows, the state now accounts for over 70% of total economic activity—a sharp turn from the semi-liberal 2000s.

IV. Political Utility of a War Economy

1. Employment and Social Control

The war economy ensures near-full employment in regions where alternative industries are absent. Defense factories and military recruitment centers offer one of the few stable sources of income—especially in rural and peripheral regions.

Conscription, military benefits, and state subsidies (including war widow pensions and wounded soldier stipends) have created a militarized welfare state.

2. Control of Narratives and Nationalism

The state’s narrative of existential conflict legitimizes economic sacrifice, central control, and repression. By linking economic hardship to patriotism and survival, the Kremlin has transformed economic scarcity into ideological loyalty.

V. Risks and Fragility

While the war economy provides short-term insulation against collapse, it is deeply vulnerable:

• Unsustainable Budgets: High military spending comes at the cost of education, healthcare, and infrastructure. Budget deficits are rising, forcing the state to deplete reserves and print rubles.
• Tech Bottlenecks: Critical military components—like guidance systems, radar, and high-grade alloys—still depend on foreign inputs. These dependencies are being exploited by export controls.
• Brain Drain and Human Capital Flight: Since 2022, over 1 million skilled professionals (tech, academic, medical) have fled Russia. The military economy cannot absorb this loss.
• Global Isolation: Dependency on China for high-tech goods and oil sales creates strategic vulnerabilities, while increased alignment with sanctioned states makes Russia more isolated and dependent on fragile alliances.

VI. Strategic Implications

1. Long-Term Growth Prospects: Unless the war ends or diversifying reforms begin, Russia risks stagnation and zombification—an economy sustained by state orders but incapable of innovation.
2. Weaponization of Trade: As Russia turns arms exports into a primary currency with Global South allies, it could fuel regional instability—trading munitions for food, fuel, or political loyalty.
3. Reversal Will Be Hard: Even if peace is achieved, the entrenched military-industrial complex will be politically powerful and difficult to demobilize without major structural reforms.

VII. Conclusion

Russia is no longer a resource-based economy in transition—it is becoming a war-based economy in stasis. The state's economic survival now hinges on prolonged militarization, conflict-driven demand, and the suppression of civilian alternatives.

Without external pressure, regime change, or a decisive end to hostilities, Russia's war economy will remain its dominant—and dangerous—modus operandi.

Recommendations

• For Policymakers: Tighten export controls on military-enabling technologies and monitor secondary markets via China, Turkey, and UAE.
• For Economists: Track defense spending as a share of GDP and monitor macro indicators like real wages, reserves, and import origins.
• For International Partners: Invest in resilience of frontline states and increase humanitarian and information access to Russian civilians and dissenters.

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