The economy of the war of Russia, once provocative in the face of Western sanctions and geopolitical isolation, shows signs of fatigue. Thursday, Russian Minister of Economy Maxim, Maxim Reshetnikov, warned that the country was “On the edge” of a recession at the Saint Petersburg Economic Forum.
The Declaration of Reshetnikov confirmed what several economists predicted earlier this year: the economy of broadband war of Russia, after years of predictions of the imminent recession, finally comes up against the limits due to work, productivity and inflation.
The invasion of Ukraine in 2022 by Russia caused a multitude of sanctions by the Western nations and the almost total departure of Western nation companies. But despite the predictions of its imminent disappearance, the country’s economy resisted quite well by continuing what economists call “military Keynesianism”, fueling growth through massive budgetary expenses related to defense. By paying a record number of resources into the military-industrial complex, which reached a value of $ 167 billion last year, the Kremlin increased industrial production, led two consecutive years of GDP growth and raised wages in the war-related sectors.
For decades, the Kremlin has allowed the defense of Russia to grow faster than the country’s GDP, but budgetary expenses have enormously increased Since the beginning of the invasion of Ukraine by Russia. In 2021, the country spent 3.6% of its GDP for national defense, according to the World Bank. Now, 6.3% of GDP goes to defense expenses, almost double on the part in the United States.
Russia’s military expenditure bubble has created what Elina Ribakova describes, economist at the Peterson Institute for International Economics as a set of musical chairs.
“Everyone earns money. Suddenly people appreciate higher income and can get a mortgage or buy lasting goods. This makes this war popular in a practical and morbid way. You want music to continue, ”she explains.
But, as Nicholas Fenton, associate director of the Center for Strategic and International Studies, warns, “you can only pass so many things before touching structural limits in the economy. And the large hangs up for the Russian economy throughout this period was the chronic work shortage of the country. ”
Before the invasion of Ukraine by Russia, the country reported unemployment of 4.75% in 2021, with levels reaching a Record 2.4% stockings At the beginning of 2025, according to data declared by the state. But as unemployment has decreased, the country also witnessed a massive exodus as long as one million residentsand suffered significant military deaths in the hundreds of thousands. These figures exacerbated a preexisting deficit of workers in Russia due to a decrease in the working age population. In 2022 alone, the number of workers aged 16 to 35 fell 1.33 million and their share of the workforce was the lowest ever since 1996.
These preexisting shortages on the labor market have aggravated While citizens have been written, emigrated or fought towards defense -related jobs with lucrative bonuses. Although real wages have increased, productivity has not done, fueling inflation and the threat of stagflation outside the military and stifling investments in non -defended sectors.
This spring, the manufacturing sector of Russia, an industry that also includes defense companies, has suffered its steepest slowdown in almost three years, lowering 2 points from February to March. Likewise, the growth of industrial production of Russia has reached a two -year hollow, increasing by 0.2% in annual shift.
Throughout this time, prices continued to increase, Growth of 9.52% Last year, compared to 7.42% in 2023. Currently, inflation in Russia is nearly 10% and the belligerent position of the Central Bank Interest rate up to 20% in June. Meanwhile, the central bank growth forecasts are between 1 and 2% for 2025.
Interest rates can, however, evolve: senior Russian officials and businessmen have repeatedly called update to promote growth, and President Vladimir Putin urged decision -makers to find a balance between the fight against inflation and increased growth.
In the end, for the country’s growth potential to change, the country should improve labor productivity, a difficult feat in the midst of persistent sanctions and significant inflation, according to Alexander Kolyandr, the main member of the Center for European Policy Analysis.
On a basis per capita, the country’s GDP is far behind peers, closer to that of Mexico or Turkey than Western Europe. And unlike Germany or Japan, the growth of Russia depends strongly on exports of volatile basic products, such as oil and demand focused on the state.
Oil and gas income represent around 20% GDP of the country, emphasizing the precarious nature of its budgetary health. In the first half of 2025, the drop in oil exports and a drop in world prices forced the Kremlin to revise its budget deficit. But the growing conflict between Israel and Iran has already increased oil prices, providing potential temporary budgetary reductions in Russia.
“The war in the Middle East is actually good enough for Putin, but that would not save the economy. This simply means that the government can continue to maintain this managed decline policy,” said Kolyandr Fortune.
Ribakova agrees with Kolyandr. “We were in a way rubbed our hands while oil fell because it is the most effective sanction against Russia. And of course, we have now seen the prices increase, ”she says.
Russia oil exports, however, provide a solution to the lack of foreign investment in the country and to the total retirement of American companies. Even with the practical approach to President Donald Trump in terms of diplomacy with the Kremlin, Charles Kupchan, principal researcher at the Foreign Relations Council, considers the return of American companies to Russia as a key negotiation program.
“Trump said to Vladimir Putin:” If you are ready to conclude an agreement and put an end to this war and accept a cease-fire in place, I can consider a return of American companies to Russia. I can consider the rehabilitation of Vladimir Putin, “he said.
