Russia’s war economy has long been a paradox.
For over two years, it has weathered intense Western sanctions, a costly war effort, and international isolation.
On the surface, it appears resilient, with growth figures that defy economists’ expectations.
But beneath the headlines, cracks are deepening. Inflation is soaring, the ruble has plummeted, and the labor market is stretched to its limits.
Can this economic machine keep running, or is it destined for decline?
Russian ruble: a plummeting currency
One of the clearest signals of economic trouble is the ruble’s plunge. Recently, it hit 108 per dollar, its weakest value since the early days of the Ukraine war.
The ruble’s fall was triggered by new U.S. sanctions on Gazprombank, one of Russia’s last remaining links to Western financial markets.
For years, Gazprombank facilitated payments for energy exports, a vital source of hard currency.
The sanctions have disrupted trade and raised fears among traders and businesses.
Source: FT
In response, Russia’s Central Bank halted foreign currency purchases to stabilize the ruble. While this intervention offered temporary relief, the underlying issues remain unresolved.
With limited access to dollars and euros, Russia increasingly relies on alternative currencies like China’s yuan or India’s rupee.
While these “friendly currencies” help, they cannot fully replace the dollar’s role in global trade. The ruble’s volatility is now a barometer of the economy’s fragility.
Inflation: the hidden tax on Russians
Inflation is eroding purchasing power across Russia.
Officially, consumer prices are rising by 9.5%, but independent estimates suggest the true rate is much higher.
Everyday goods tell the real story: potatoes have surged by 74% this year, and butter is up 25%.
These are not just economic statistics—they are daily realities for Russian households. Supermarkets have started locking up butter to prevent theft, a stark symbol of rising desperation.
The inflation problem stems from several factors. Wartime spending has pumped money into the economy, creating excess demand.
At the same time, sanctions have disrupted supply chains, making imports more expensive.
To combat inflation, the Central Bank raised interest rates to 21%, but this has done little to cool prices.
Higher rates also hurt businesses by increasing borrowing costs, further straining the economy.
Military spending is a double-edged sword for Russia
Russia’s military spending is both a lifeline and a liability.
In 2025, defense spending is set to surpass 6% of GDP, reaching $145 billion—the highest level since the Cold War.
This spending keeps the economy afloat by creating jobs and driving demand.
Factories run 24/7 to produce weapons, and soldiers receive generous pay packages.
In some regions, these payments have transformed local economies. For instance, in Buryatia, one of Russia’s poorest regions, military incomes are funding new homes and businesses.
But this economic boost comes at a cost. Military spending is crowding out other priorities, such as healthcare and education.
It also fuels inflation by injecting more money into an already overheated economy. Analysts warn that this level of spending is unsustainable.
The government has already depleted much of its rainy-day fund and is raising taxes to cover budget shortfalls. These measures may buy time, but they won’t solve the underlying issues.
A vacant labor market
Russia’s labor market is under immense strain. Unemployment is at a record low of 2.3%, but this reflects a severe labor shortage, not a thriving economy.
Hundreds of thousands of workers have been conscripted or killed in the war, and many others have fled the country.
The government is trying to recruit replacements by offering lavish incentives, including signing bonuses of up to $25,000. Nevertheless, businesses across the country are struggling to find workers.
This shortage is driving up wages, which are expected to rise by 20% next year. While this benefits workers in the short term, it exacerbates inflation and raises costs for businesses.
Many companies, especially in non-military sectors, are at risk of bankruptcy. Agriculture and transport, for example, have already started to contract.
The longer the war drags on, the harder it will be to sustain this fragile equilibrium.
A parallel civil war?
The war in Ukraine has unleashed a demographic crisis in Russia, accelerating a decline that was already underway.
Birth rates have dropped to their lowest levels since the 1990s, with fewer than 100,000 births recorded in June 2024—the lowest monthly figure in Russian history.
Meanwhile, the war has taken a heavy toll on the population. Over 200,000 soldiers have been killed, and another 500,000 have been injured. At least 650,000 young men have fled the country, further depleting the workforce.
The demographic impact is compounded by deepening regional inequalities.
Poorer regions like Buryatia and Belgorod, where many men have been conscripted or killed, have disproportionately felt the war’s effects. These areas have seen short-term economic boosts from military spending, as incomes rise due to recruitment incentives.
In contrast, wealthier cities like Moscow and St. Petersburg, while shielded from mass casualties, face the economic strain of sanctions and reduced access to Western goods. These disparities are fracturing the country’s social cohesion.
Social tensions are also rising. Many Russians are ambivalent about the war, neither fully supporting nor openly opposing it. Public dissent is rare under government control, but private frustrations simmer.
As the war drags on, these demographic and social fractures risk deepening further, creating an internal struggle that parallels the external conflict.
Adaptation or decline?
Russia’s war economy has shown remarkable adaptability under pressure. Businesses have developed workarounds for sanctions, using cryptocurrencies, bartering, and trading in alternative currencies.
Military spending has provided a short-term economic boost, and poorer regions have seen improvements in living standards.
But this adaptability has limits. The economy is becoming increasingly dependent on war-related industries, leaving other sectors to stagnate.
Isolation from global markets is stifling innovation and reducing productivity. Analysts warn that the current trajectory is unsustainable. Persistent inflation, demographic decline, and labor shortages are creating a perfect storm of challenges.
A narrow path forward
Russia’s war economy is not collapsing, but it is walking a tightrope.
The government faces tough choices: continue high military spending and risk runaway inflation or scale back and face the economic fallout.
Either path comes with significant risks. The question is not whether Russia’s economy can survive in the short term, but how long it can sustain this delicate balance. Without meaningful reforms, the cracks in the system will only grow larger.
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