Russian military spending bubble shows signs of rupture

Reshetnikov’s declaration confirmed what several economists foresaw earlier this year. After years of rebelling against Russia’s expensive recession forecast, Russia’s high-expenditure economy ultimately hit harsh limits of labor, productivity and inflation.

Russia’s 2022 invasion of Ukraine prompted many Western sanctions and a near-deviation of Western companies. But despite the imminent forecast of a final mise, the country’s economy is maintained fairly well in pursuit of what economists call “military Keynesianism,” and promotes growth through massive defense-related fiscal spending. By pouring record numbers of resources into the military industrial complex, which reached $167 billion last year, the Kremlin has surged industrial production, fostering GDP growth for the second year in a row, and drawing wages across war-related sectors.

For decades, the Kremlin has allowed Russia’s defense budget to grow faster than the country’s GDP, but it has budget spending It has increased significantly This is the first time since the start of Russia’s invasion of Ukraine. According to the World Bank, in 2021, the country spent 3.6% of its GDP on national defense. Currently, 6.3% of GDP supplies defence spending, almost twice the US share.

The Russian military spending bubble produced what Erina Ribakova, an economist at the Peterson Institute for International Economics, calls the game of music chairs.

“Everyone is making money. Suddenly, people are enjoying higher incomes, they can get mortgages, buy durability, and more. This war is popular in a practical and pathological way. I want to advance music,” she explains.

However, as Nicholas Fenton, associate director of the Center for Strategic and International Studies, warns, “We can spend so much money before we reach structural limits in the economy. And the big hang-up for the Russian economy throughout this period is the country’s chronic labor shortage.”

Before Russia’s invasion of Ukraine, the country reported an unemployment rate of 4.75% in 2021, with the level being Record 2.4% lower According to data reported by the state in early 2025. However, as unemployment rates fell, the country has also witnessed a large number of outbreaks. 1 million residentsand hundreds of thousands of people suffer serious military deaths. These numbers exacerbate the deficit for existing workers in Russia as the working-age population is declining. In 2022 alone, the number of workers aged 16 to 35 fell by 1.33 million, with the lowest share of the workforce since 1996.

These existing shortages in the labor market It’s getting worse Citizens flocked with favorable bonuses, drafted, migrated, and flocked to revenue-related jobs. Real wages increased, but no productivity occurred. It promoted the threat of inflation and non-military stagflation and curbed investment in the non-defense sector.

This spring, Russian manufacturing, an industry that includes defense companies, took the sharpest economy out of nearly three years, dropping two points from February to March. Similarly, Russia’s industrial production growth rate was the first decline in two years, up just 0.2% from the previous year.

Prices have continued to rise for the rest of the time. 9.52% growth Last year, we compared it with 7.42% in 2023. Currently, Russia’s inflation is close to 10%, and central bank Hawkish’s attitude is Up to 20% interest rate June. Meanwhile, the central bank’s growth forecast is 1-2% for 2025.

However, interest rates may be changing. High officials and Russian businessmen have repeatedly called for cuts to promote growth, and President Vladimir Putin has urged policymakers to balance struggles with fostering growth.

Ultimately, labour productivity needs to be improved to change the possibilities of nation change, according to Alexander Coriandor, senior fellow at the European Centre for Policy Analysis.

By per capita standards, the country’s GDP is far behind its peers; Closer More Mexican or Turkish than Western Europe. Also, unlike Germany and Japan, Russia’s growth is heavily dependent on unstable commodity exports, such as oil and state-led demand.

Oil and gas revenue It accounts for about 20% It highlights the unstable nature of the country’s GDP. In the first half of 2025, lower oil exports and lower global prices forced the Kremlin to revise its fiscal deficit. However, the growing conflict between Israel and Iran has already raised oil prices, offering Russia the possibility of temporary budget easing.

“Wars in the Middle East are actually pretty good for Putin, but it doesn’t save the economy. That means the government will continue to maintain this policy of decline in management,” says Kolyandr. luck.

Ribakova agrees to Kolyandr. “We used to rub our hands while the oil was dropping, as it was the most effective sanctions against Russia. And of course, we’ve seen prices go up now,” she says.

However, Russia’s oil exports do not provide a solution to the lack of foreign investment in the country and the complete setback of American companies. Even President Donald Trump’s handoff approach to diplomacy with the Kremlin, Charles Kupchan, a senior fellow at the Council of Foreign Relations, sees American companies returning to Russia as a key negotiation tip.

“Trump tells Vladimir Putin, “If you agree to make a deal and end this war and implement a ceasefire, I can imagine the return of American companies to Russia. I can imagine the rehabilitation of Vladimir Putin,” he says.