Russia’s Two-Speed Economy: Military Spending Surge Masks Civilian Sector Struggles

Russia’s Economic Transformation in 2025

Russia’s war economy, now in its third year, is facing mounting challenges, including rising inflation, labor shortages, and growing economic imbalances. The nation’s economic landscape has undergone significant changes, reflecting the priorities and pressures of sustained military engagement.

Military Spending and Economic Impact

The direct financial expenditure for waging the war was estimated at US$250 billion through June 2024, rising to over 20% of annual GDP. Defense and security spending now accounts for approximately 40% of Russia’s total government spending in 2025, exceeding combined spending on education, healthcare, social policy and the national economy.

While GDP growth persists, it primarily reflects an increase in military production rather than the strength of the overall Russian economy. War-related incomes are being funneled into consumer markets, driving inflation and deepening the imbalance between the military and civilian sectors.

Labour Market and Economic Challenges

The army and military factories are depleting the labor market, a decline further compounded by the emigration of anti-war workers and reduced migrant inflows due to ruble devaluation and restrictive policies. Demand for labor has risen by 2 million (2.7 percent) from pre-war levels, while the labor supply has shrunk, driving unemployment down from 4–5 percent to 2.3 percent.

Future Outlook and Risks

In 2025, the Russian economy faces significant risks. A stagflation scenario—where inflation remains high while growth slows—is increasingly likely. Avoiding this outcome would require a sharp decline in inflation coupled with economic growth of at least 2 percent, both of which remain uncertain.

While these economic strains burden the civilian economy, they have not been severe enough to force Vladimir Putin to halt the war. Instead, the Kremlin has prioritized military production and maintained high levels of spending on soldiers and defense industries, while shielding war-related sectors from the economic pressures faced by the rest of the country. This dual-track strategy reflects Putin’s commitment to prolonging the conflict, despite the increasing costs for ordinary Russians and non-military industries.

Conclusion

Despite experiencing significant expansions in both 2023 and 2024, analysts have warned that the Russian economy risks stagnation in 2025 and onward due to labor shortages, high inflation, military overspending, falling resource prices and a dwindling National Wealth Fund. The sustainability of this economic model remains a critical question for Russia’s future.