Despite growing risks to its economy, Russia can still finance the war

Russia’s war of attrition against Ukraine requires enormous financial resources, and so far, the Kremlin has succeeded in finding them. Military spending has been growing every year at a staggering rate and will rise to 13.5 trillion roubles (around €120 billion) in 2025, amounting to 6.3 percent of GDP. It will be Russia’s largest military budget since the collapse of the Soviet Union and nearly four times bigger than in 2021 – the last year before the invasion of Ukraine. It is almost certain that the actual spending on the war will be even higher, as Russia usually allocates additional funds from the classified part of the budget as well as other sectors (e.g. healthcare and education).

Russia has not yet reached the limit of its financial capacity. Untapped economic reserves give the government room for manoeuvre. As a result, it will not only be able to maintain a similar level of war funding in the near term but is likely to be able to increase it further. If necessary, the government could borrow domestically, raise taxes or introduce new ones (e.g. a windfall tax on the most profitable companies), and use the liquid assets of the National Welfare Fund. In addition, cutting expenses of the other segments of the federal budget could be another (albeit a politically sensitive) solution. A precedent has already been set – allocations for social services, which are among the regime’s priorities, were cut by €11 billion (around 16 percent) in the budget of 2025.

‘THE NEW ECONOMY’

The Kremlin declares that the military sector will be the engine of the ‘new, independent and invulnerable’ Russia’s economy. For the Russian people, Putin promises development, which the country is supposed to achieve by fusing military and civilian industries and deepening partnerships with the Global South. For this reason, in 2024, the Kremlin moved to curb systemic corruption and created a new team of trustees to oversee military spending. In May 2024, Sergei Shoigu, a long-time defence minister and friend of Putin’s, was replaced by the economist Andrei Belousov. Other top officials within the Ministry of Defence were accused of fraud or bribery. However, structural preconditions for a thriving economy in the authoritarian Russia do not exist as the war continues. Strict administrative measures are helping the Kremlin to increase the efficiency of individual projects or programmes, but there will almost certainly remain the priority for strengthening Russia’s military power and regime’s security. For Russia’s neighbours, this will remain a source of threats.

However, high military spending also has a negative impact. The resulting growth of Russia’s GDP is not sustainable. As the share of military spending within the national economy grows, Russia will find it increasingly challenging to reorient itself and return to a peacetime economic model. The military-industrial complex and the Russian Armed Forces (financially supported by the government) attract labour from other sectors.

Therefore, the overall productivity and competitiveness of the Russian economy is declining. So far, all these trends have not forced the Kremlin to change its foreign and security policy. Moscow is willing to absorb the rising costs to continue the war of attrition. It is highly likely that such course will make the country’s economy weak, uncompetitive, and extremely vulnerable in the future.