Russia rather adapts to an economic slowdown than changes its military ambitions

The Kremlin justifies the transfer of military costs to Russian citizens as necessary for national survival, given the ‘fateful war’ taking place around Russia. Despite the deteriorating economic situation, Russia’s defence and national security spending will remain at record levels in 2026-2028, accounting for about 38 percent of the total budget, or 7-8 percent of GDP. Russia is currently mobilising its economic resources primarily to continue its aggression against Ukraine; but even if the war in Ukraine ends, the restoration of arms reserves and the development of the Armed Forces will remain key priorities in the medium and long term.

The militarisation of the Russian economy has exacerbated structural problems. State investment in the military industry does not provide a basis for sustainable economic development. Having ensured growth in 2023–2024, further development is hampered by the limits of state needs, labour shortages, and ongoing supply chain and raw material constraints. Russian regions involved in military industry activities are maintaining annual economic growth, but other regions are showing clear signs of economic stagnation or even decline.

The Kremlin is promoting the narrative that Russia’s economic situation allows it to continue the war against Ukraine and that the country’s economy can develop despite the sanctions imposed by Western countries. The uncontrollable inflation, growing budget deficit and rapidly declining volume of liquid assets of the National Welfare Fund became the most prominent signs of Russia’s ineffective fiscal policy in 2025. Despite Putin’s promise to the public not to raise taxes until 2030, Russian citizens welcomed the New Year with an even greater burden of new or adjusted taxes: firstly, with an increased value-added tax (VAT) and more entities and individuals as tax payers. It is unlikely that deteriorating living standards will pose a risk to the Kremlin’s political stability. Low unemployment, nominal wage growth, and high demand for labour in the defence sector have so far directly cushioned the effect of the economic slowdown on society.

Since the start of the war against Ukraine, Russia’s economic model has exhausted its capacity and macroeconomic indicators are deteriorating, but even if the economic situation continues to worsen, military spending will remain a priority for the Kremlin. Russia’s determination to strengthen its military power remains a major source of threat to its neighbours.