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The author is a non-resident senior fellow at the Peterson Institute for International Economics and director of the International Affairs Program at the Kyiv School of Economics.
The increasing structural militarization of the Russian economy significantly complicates any efforts to end the war in Ukraine. Contrary to expectations that economic constraints would hamper Russia’s ability to continue fighting, fears of economic collapse have led President Vladimir Putin and his officials to double down on militarization even if the invasion of Ukraine stalls. , may seek further conflict.
The Russian economy is expected to grow by 3.6% in 2023 and expand by more than 3% in 2024. Despite continuing widespread sanctions and export controls that are expected to hamper investment and growth potential in the long run, Russian authorities are boasting. The short-term success is to avoid a deep recession in 2022 and achieve strong growth thereafter.
Much of this success depends on the expansion of the military-industrial complex. The late and incomplete introduction of the oil price ceiling allowed Russia to increase fiscal revenue, which could be used to stimulate the domestic economy. Export restrictions have hampered Russian munitions production and made it more expensive, but they have not yet led to critical hurdles or supply chain disruptions.
Fiscal spending has focused on supporting war-related production. Direct military spending has more than tripled to more than $100 billion (6% of GDP) compared to before the 2022 invasion of Ukraine. More than a quarter of Russian government spending is hidden from the public, and actual war-related spending is likely to increase significantly.
Russia now boasts 6,000 military-industrial enterprises, a marked increase from less than 2,000 before the war. Together, these facilities employ more than 3.5 million people and operate around the clock, with three-shift, six-day weeks the norm.
Since Russia’s full-scale invasion of Ukraine, the sector’s workforce has expanded significantly, with at least 500,000 new jobs. Additionally, these salaries have skyrocketed by 20 to 60 percent since the war began, and many companies offer draft exemptions.
This increased demand from the military sector, combined with the loss of life caused by the war, pushed Russia’s unemployment rate to an all-time low of 2.8%.
Industrial production is also increasing with sectors such as metal products, machinery manufacturing, and chemical production. This can be attributed, at least in part, to the military-industrial complex. Employment, income, and tax collection all benefit from the war boom. The local government reports that this surge was achieved “by the establishment of new production facilities, including the creation of industrial parks, the development of enterprises and the creation of a significant number of new jobs.”
Moreover, regions that have struggled to make ends meet for years are now experiencing a significant turnaround due to the redirection of production toward the war effort. For the Russian people, the decision to support the war is no longer simply influenced by political rhetoric and propaganda. It is now also driven by pragmatism.
At the same time, the shift to war-related activities is no longer just a cyclical, short-term policy measure, but a structural one. Although cyclical adjustments may be difficult to manage, the Bank of Russia is trying to cushion the economy by keeping interest rates at 16%, well above the current inflation rate of 7.7%.
But undoing the structural investments made during the war will be a major challenge. Russia has suffered from underinvestment and regional inequality for decades, with only a handful of regions producing primarily primary products and contributing net to the budget transfer system. Past national projects and executive orders seemed unable to change that. But for now, the war continues.
If authorities try to halt militarization, it could create a hard landing and add pressure to governments that already rely on repression to maintain power. Internal conflicts over limited resources may also intensify. Given these challenges, continuing militarization may be a more realistic choice for governments.
Far from being a constraint, the Russian economy could become a further incentive to prolong the Ukraine war.